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Mumbai: The National Highways Authority of India (NHAI) has pegged its FY20 ordering at 6,000km. However, after a good run for about four years, there is an air of scepticism in the road construction sector.

Data on orders bagged by leading firms and awards given out by NHAI since 1 April clearly points to a slowdown. Between April and August, NHAI has awarded barely 555km of contracts. A report by JM Financial Services Ltd points out that while construction firms scored on execution in the September quarter, the average order book of five firms was 11% lower year-on-year. Order flows too fell by 37% from a year ago in Q2 FY20. Most of them have not even clocked half the targeted annual order flows in the first six months.

Firms and investors are hoping order flows will pick up in second half of FY20. However, a paradigm shift in mode of awards to HAM (Hybrid Annuity Model) has put the onus of acquiring 80% of the land on NHAI. This has been the biggest road block that has stymied the progress of even awarded projects.

Land acquisition woes and liquidity constraints are unresolved, forcing NHAI into the slow lane. According to Crisil Research, “Around 2,540 km of the 6,670 km of awarded HAM projects are awaiting the appointed date (de facto starting date of a project). And, about 60-65% of the 2,540 km run the risk of termination since the wait has exceeded 18 months."

Further, after NHAI awards scaled a peak of 7,397km in FY18, it slipped dramatically to 2,222km in FY19. What’s disturbing is that orders are yet to pick up after the general election in May.

After NHAI awards scaled a peak of 7,397km in FY18, it slipped dramatically to 2,222km in FY19.
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After NHAI awards scaled a peak of 7,397km in FY18, it slipped dramatically to 2,222km in FY19.

Concerns have only mounted after NHAI was ticked off by the Prime Minister’s Office for reckless spending.

Therefore, most analysts have challenged NHAI’s guided 6,000km of awards in FY20. Crisil estimates 4,300-4,700 km, while some analysts reckon it will not be over 3,500-4,000km. The uncertainty on order flows is mirrored in the volatility of infrastructure stocks such as Dilip Buildcon Ltd, Sadbhav Engineering Ltd, Ashoka Buildcon Ltd, PNC Infratech Ltd and KNR Construction Ltd.

Be that as it may, most firms are sitting pretty on order books totalling two-three times the annual revenue. Some firms have diversified into Metro, irrigation and mining sectors to mitigate the risk in roads. In fact, strong execution has helped them clock double-digit revenue growth and stable operating margin in the last few quarters, a consoling factor for investors.

That said, “if HAM projects that are awaiting appointed dates for over 1.5 years get terminated, the execution outlook for fiscals 2020 to 2022 faces a downside risk of 5-10% in most companies," says the Crisil report. Further, if the slowdown in NHAI ordering spills over beyond FY20, it could jeopardize the order book ramp-up too.

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