Roads sector may fall short of goals despite strong execution of orders

Order flows in the roads sector by the National Highways Authority of India is likely to fall short of its target in FY19. Note that expectations were high after the government doubled project awards in FY18 compared to the previous year.

The pace of ordering in roads slowed down in the first six months of FY19 as issues related to land acquisition cropped up. Under the new projects based on the hybrid annuity model (HAM), bank funding is available only after 80% of land is tied in. Further, with existing developers having significant orders in hand, the participation in new orders has dwindled. A Motilal Oswal Financial Services report says that going forward, competition may reduce in HAM projects, as seen in some recent bids.

This is not all. Given the delay in financial closures for existing projects after the banking crisis, the government seems to have slowed the pace of tendering. The cautious approach of developers may move NHAI projects back towards the engineering, procurement and construction (EPC) model. That apart, with the general elections around the corner, it is likely that government capex will be stalled.

To be sure, this is a dampener, especially since it has been a sector where government activity was high for several years. Shares of new-age construction firms that built huge order books, such as Dilip Buildcon Ltd, Sadbhav Engineering Ltd, PNC Infratech Ltd and PNC Infratrech Ltd have receded since April.

Further, execution of road projects too may fall short of initial targets. According to Icra Ltd, the execution increased at a compounded annual growth rate of 27% to 3,017km in FY2018 from 1,500km in FY2015. NHAI’s actual execution during H1 FY2019 is estimated to be in the range of 1,300-1,400km. Considering that execution is typically lower in the first half due to monsoon, Icra estimates full year execution to be in the range of 3,800-4,000km. But this will fall short of NHAI’s FY19 target of completing 6,000km, by 33%. To be sure, execution will pick up in the second half, in line with historical trends, but that’s nothing to get excited about.

Shubham Jain, group head and vice president, corporate sector ratings, ICRA Ltd says that while execution may be strong, awards are likely to remain subdued in 2019.

So, while infra firms with exposure to roads are normally investors’ preferred bets, they may be off their radar at least until after the general elections.