BackSmall firms lap up NHAI projects as large ones focus on cutting debt
Between January and July, NHAI awarded a total of 30 road projects whose cost is estimated to be `28,000 crore
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Mumbai: Smaller road builders have won a number of highway contracts awarded this year, as their larger rivals focus on reducing debt and completing existing projects rather than take up fresh projects.
The government plans to spend as much as ₹ 1.2 trillion on national highways in the current financial year, with a target of awarding a total of 273 road projects. Most projects awarded, however, have been through the EPC (engineering, procurement, construction) route, where the financial commitment needed from developers is lower.
Under the EPC model, the government pays a contractor a sum to build a project awarded through competitive bidding, meaning limited financial commitment from developers. In build-operate-transfer (BOT) projects, a private operator builds the project from its own funds, operates it for a period and then transfers it to the government.
Between January and July (for when the last monthly data was available), National Highways Authority of India (NHAI) awarded a total of 30 road projects spanning about 2,660km, with a total estimated project cost of nearly ₹ 28,000 crore. Over two-third of the 30 projects were awarded under the EPC or NHAI-funded route.
Of these, nine projects with an estimated project cost of ₹ 6,287.43 crore have been bagged by three firms with three projects each: G.R. Infraprojects Ltd, Dilip Buildcon Ltd and Sadbhav Engineering Ltd. Among the conglomerates, Larsen and Toubro (L&T), the country’s largest engineering and construction company, has won seven projects but has restricted itself to largely bidding for EPC projects.
The government has been encouraging private road developers to bid for projects via the EPC route as private sector investments have waned.
“The absence of any large BOT bidders for road projects in recent months have meant that a number of smaller or local developers are winning new projects, largely EPC, but also on the BOT front," said Maybank Kim Eng Securities India analyst Anubhav Gupta.
“Bidding has become less aggressive since the last one year whether it is BOT or EPC because of reduced competition and increased order flow. Earlier, there used to be 20-30 bidders for BOT projects, which has now come down to three-five bidders. Whereas in EPC projects, there used to be 15-17 bidders which has now come down to five-eight bidders," said a Dilip Buildcon spokesperson in an email response.
Sadbhav Engineering, which was awarded three projects in the first six months of the calendar year, will continue to bid for both BOT and EPC projects, said executive director Vasistha Patel.
Patel agrees competition is aggressive in the EPC segment, which does not require a huge financial commitment.
Sadbhav, whose BOT projects arm Sadbhav Infrastructure Project Ltd started trading as a public company on Wednesday, plans to use the funds raised to bid for new projects.
Udaipur-registered GR Infraprojects has won three of the EPC projects awarded since January. GR Infraprojects so far has completed 10 EPC and NHAI-funded projects and has another 15 under development, according to its website. A mail sent to GR Infraprojects did not elicit a response.
According to its Draft Red Herring Prospectus filed with Securities and Exchange Board of India, as of 30 September 2014, Dilip Buildcon’s order book was ₹ 5,665.87 crore. Sadbhav Engineering so far has completed 19 road projects with three projects under construction, according to its website.
The reluctance of larger infrastructure firms to bid, particularly for BOT projects, stems from their accumulated debt. The total debt of 15 listed companies with presence in the road sector was at ₹ 2.59 trillion as on 31 March.
L&T, which is often referred to as a corporate proxy for the broader economy and has 17 road projects in its BOT portfolio of assets, has decided not to bid for new BOT road projects.
The company, however, continues to bid for EPC projects and has won seven of these projects since the start of this year.
L&T had a total debt of ₹ 82,267.2 crore in the year ended 31 March.
“We have taken a conscious decision, irrespective of whether we have the money (to invest) or not, until we make all our existing projects profitable, we will not invest anymore," said L&T’s group executive chairman A.M. Naik on 9 September. Naik said L&T will review its business every three months and will bid for road projects very selectively.
Others are taking a similar approach.
IL&FS Transportation Networks Ltd (ITNL), another large BOT road developer with high debt on its books, won two BOT highway projects during the January-July period. ITNL had a debt of ₹ 23,513.48 crore as of March 2015.
ITNL declined to comment on its bidding strategy in the road sector.
IRB Infrastructure Developers, which has won one BOT project, says that competition for EPC projects is intense and this has prompted the company to stay away.
“EPC—we have seen the competition to be quite hot and as a strategy, we have kept away from this segment," said Virendra Mhaiskar, chairman and managing director, IRB Infrastructure Developers, which has an order book of ₹ 10,770 crore as on July 2015.
Mhaiskar said companies with a long-term vision continue to bid for BOT projects, where the number of bids have fallen to five to six companies per project compared with the 15-20 seen in the earlier years.
The competition for EPC projects works out in favour of the government, say analysts.
“...aggressive bids on the EPC side help reduce the cost for the government," said Gupta of Maybank.
EPC projects for about 1,800km roads worth ₹ 193 billion are to be bid out by the second half of the current financial year, brokerage Equirus Securities said in a presentation this month. “Recent bids indicate aggression by EPC players and low interest among BOT developers… Expect BOT developers to refrain from aggression in the coming 12 months at least," it said.
NHAI, which invites bids from developers and awards them to the lowest bidder, is the sole agency responsible for the development of national highways in India.
The autonomous body was constituted by an Act of Parliament—NHAI Act, 1988—to develop, maintain and manage the national highways entrusted to it.
Last month, NHAI removed a clause which required companies to invest the money received from monetization of their operational assets into new NHAI projects, offering relief to these companies.
The body has also offered to fund projects that are stuck in advanced stages of completion.
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