 "Road projects to build balance sheets of infra companies from next year")
Infrastructure companies are betting big on road contracts to shore up their revenues after facing a de-growth due to various reasons, such as shrinkages in EPC opportunities, in the recent past.
But in the past year, the National Highways Authority of India (NHAI) has awarded close to Rs 60,000 crore worth of projects, mostly as cash contracts, which is expected to help infrastructure companies with good execution skills.
"Road projects will certainly help infrastructure companies increase their revenues. As the EPC road contracts involve milestone-linked payments , those who perform better will gain more out of this opportunity," Manish Agarwal, leader, Capital Projects and Infrastructure at PWC India, told Business Standard.
Apart from the bigger players, such as L&T and IRB Infra, tier-2 companies, such as Gayatri Projects Limited, have been actively bidding for road contracts on the back of their expertise in the road construction. About 50% of the Rs 13,000-crore order book of Gayatri comprises of road projects is awarded by the NHAI.
The company's managing director TV Sandeep Reddy recently told Business Standard that they were aiming to win additional road projects worth of Rs 5000 crore-Rs 6,000 crore before the end of March 2017. But the activity on new road projects will reflect on the company's balance sheet from the next financial year because it takes about 6 to 8 months to complete some mandatory processes, such as design approvals.
The company, which has been repositioning itself as a pure play EPC construction company on the back of these cash contracts, says the cash contracts will also help reduce the dependence on bank loans even for the working capital requirements as they expect to generate additional cash flows sufficient to fund the operational costs.
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NCC Limited, one of leading construction companies from Hyderabad, has also started focusing on road sector once again after going through the usual difficulties caused by the BOT (build, operate and transfer) road projects.
"Currently the road projects constitute just about 4-5 per cent of our order book. However it is set to grow under the changed circumstances in road construction sector . We have decided to stop bidding for EPC contracts in the power sector and would be looking at the new road projects as we see opportunities," Y D Murthy, executive vice president of NCC Limited told Business Standard.
The company's order book stood at Rs 19,500 crore, comprising of buildings and water projects with a share of 40 per cent and 20 percent respectively, as at the end of June, 2016.
Companies get mobilisation advances in cash contract based road projects. This would help them jump start the construction activity as soon as the approvals are in place. These projects would start generating the much needed cash flows as the companies keep meeting the milestones unlike the BOT(build, operate and transfer model based on the equity investment by the developers of road projects) projects that would start yielding returns only after they begin commercial operations.
A Crisil report last year said even after the things were speeded up on matters such as land acquisition under the NDA Government, almost half of the BOT model with sanctioned debt of Rs 45,900 crore were still at high risk of not being completed.
However, Murthy says his company wants to strike a good balance between the EPC road projects and the hybrid annuity road projects since cash contracts in road sector have been witnessing an intense competition that might impact the margins.
As the hybrid annuity model was recently introduced, most of the projects awarded by NHAI in the last 2-3 years came in the EPC mode, according to Manish Agarwal.
NCC Limited is was about to complete the Rs 1,068 crore Agra-Lucknow Expressway project soon while a couple of other BoT road projects being built by the company were also expected be ready to start generating revenues this year.
The company was also able to monitise a couple of road projects in the last couple of years. "We will have additional funds to make fresh equity investments into the road projects. Therefore we are looking at winning at least one hybrid annuity road project with a size of Rs 1,000 crore in the current year," Murthy told Business Standard.
Madhucon Projects Limited is yet another infra company looking at winning at least Rs 4,000 crore to Rs 5000 crore worth of road projects in the coming days.
"We were the first private company to take up a road project in AP in the country soon after Government of India had decided to allow private contractors in road construction way back in the year 1996. We expect to double our revenues from the present level by undertaking the new road projects in the coming years," Madhucon Group chairman Nama Nageshwar Rao said.
The company, which has three operating road projects, is looking at scaling up the revenues to Rs 3000 crore-Rs 4,000 crore level in the next financial year.
Madhucon group has registered little over Rs 2,300 crore revenues in 2015-16. The company's 600 mw coal fired power project had to face difficulties earlier this year owing to lack of demand for power. With the project being run purely as a merchant power plant facing risk of low open market prices and even closure in the absence of demand, it had recently tied up 400 mw under a 12-year PPA with AP power utilities. Coupled with the new road projects the company hopes to accelerate growth in revenues and profitability from next year.