NHAI Orders Gain Pace, But Road Builders May Take Time To Recover

Shares of India’s construction and engineering companies have rebounded from their April lows, tracking recovery in equity markets and as highway ordering picked up after the nation eased lockdown curbs.Stocks of companies that bid for orders to build ports to roads have surged 35-80% since hitting 52-week lows more than four months ago. Sadbhav Engineering Ltd. and ITD Cementation Ltd. led the rally.That came after India gradually lifted one of the world’s strictest restrictions that had shut economic activity and caused labour exodus. The stock surge continued during the monsoon period when construction activity slows down.Project execution and labour availability is back to near normal, touching almost 90% of pre-Covid levels, Dilip Buildcon Ltd., among the top infrastructure builders, said in its conference call. Execution is almost at 80% of pre-pandemic levels, it said.According to K Jalandhar Reddy, executive director at KNR Constructions Ltd., though the execution of engineering, procurement and construction, and hybrid annuity model projects were impacted in the initial days of lockdown, there has been a gradual improvement in the pace of execution at all project sites. Based on labour and raw material availability, project execution may move towards optimum levels by September, barring any further disruptions, Reddy said in a conference call after first quarter results.PNC Infratech Ltd. and Reliance Infrastructure Ltd. have yet to respond to BloombergQuint's emailed queries..NHAI’s Awarding, Construction Jumps.One of the key factors that helped the infrastructure companies could be that highway contracts and construction activity by the National Highway Authority of India picked up pace. Besides, implementation of relief measures by the Ministry of Road Transport and Highways provided liquidity support during the lockdown.A total of 3,181 kilometres of highways were built during April-August of the financial year ending March 2021 against the targeted 2,771 km during the period, according to a PIB release.Contracts to build 3,300 km were awarded in the April-August period of the ongoing fiscal against 1,367 km a year ago. Of this, NHAI awarded 744 km, the highest since FY18..This number, according to Vinayak Chatterjee, chairman of Feedback Infra Group, is very positive. Lauding the NHAI’s efforts for maintaining project implementation despite Covid-19 lockdown, he tweeted that while most of the infrastructure discussions are about financing, the country needs more institutions such as highway authority that also knows how to implement. April-August highway construction, he said, was still at decent pace of 21.2 km a day against earlier high of 29 km a day..What It Means For Infra Companies.ICRA Ltd. sees a positive momentum in top line of infrastructure companies for FY22 if there is sustained or better momentum in NHAI’s awarding pace. Relatively healthy balance sheets also somewhat provide comfort in the stressful situation, it said.Crisil Ratings, however, expects the revenue of road-building engineering, procurement and construction companies to contract 8-10% this fiscal with the pandemic-driven lockdowns severely curtailing activity. That compares with a 17% growth between fiscals 2017 and 2020 for 300 Crisil-rated EPC companies with rated debt of Rs 51,000 crore.For ICRA, NHAI’s pipeline of orders offers hope.“The execution in national highway projects has been better than expectations given the lockdown conditions,” said Subham Jain, senior vice president and group head at ICRA. “The strong pipeline of orders should support order book and consequently revenues of construction companies focussed on national highway projects.”According to a report by IIFL Securities, most infrastructure companies did better than expected in the quarter ended June 30, 2020 as the impact of Covid-19 disruptions was lower on execution for road contractors.Dilip Buildcon’s management, in the first-quarter earnings concall in August, said the industry has adapted to the challenge. Though monsoons would obviously impact execution in the first two quarters of the financial year, all sites would operate at normalcy post monsoon, Rohan Suryavanshi, head, strategy and planning, Dilip Buildcon, said. The government’s move to ease payment terms improved cash flow for all companies.Among measures announced in May, the government announced faster settlement of claims, partial release of bank guarantees and retention money, waiver of penalty for the delay submitting performance bank guarantees and extension of up to six months of payment period to all contractors.A Nomura report said the measures released liquidity worth Rs 34,600 crore to construction contractors and Rs 2,500 crore will likely flow in coming months.Still, the rating agencies said there could be delays in recovery, and there could be a possibility that the sector recovers to normalcy only by end of FY21 or FY22. The good thing, according to Crisil, is that the sector currently is well insulated from financial shocks and/or downgrades given the balance sheet strength of most of the companies.

NHAI Orders Gain Pace, But Road Builders May Take Time To Recover

Higher orders doesn’t mean immediate recovery for road builders.

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