Awards, execution of road contracts on fast track, but risk looms
A few new mid-sized companies have bagged most contracts. Their order books have swollen up to four times their revenues, raising concerns of timely execution
Roads have been the sweet spot within the infrastructure sector. In a recent report, Icra Ltd says that between 2014 and 2018, contracts awarded by both National Highways Authority of India (NHAI) and the ministry of roads transport and highways clocked a whopping 47% compounded annual growth rate (CAGR). That is not all. Execution of road contracts recorded 23% CAGR to touch 26.9km per day in 2017-18.
This is good news, especially given the lull for several years. The biggest push came from eliminating bottlenecks such as issues with land acquisition. Stranded legacy projects have, however, weighed heavily on many developers.
NHAI has also changed track to award contracts through the new hybrid annuity model (HAM), which is reckoned to have less risk for the developer as the government steps in with two-fifths of the project cost. HAM, introduced in 2015, has seen faster financial closures of projects.
However, it is not without risks. A few new mid-sized companies have bagged most contracts. Their order books have swollen up to four times their revenues, raising concerns of timely execution. This is perhaps why the construction stocks are under pressure, with little retail investor participation.
Banks are also wary of lending to the roads sector given the turmoil around stressed infrastructure assets. So, industry experts believe that most projects will be awarded through the engineering, procurement and construction (EPC) route, where companies need to get only working capital, with less balance sheet leverage.
Editor's Picks »
- What to expect from Q3 results of IndiGo, SpiceJet, Jet Airways
- Forget privatisation, govt has hugged its banks tighter
- Flat profit, rising debt are growing worries for Reliance
- Q3 results: HUL growth off a high base shows it’s on a roll
- DCB Bank Q3 results: Small loans give big pain as farm, mortgages lift delinquencies