BackInterest in road projects wanes
The return on road contracts executed on a BOT model has dropped to 12-14% from 16-18% five years ago
Premium(Pradeep Gaur/ Mint)
The slowdown is levying a heavy toll on roads. The number of contracts awarded in 2012-13 was the lowest in four years. What is worse is that the number of contenders for road projects has dwindled to a handful. A shift in the dynamics of such projects has made them less attractive.
The key issue is that the return on road contracts executed on a build-operate-transfer (BOT) model has dropped to 12-14% from 16-18% five years ago. Project returns are falling due to various factors. Initially, returns were high on the first phase of the National Highways Authority of India (NHAI) because these were arterial routes like the Golden Quadrilateral, where traffic density and toll collections were better than expected.
However, by fiscal 2012 and 2013, ordering out was mainly in the phase three and five categories, which comprise mainly road widening. These were less profitable compared with the first phase. Further, as the number of bidders soared to 30 per project by 2012 from about five or six, firms sometimes bid competitively at the cost of profitability in the rush to bag orders. Reiterating this, Ajay D’Souza, director, Crisil Research, says, “In fiscal 2012 road projects were bid out on a premium because of heightened competition, which was in stark contrast to about five years ago when projects were backed by grants and viability gap funding given to the contracting company."
Meanwhile, the last-mile clearance on land acquisition, which is still a burning issue among road developers, led to delays in project commissioning, putting pressure on firms’ liquidity and profitability.
So, with most infrastructure behemoths like GMR Infrastructure Ltd, IVRCL Ltd and GVK Power & Infrastructure Ltd caught in a quagmire of high interest rates in the last two years versus project delays and poor returns, it is not unnatural that interest in new projects has waned.
“Add to this the regulation that those firms with more than three projects pending cannot bid further. Most banks have also reached the sector funding limits internally," adds D’Souza.
Research conducted by Crisil Research on 24 infrastructure and construction firms shows that the debt-to-equity ratio more than doubled to 3.7 times in fiscal 2012. Meanwhile, high interest costs and depreciation charges on commissioned projects will hit profit margins too. In fact, the March quarter, like the previous four-six quarters, is expected to see a contraction in income and profits of infrastructure firms with a high exposure to the BOT roads sector.
The sought-after BOT road projects are now on the backburner of most infrastructure firms. The financial and policy logjam has also seen the ordering out from NHAI and the ministry of road transport and highways fall to a four-year low at 1,941km in fiscal 2013, after touching a peak of 6,326km in the previous year. The handful of firms that are still interested seem to prefer the engineering, procurement and construction model with transparency on environmental and land clearances. This might well be the trend at least until the general election, though industry experts expect about 4,000km of roads to be ordered out this fiscal year.
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