Construction on a bumpy path

The Centre’s thrust on building highway infrastructure continues, with allocation to the National Highways Authority of India (NHAI) coming in at a healthy ₹36,691 crore for 2019-20.

At 27 km/day, the construction of highways is at record levels.

But none of the stocks in the space, including the likes of Dilip Buildcon, IRB Infrastructure, KNR Construction and HG Infra, has reacted much, as the problems for the sector have more to do with execution and financial closure of projects rather than budgetary allocations.

The change

The allocation for the highways segment is likely to increase, if past experience is anything to go by. In 2018-19, for example, from the initial estimate of ₹29,663 crore, the revised estimate has gone up to 37,321 crore, an increase of 25.8 per cent.

The allocation to village road construction, through the Pradhan Mantri Gram Sadak Yojana, has been increased to ₹19,000 crore in 2019-20.

The background

Thanks to increasing land costs, unwillingness of banks to lend and execution delays, the sector has been de-rated substantially. Most stocks are down 30-70 per cent from their peak in the last one year. With liquidity crisis in the NBFC space and many public sector banks under preventive corrective action (PCA) mode, lending has been curtailed.

The NHAI continues to award contracts at a brisk pace, especially under the HAM model (in which costs are shared by the NHAI and the vendor), with award of contracts going up 10-fold in the last couple of years.

In a recent report, CRISIL has indicated that nearly 800 km of execution under the HAM model may be under risk.

An India Ratings report suggests that the average of the order book-to-revenue ratios of the top five companies in the road sector is likely to be 3.2 in FY19. While a large order book is welcome, execution risks could mean that translation to revenues may not happen soon.

Banks continue to be reluctant on the HAM model.

Many players have gone on to bid only for EPC (engineering procurement and construction) contracts, as there is more certainty in such projects, with predictable margins for established firms in the space.

The verdict

Though allocations are healthy, bottlenecks in terms of quick land acquisition and limited availability of bank loans need to be sorted out by the Centre.

In this regard, three banks coming out of the PCA mode is a welcome sign as lending to the segment could pick up.

But rising land costs and execution delays mean that it may take a while — perhaps after political direction emerges after May — before key players in the segment start to be viewed favourably by the market.

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