Govt’s push for highway projects likely to benefit road developers
Mumbai: Several road builders including Sadbhav Infrastructure Project Ltd, PNC Infratech Ltd, Ashoka Buildcon Ltd, and NCC Ltd are expected to benefit from the increased budgetary allocation to India’s national highways, analysts and companies said.
The government in its Union budget on 1 February announced an allocation of Rs64,900 crore for the construction of national highways for fiscal year 2017-18, up from about Rs58,000 crore for FY 2016-17; and maintained allocation to the roads sector under the Pradhan Mantri Gram Sadak Yojana (PMGSY) at Rs27,000 crore.
Road developer Ashoka Buildcon is expecting its order book to rise to Rs8,000 crore in fiscal year 2018 from Rs5,000 crore in the current fiscal and expects execution to rise by 25-30% year-on-year, managing director Satish Parakh said. “The allocation for national highways will likely be used very efficiently by the ministry. Execution is expected to pick up pace this year as projects will be under the new land acquisition act,” Parakh said.
Hyderabad-based NCC Ltd, too, expects an increase in the number of awards in the new fiscal. “For NCC, roads remain a major component of our business, but we will bid very carefully on the basis of fundamentals without sacrificing the margins. The pace of order allocation is likely to improve further based on the Union budget,” said Y.D. Murthy, executive vice-president of finance, NCC.
Higher allocation towards roads and highways will be a positive for road engineering, procurement, construction (EPC) firms such as KNR Constructions Ltd, Sadbhav, IRB Infrastructure Developers Ltd and J Kumar Infraprojects, according to Angel Broking’s post-budget report.
The allocation will be a positive for road developers and EPC contractors as it would translate to higher road awarding and construction, IIFL Wealth Management said in its report on 2 February.
“The pace of construction of PMGSY roads has accelerated to reach 133km roads per day in 2016-17, as against an average of 73km during the period 2011-2014 and a further outlay of Rs27,000 crore will boost the rural road construction project of the government,” brokerage firm KR Choksey said in a post-budget report.
The Modi-led government’s thrust on speeding up construction of highways means that these companies stand to win increased business. In the past year, the government has also been pushing for the hybrid annuity model, where it will share 40% of the project cost and allocate funds to the developer to start work.
Owing to highly leveraged balance sheets in the sector, only a handful of developers such as IRB Infrastructure, Sadbhav Infrastructure and IL&FS Transportation Networks Ltd continue to bid for projects under the build, operate and transfer (BOT) model.Several other large companies such as Larsen & Toubro Ltd (L&T) prefer projects under the government-funded EPC model.
In the BOT model, the developer builds the project with its own money, operates it for a specified period and transfers it to the government.
“While there is increase in budget allocation for roads and highways sector by 12% for FY 2017-18, that is much below the average annual increase of around 33% during the last three years... Less increase in allocation for national highways would mean that private sector investment under PPP (public private partnership) would be an important source of finance,” according to Vikash Kumar Sharda, director of capital projects and infrastructure at PwC.