Pick-up in awards in the transportation segment has kept the order books of developers focused on engineering, procurement and construction (EPC) ringing. So much so, that the order books for some of them are currently at their highest. At the end of FY16, a clutch of seven contractors that have been active in bagging EPC contracts recorded a combined order book of a whopping R50,600 crore—levels never seen before, according to data sourced from companies. The last high was in FY12, when the order books of these seven contractors was at R36,200 crore.
In the last 18 months, 13,000 kilometres of roads have been awarded between MoRTH and NHAI, which are jointly targeting to award 25,000 km of road projects in FY17 (a sharp jump of 2.5 times the FY16 award numbers). Given the pace of awards in the first six months of the current financial year, industry players are sceptical that MoRTH and NHAI will be able to meet these targets. In fact, the number of kilometres awarded during April to September 2017 (3,969 km) is a good 11% reduction over the kilometres awarded in the six months to September 2016.
However, analysts believe that even if the awards fall short of the targets, there will still be enough business coming in for the contractors. Alok Deora, analyst with IIFL Wealth told FE, “Even if awarding were close to 70-80% of the target, the opportunity available for these players would be huge and the top line growth should be strong for EPC focused players over the next few years.”
Over the last year itself, there has been a pick up in awarding road projects due to multiple factors like introduction of hybrid annuity model (HAM) and certain developer-friendly regulatory measures by the ministry.
These efforts resulted in road awards crossing 10,000 km during FY16, a sharp jump from 8,000 km awarded in FY15. Awarding also picked up for metro projects during the current year.
In fact, the average construction order book to sales for road companies which used to hover at 1.5 times revenue, already stands at 2.5-3 times the revenues, observes Deora. “Some of the pure-play EPC players with strong balance sheets are sitting on order books of 3.5-4 times revenue, and some even at 7 times the revenue,” he says.
EPC focused companies with strong order books include KNR Constructions, PNC Infratech, ITD Cementation, MBL Infra, Simplex Infrastructures, JKumar Infraprojects and Sadbhav Group. In FY16 for instance, the EPC order book of JKumar Infraprojects stood at around R8,500 crore, KNR Constructions stood at R4,500 crore, PNC Infratech at about R6,300 crore, while for Sadbhav it was at R6,800 crore. These numbers have grown further with the projects bagged in H1FY17.
Indeed, Nalin Gupta, managing director, J Kumar Infraprojects, told FE that the company’s order book is at historically high levels, thanks to the robust project awarding. “We are at R10,000 crore plus order book as of now and these have come only from EPC segment. We have seen ordering not just from roads ministry and NHAI, but also in the metro space,” says Gupta. He says that the future revenues look good, and while the company expects to close FY17 with a top line of R1,700 crore, it expects to achieve a top line growth of 20%-25% for the next three-four years on the current order book position.
Along with the healthy pace of awards, Varun Mehta, chief financial officer, Sadbhav Infrastructure Project feels that the legacy issues of land availability etc are also getting resolved, which means the execution of projects will also gain momentum.