Has road construction come to a stand still?

Many economists claim that the current slowdown has emanated from years of paralysis witnessed in the infrastructure space. The alarming drop in private investment was shunned off in the pretext of government-backed capex covering up for the former.

Apparently, this did hold good for quite some time. This is evident from the Gross Fixed Capital Formation (GFCF) ― indicator of gross investments in the GDP ― which grew at above 10 per cent levels for most quarters in late FY15 to late FY19.

But the slowdown in GFCF in the last two quarters clearly shows that Centre-funded projects have also witnessed a lull.

During the years of the infrastructure boom, within the CPSE-led projects, the highest traction was seen in roads and highways. That apart, with Bharatmala on full swing, pureplay road infrastructure companies also reaped the benefits. However, since late 2018, mounting debt levels crippled the performance of these companies. To make matters worse, NHAI awarding also slowed in FY20 ― it has awarded only 15 contracts in the year so far, for the construction of 515 km. During FY18, NHAI awarded a whooping 147 contracts for the construction of 7,394 km. In FY19, 77 contracts were awarded covering 2,263 km.

Just when private equity deals helped road construction companies bring down their debt levels, fresh order awarding from NHAI has almost come to a standstill. Reasons for the halt in fresh awarding can be attributed to, one, most projects already awarded (including completed ones) turned unviable, given the difficulties in toll collection, and two, prolonged delays in execution of projects already awarded, due to various reasons, including land acquisition. According to a report by CRISIL, under the Hybrid Annuity Model (HAM), the NHAI had awarded 6,670 km under 119 projects, during FY16 to FY19. Of this, only 4,130 km (62 per cent) have received appointed dates — implying the starting date of a project. A more alarming fact is, that of the remaining 2,540 km that haven’t yet received the appointed dates, over 60-65 per cent run the risk of termination since the wait has exceeded 18 months.

Consequently, despite most companies continuing to show positive earnings growth in H1 FY20 (on the back of healthy order execution and savings on corporate tax for a few), investors have turned wary of their future performance.

FY20 so far

Given the healthy order inflows until FY19, most pureplay road construction companies started off the year with sky-high targets. For instance, PNC Infratech which ended FY19 with an order book of Rs 12,200 crore, guided the order inflows for FY20 to be in the range of Rs 6,000 to Rs 7,000 crore. Likewise, Dilip Buildcon also was keen on a 57 per cent growth in its order book as on March 2019 — Rs 21,172 crore, through inflows. The management of Ashoka Buildcon was also expecting 50-70 per cent growth through order inflows. But the order inflows for H1 FY20 have been close to zero for these companies. While Dilip Buildcon managed an order inflow of Rs 1,189 crore (thanks to its irrigation business), PNC Infratech could garner orders worth only Rs 170 crore. Until September 2019, Ashoka Buildcon had zero order inflows.

Given the suspension in NHAI’s order awarding, meeting the yearly targets seems far-fetched, for these companies.

Road ahead

Following this, pureplay road construction companies are also looking at diversifying their avenues for generating revenue. For instance, PNC Infratech is eyeing projects from Metro Rail and Railways to meet their earlier guidance levels. A few companies have also considered revising their earlier growth guidance. That said, company filings in the last two to three months and management conference calls show some signs of revival in the almost gloomy picture. For instance, in the last week, Ashoka Buildcon has received a fresh order from NHAI worth Rs 1,000 crore. This order (HAM project) is for the four-laning of NH-161 from Kandi to Ramsanpalle in Telangana under the Bharatmala Pariyojna. PNC Infratech, also banks on a Rs 1,000-crore EPC project from NHAI, received post Q2. The company’s management expects NHAI order awarding to revive from December 2019.

While the timing may not be precise, the ‘Tenders’ section on the NHAI website does reveal that the halt in awarding is temporary. The site shows that in the last two months alone (October and November 2019), NHAI has called for 169 tenders for various projects. It must however, be noted that these tenders also include orders for maintenance of existing roads and manpower supply for NHAI offices, and not just fresh construction orders.

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