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A slowing pace in awarding road projects will significantly impact the top-line growth of engineering, procurement, and construction (EPC) developers, from 30 per cent in 2019 to 10 per cent in the near term.
According to ratings agency CRISIL, the sector once again, seems to be facing many roadblocks — slowdown in awards, delays in execution owing to postponement of appointed dates, slow pace of land acquisition and elusive financial closures. The key question is whether history is repeating itself and could we see distress in the sector similar to that observed in the 2013 and 2015 periods, noted CRISIL.
As of December 2019, ratings agency ICRA had said that 4 per cent of projects awarded in FY2018 and 95 per cent of projects awarded in FY2019 are yet to receive appointed date (AD). AD refers to the date from which the project comes into existence.
Transition throes
To put it in context, after 2015, when many large players in the road sector went into financial distress, the sector saw the emergence of the next tier of players. These were primarily EPC companies, with smaller scale and without much, or with limited, exposure to build-operate-transfer (BOT) risks. They had smaller but healthier balance sheets, and had stayed away from the BOT bidding in the past, noted CRISIL.
CRISIL has analysed the top 10 players (by revenue) post fiscal 2015. With increase in awarding and NHAI’s focus on EPC and hybrid annuity model (HAM), these players were able to win projects on the back of their strong execution skills. By fiscal 2020, most of these developers were estimated to triple their scale without significantly leveraging their balance sheets.
The sector moved from a high of BOT awards in 2010, to a low of land acquisition hurdles and abysmal private sector participation in 2014. It was lifted by the introduction of newer modes such as HAM in 2016, and the highest-ever award of 7,400 km by the National Highways Authority of India (NHAI) in 2018.
Land acquisition issues
Other ratings agencies too share a similar view. Recently, ICRA said that even as financial closures have improved, land acquisition issues have delayed 60 per cent of road projects. “Till date, out of 24 projects due for completion, 15 have witnessed delays in execution,” noted Rajeshwar Burla, Vice-President, Corporate Ratings, ICRA.
CRISIL, however, pointed out that even in the backdrop of all these issues, it expects the credit profiles of CRISIL-rated companies to remain healthy.
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