Macro Economy

More competition in road sector could impact profits for contractors: ICRA

Our Bureau Hyderabad | Updated on June 22, 2021

MoRTH relaxed norms brings more players

With the Ministry of Road Transport and Highways (MoRTH) relaxing the eligibility criteria of bidders for HAM/EPC projects, there has been increased competitive intensity over the past few months.

And this aggressive bidding in the sector could result in build-up of stress on profitability and working capital cycle, according to ICRA.

Also read: Investment in road infrastructure is a ticket for speedy recovery of India

There has been entry of new players in the road sector from other sectors due to increase in bidding eligibility for existing players.

Lower state capex, muted private sector opportunities and higher opportunities in road sector have pushed more entities towards the road sector.

Rajeshwar Burla, Co-Group Head & Vice President, Corporate Ratings, ICRA, in a statement said, “Competition in the road sector is expected to remain at an elevated level with more contractors fulfilling the relaxed eligibility criteria. The EPC mode continues to remain extremely competitive with many bidders quoting at a discount of as high as 30-35 per cent to the NHAI’s base price.”

“The BOT (hybri annuity model) has also witnessed heightened competition resulting in average premium to NHAI cost reducing to around 15 per cent from 25-30 per cent earlier and even negative O&M bid in some cases. The number of bidders has surpassed 40 for some of the EPC projects and 10-15 for HAM projects.”

ICRA expects the central government spend on infrastructure building to be maintained, given its positive multiplier effect on the overall economy, notwithstanding the adverse impact of Covid-19-induced slowdown on economic activities. The budgetary allocations for MoRTH increased at a CAGR of 21 per cent to ₹1,08,230 crore in FY2022 BE from ₹41,193 crore in FY2017, and is expected to remain robust considering the large Bharatmala Program.

This apart, NHAI has been actively trying to monetise assets through TOT and InvIT modes.

Discounted bids to NHAI’s base price are coinciding with the period of high commodity prices of steel, cement, etc. Consequently, the impact on the profitability of the contracting companies could be substantial.

“While price escalation is covered in EPC contracts, the fact that NHAI’s base price itself is based on dated DPRs implies that the escalation clauses may not mitigate the impact of rise in input prices to a large extent. Bidding discipline therefore, remains a key for road contractors to maintain adequate profitability and avoid build-up of stress on working capital cycle,” Burla added.

Aggressive bidding for the projects may also lead to projects getting delayed or stuck or going under dispute on lower profitability in the projects. The time and cost overruns could be due to various reasons, including steep increase in commodity prices, change in scope, delays in land acquisition and approvals, and force majeure events, among others, according to ICRA.

Published on June 22, 2021

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