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Road developers step up bidding war in quest to win EPC projects

The government’s push for a new low-risk hybrid-annuity model and the emergence of a number of smaller, regional companies have added to the competitive intensity, according to road developers and analysts. Photo: MintPremium
The government’s push for a new low-risk hybrid-annuity model and the emergence of a number of smaller, regional companies have added to the competitive intensity, according to road developers and analysts. Photo: Mint

A total of 52 EPC road projects worth about Rs26,700 crore have been awarded between January and June, with nearly 40 won below the NHAI's estimated cost

Road developers are locked again in a bruising bidding war, offering to build highways at prices that are lower than cost estimates, just months after the government offered a bailout to companies to help revive stranded road projects.

Several debt-laden developers, unable to take up build, operate and transfer (BOT) projects because they are capital-intensive, have opted to bid for engineering, procurement and construction (EPC) projects, where the government pays the contractor to build the project.

A total of 52 EPC road projects worth about 26,700 crore have been awarded between January and June, according to data compiled by brokerage Equirus Securities Pvt. Ltd. Of these, close to 40 projects were won below the National Highways Authority of India’s estimated cost and each of the projects attracted three to 14 bidders.

The government’s push for a new low-risk hybrid-annuity model (HAM), in which the state commits up to 40% of the project’s total cost to kick-start private sector investments, and the emergence of a number of smaller, regional companies have added to the competitive intensity, according to road developers and analysts.

The government has been trying to resolve stressed assets in the sector by giving faster land acquisition approvals and providing last-mile funding. Last year, it eased rules for companies to exit their operational road projects. It has terminated more than 40 unviable BOT road projects spanning 7,000km lane. These projects are being re-awarded via the EPC route.

Larsen and Toubro Ltd (L&T) has decided to focus solely on EPC projects. It won five awards in the six months ended 30 June, all of them below estimated costs. It won two EPC projects in Tamil Nadu in February by bidding 27% and 13% lower than the project cost suggested by the awarding authority. In March, L&T won a road project in Kerala at a bid that was 38% below the estimated project cost.

Similarly, Bhopal-based Dilip Buildcon Ltd has won six contracts, which were between 13% and 31% below the estimated cost. Apart from L&T and Dilip Buildcon, firms such as PNC Infratech Ltd, Ramky Infrastructure Ltd, Ashoka Buildcon Ltd and GVR Infra Projects Ltd have won EPC road contracts in 2016.

The NHAI, which invites bids from developers and awards them to the lowest bidder, is the sole agency responsible for the development of national highways. Projects are also awarded by the ministry of road transport and highways and states.

Infrastructure developers, weighed down by debt, are seeking to monetize dozens of highway and power projects to repay creditors. Many are taking on state-funded EPC projects to pay their interest and other costs and to grow their order book.

Companies with weak balance sheets that do not support investing in BOT or HAM projects are bidding aggressively for EPC projects, said Devam Modi, an analyst with Equirus Securities. “This makes them bid below the NHAI cost, and this will impact margins, but it is difficult to say how much they will lose as of today."

L&T, however, said it has been able to win projects at lower costs due to better planning, design, and engineering.

“It has nothing to do with competitive intensity. We do not want to improve market share at the expense of margins," said chief financial officer R. Shankar Raman.

While Dilip Buildcon acknowledges intense competition, it does hold NHAI’s project cost as an accurate metric.

“Every state has a different cost and often cost estimates are not accurate... Competition has definitely increased. From four bidders in 2014, there are seven-eight bidders in EPC projects. But a lot depends on a company’s cost structures and their target for contracts," said Rohan Suryavanshi, head of strategy and planning.

The shift towards awarding projects under the HAM model this fiscal will heighten competition for EPC projects and benefit companies with financial muscle because of moderate competition for HAM projects, Edelweiss Securities Ltd analysts Parvez Akhtar Qazi and Rita Tahilramani wrote in their 27 July report. “The shrinking pie of EPC projects (expected to more than halve in FY17 from about 40,000 crore in FY16) is likely to result in intense competition for such projects," they wrote.

In contrast to EPC, all the 25 HAM projects between January to July this year were awarded above the estimated project costs. Many of these projects had nine to 13 bidders each. MEP Infrastructure Developers Ltd along with partner Sanjose India Infrastructure, Sadbhav Infrastructure and MBL Infrastructures Ltd have won the most number of projects under HAM so far this calendar year. A total of 50 HAM projects are to be awarded in fiscal 2017.

EPC projects formed the bulk of awards in the past two years; this year, however, most projects have been awarded on the HAM model, said Vasistha Patel, executive director at Sadbhav Infrastructure Projects Ltd. “This has led to aggressive bidding for the limited number of EPC projects... In EPC, we earn margins of 11-12%, while in BOT, they are naturally a little higher," he said. Sadbhav had also bid 3-5% below the estimated cost for some projects, Patel said.

India has set a target to award 25,000km of road projects in FY17 under the ministry of road transport and highways and NHAI, compared to 10,000km achieved in FY16.

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