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The roads sector, which was on an overdrive for the last five years, seems to have hit a speed breaker. The Prime Minister’s Office (PMO) rapped the ministry of road transport and highways saying that the present road contracts “have become financially unviable".

The PMO said the hybrid annuity model (HAM) and EPC (engineering, procurement, construction) mode of contracts entail heavy investment from the government, which is unsustainable. Hence, it suggests the traditional build-operate-transfer (BOT) model to be adopted for future road contracts.

But analysts said that the appetite for BOT projects will be weak. Rajeshwar Burla, vice president and associate head (corporate ratings) at Icra Ltd, said: “Road developers have become risk averse. Many developers’ balance sheets cannot support huge equity investments towards BOT projects."

He added that with the transportation sector undergoing change with alternative modes of transport (freight corridor, inland waterways), forecasting traffic is extremely challenging.

Note that between FY10 and FY14, the share of BOT projects was nearly 93% of the total awards. It is now down to less than 10%.

In BOT projects, land acquisition delays, related litigations and cost overruns dragged many companies into the red. Cash- strapped developers then shied away from the sector.

To save the situation and put road construction on a war footing, the National Highways Authority of India came up with HAM. The government’s commitment to 40% of the equity brought developers back into the fray. New-age companies such as Sadbhav Engineering Ltd, Dilip Buildcon Ltd and Ashoka Buildcon Ltd have order books of about three times their annual revenues.

However, an economic slowdown, delays in financial closure and slow growth in toll traffic have jeopardized the cash flows of road developers.

Interest cost to sales increased from 9.8% in Q4 FY19 to 16.2% in Q1 FY20. Interest cover, fell from 3.8 times in Q4 FY19 to 1.4 times for the sample 20 mid-sized companies (bit.ly/2U92fmh).

Order flows were weak due to the general election in the first six months of 2019. Now, if the sector gets caught in a policy logjam, the ambitious road construction commitment of Prime Minister Narendra Modi’s government might take a hit.

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