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India’s pace of national highways construction (NHs) is expected to increase to 32-33 km per day in the current financial year compared to 30 km in FY23.
According to CareEdge Ratings, even as the pace of road construction is expected to pick up gradually, the execution pace will be lower than FY21 levels.
India’s pace of NH construction stood at 30 km per day in FY19 before slipping to 28 in FY20. During the Covid-impacted FY21, highway construction pace picked up to hit 36 km per day. During FY22, the activity fell to 29 km a day from which it rose marginally to 30 km in FY23, CareEdge data shows.
Maulesh Desai, Director at CareEdge Ratings, pointed out that the execution pace of National Highways Authority of India (NHAI), though stable at 30 km per day during FY23, is lower than the Roads and Highways Ministry’s estimates.
The agency explained that it is attributable to pending or delayed receipt of the appointed date, prolonged monsoon, surge in commodity prices and impending execution challenges elevated by limited financial flexibility of sponsors with moderate credit profile.
“For FY24, the pace of road construction is expected to pick up gradually to around 32-33 km/day. Despite the uptick, the execution pace shall be lower than FY21 levels and profit before interest, lease, depreciation and tax (PBILDT) margins for road developers to remain moderate at around 13.50 per cent due to heightened competitive intensity,” he added.
Mounting execution woes
During March 2020, NHAI relaxed bidding criteria for developers that have intensified competition with forays of mid-sized sponsors possessing modest credit profiles. The share of moderate and weak sponsors steadily increased from 22 per cent (for projects awarded before FY20) to 36 per cent (for projects awarded in FY21 and FY22). Correspondingly, the share of strong sponsors shrunk from 78 per cent to 63 per cent.
“CareEdge Ratings thus believes execution risk has heightened for projects with aggregate Bid Project Cost (BPC) of ₹13,000 crore due to the moderate credit profile of a new set of road developers, unprecedented surge in commodity prices (post bidding), funding risk (elaborated below) and relatively stricter terms of debt sanction. In view of intense competition in the sector, strong sponsors have shifted to structurally complex projects and forayed into newer geographies where competition is relatively moderate,” it added.
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