Highway Construction May Contract First Time In Six Years. What It Means For Road Builders

The pace of building national highways in India may fall for the first time in six years in the ongoing fiscal because of a liquidity crunch, stricter lending norms and subdued awarding.Nearly 10,000-10,200 km of highways may be constructed in 2019-20, according to projections by the rating agencies ICRA and CARE Ratings. That’s a decline of about 6-8 percent over the previous year and nearly 90 percent of the Ministry of Road Transport and Highways’ 11,000-km target, data sourced from the website of Press Information Bureau showed.Around 6,490 km of highways—or 63 percent of the target—have been constructed in the first nine months of 2019-20, according to PIB data. The last time highway construction contracted was in 2013-14, when the activity declined by nearly a fourth..Reasons Behind The DeclineAccording to CARE Ratings, the factors that led to the decline in construction are:Stricter pre-disbursement norms by lenders.A debt market scenario (liquidity crunch)Delay in declaration of appointed date for HAM (hybrid annuity model) projects awarded in the previous year.Higher-than-expected rainfall in 2019.Subdued awarding of projects for the second consecutive year may also have contributed to the problem. Awarding activity growth, CARE Ratings said, is expected to drop by 7 percent year-on-year to 5,110 km in the ongoing fiscal. ICRA’s estimates national highway awarding at 5,500 km, almost unchanged over the previous year, because of challenges related to land acquisition and funding..“Awarding activity has been slow as NHAI’s (National Highways Authority of India) balance sheet has come under the scanner for its high leverage,” Rakesh Arora, managing partner at Go India Advisors, told BloombergQuint over the email. He said the industry was already struggling due to financing of HAM projects—under which the state sponsors 40 percent of the project cost disbursed in tranches anchored to milestones, with the remainder borne by the private entity—and had little capability to bid for more.Only EPC projects found takers. This explains the reason behind the slow pace of construction as financial closures of HAM projects took longer time, Arora said..Earnings Outlook .The order book-to-bill ratio of the 12 largest construction companies has dipped only marginally and remains above 3x, according to data complied by ICRA. That, on the face of it, suggests a steady earnings outlook..Dig deeper and concerns become evident. The order book of the 12 companies on an average declined 9 percent year-on-year in the quarter ended December compared with a growth of 20 percent in the corresponding period of the previous fiscal.And the order-book-to-bill ratio appears stable because of a decline in the pace of execution. In the quarter ended December, aggregate sales of the 12 companies declined 16 percent compared with a growth of 24 percent a year earlier..“The aggregate order backlog is three times TTM (twelve months trailing) revenue, which is only enough for a 10 percent revenue growth—or flat at worst,” said Rohit Natrajan, associate vice president at Antique Stock Broking Ltd. “However, financial charges, largely led by credit squeeze in markets, is a cause for concern.”Natrajan said while larger players like Dilip Buildcon Ltd. are already moving to segments like airports and coal mining due the NHAI hitting saturation due to its weak balance sheet, smaller firms like HG Infra Engineering Ltd. and KNR Construction Ltd. still have legroom for expansion as project awards slow.Arora of Go India Advisors expects revenue growth for most companies to remain unchanged or contract slightly on the back of order book declines.

Highway Construction May Contract First Time In Six Years. What It Means For Road Builders

The pace of building national highways in India is on track to fall for the first time in six years.

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Highway Construction May Contract First Time In Six Years. What It Means For Road Builders

The pace of building national highways in India is on track to fall for the first time in six years.

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