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Business News/ Market / Mark-to-market/  Road projects hit a speed breaker
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Road projects hit a speed breaker

Road projects, which delivered reasonable returns so far among infrastructure assets, are in a jam

Poor revenues against a backdrop of fixed project costs would trickle down to poor operating profit and low interest coverage ratio for construction firms. Photo: MintPremium
Poor revenues against a backdrop of fixed project costs would trickle down to poor operating profit and low interest coverage ratio for construction firms. Photo: Mint

Road projects, which delivered reasonable returns so far among infrastructure assets, are in a jam. Naturally, infrastructure companies with a high exposure to road projects will face further challenges to their already troubled financials.

On Monday, news reports stated that the National Highways Authority of India (NHAI) cancelled almost 2,500km of road projects, most of which were awarded in 2012. The reason is lack of financial closure because of poor company credentials or delays in land and environmental clearances. The number could increase if the companies that are in talks to reschedule the premium payment with the government are dissatisfied with the proposal.

The decision to allow premium rescheduling is to help the road projects make up for delays. However, another bone of contention is the cost escalation compensation sought by road developers, given the 25-30% rise in costs over the last few years. This is unlikely to be granted to developers. Cost overruns, in the final analysis, lower project returns, too. The forthcoming elections would also put fresh project bids on hold.

Meanwhile, road traffic movement has not been in line with estimates. A Crisil Research report says, “Overall traffic growth, estimated at 7-8% between fiscal years 2008 and 2011, fell sharply to 3-4% in 2012 and 2-3% in 2013." Perhaps the economic slowdown has hit road traffic and toll revenues, which on arterial roads hinge on commercial vehicle traffic, which has dropped.

The aggregate data of 19 construction companies (primarily in the roads business) shows that the average revenue was flat for the last five quarters, although it got a tad better in the December quarter.

Poor revenues against a backdrop of fixed project costs would trickle down to poor operating profit and low interest coverage ratio.

No wonder there’s poor investor interest in road development companies. Besides, the long-gestation period to return on investment and uncertainty about toll traffic growth rates makes it tough to estimate correct revenue streams, which in turn affects the profitability of developers.

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Published: 24 Mar 2014, 10:30 PM IST
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