Competition in India's road building sector intensified as aggressive bidding by small and mid-sized companies turned larger players cautious even as the pace of construction slowed. That may change soon.
The National Highways Authority of India eased the minimum net-worth requirement last year for bidders of roads to bridges projects. The Ministry of Road Transport and Highways had also waived earnest money and bid security. According to Rohit Natrajan, associate vice president-research at Antique Stock Broking, it was done to encourage private participation.
But small and mid-sized companies turned out in hordes, undercutting larger peers. The share of medium-sized construction firms, according to Natrajan, rose in the projects awarded. That increased the risk of delays and stalled projects.
“The space was overcrowded with some players undercutting NHAI's total project cost by 10-15%,” Anil Yadav, director of investor relations at IRB Infrastructure Developers Ltd., told BloombergQuint over the phone.
The NHAI now seeks to tighten the minimum net worth criteria to ensure that the successful bidder does not falter on achieving financial closure and the project isn't stuck, said Yadav. And the ministry has restored earnest money requirement.
That may tilt the balance for larger-sized players, giving them the "lion's share of the business" like in financial year 2019, Natrajan said.
Yadav of IRB Infrastructure agreed. With the government seeking to tighten the norms, “more sensible and serious players would re-enter the game, which would ensure higher success rate in execution of these orders”, he said.
Bigger Players Take The Backseat In FY22
The NHAI awarded tenders for projects spanning 2,583 km of length for the first 10 months of the financial year.
Of the 92 projects awarded, around 43 or 46.7% were engineering, procurement and construction or EPC projects, while the remaining 49 projects or 53.2% were under the hybrid annuity model or HAM. It's a combination of outright government-funded EPC contracts and the built-operate-transfer system.
In FY21, 33% of projects were awarded under HAM, according to a report by Antique Stock Broking.
After the net-worth criteria was eased, mid-sized players' share in HAM projects rose to 58%, Antique Stock Broking's Natarajan said. That compares with 33% in FY21.
Of the projects awarded by the NHAI, only 14.7% went to listed construction firms, while more than 85% were bagged by unlisted entities.
That's because large developers like IRB Infrastructure adopted “a conservative approach” towards bidding for HAM projects accounting for more than half the share.
IRB Infrastructure bagged Rs 909 crore worth of projects from the NHAI so far this financial year. That compares with Rs 5,000 crore worth of orders in entire FY21.
The top listed construction firms bagged 15% of the NHAI orders worth Rs 81,747.9 crore. The list was led by Ircon International Ltd., HG Infra Engineering Ltd. and Dilip Buildcon Ltd.
Decreased interest from bigger developers also coincided with a slowdown in infrastructure development in the first 10 months of FY22. Construction activity dropped 27%, while project awarding fell 11%, marking the first decline in at least three years, according to data from the Ministry of Road Transport and Highways.
One of the major factors for the lag in execution has been heavy rains and multiple cyclones, Rajeshwar Burla, associate vice president at ICRA Ltd., told BloombergQuint over the phone.
India has built 21.8 kilometres of roads daily so far this fiscal, according to the monthly data by the Ministry of Road Transport and Highways. At this pace, it will miss the target by the biggest margin in three years.
Burla, however, expects construction activity to pick up pace as weather conditions are normal now. The reduction in competition from tighter eligibility norms will only aid demand, he said.
“It would ensure only large-cap companies with healthy balance sheets remain at the forefront. Easing of competition would also ensure higher margins for these road infra players.”
India also increased allocation for infrastructure by a record in the budget for 2022-23. And while the analyst commentary suggested that it will aid capex cycle benefiting road building companies, Nomura has advised investors to remain cautious.
The brokerage, in its Feb. 2 budget note, called the capital allocation of 1% of the budgeted estimate towards the road sector as “disappointing” despite the thrust on expressway construction.
"The development is particularly disappointing for names like PNC Infratech Ltd., Dilip Buildcon Ltd. and KNR Constructions Ltd. as other than roads, even the spend on irrigation and river schemes is down 30%," Nomura said.
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