The show really hit the road in 2017, as the government kicked into high gear on building of highways across the country. The roads sector stayed the course with 18% year-on-year growth in the number of kilometres constructed per day, at 26 km against 22 km per day in 2016. The swelling order books of a dozen road developers also bears testimony to the healthy pipeline. While from January to August 2017 only 1,200 km of projects had been awarded, against 2,600 km in the same period of 2016, the awarding of projects has gained pace in the past three months and there is an expectation that the year will end with a big tally. In addition to this, improved construction activity and a decline in the number of stalled projects clearly indicate that the government has got its act together on roads. What’s more, the roads ministry clearly reserved the best for last. On October 25, the central government announced the Bharatmala programme, with an ambitious outlay of Rs 7,50,000 crore, targeting construction of 83,677 km of road network, subsuming the existing National Highways Development Plan (NHDP) launched by the Atal Bihari Vajpayee government in 1998, under which roughly 20,000 km has been constructed over the past two decades. The Bharatmala programme aims to construct more than double this length in one-third the time, by FY2022.
The size of the opportunity and the new model of contracts has drawn several new players to the sector in the year gone by. Little known and mid-sized companies have started building a presence, either on their own or through joint ventures with foreign companies, who are looking to get in on the action. Dilip Buildcon, Sadbhav Infrastructure and MEP Infrastructure bid and won at least five projects or more each, under a new developer-friendly hybrid annuity model (HAM) that gradually picked up steam. A clear manifestation of this are the two joint ventures of MEP Infra, with Spain’s San Jose and with Chinese state-owned firm Longjian Road & Bridge Company. The new model seems to have done the trick, with projects awarded under HAM forming about 50% of the total projects awarded this year. And this trend will likely continue.
Brimming with confidence, smaller, pure-play engineering, procurement and construction (EPC) companies, too, are moving up the value chain, increasingly bidding for HAM road projects. For instance, Sunil Hitech Engineers is one such company that has bid and won one HAM project so far. Its director, C Venkataramana, says this new model will attract companies that are serious about the business, unlike in the past. He adds, “The returns are commensurate with the low-risk profile of the model but it is a good way to build up the order book with most of the bigger companies staying away from these projects. We will selectively bid for more HAM projects in future.” As construction picked up pace, the surge in order inflow added to the momentum, with companies reporting a doubling in the order-book-to-revenue ratio to 2.5-3 times, a level that has not been seen in over five years.
Dilip Buildcon announced at the end of August that it had signed a Rs 1,600 crore deal to sell its entire stake in 24 of its road projects. That was the first big-ticket road asset sale in two years since Canadian asset manager Brookfield purchased six road projects from Gammon Infrastructure Projects for Rs 2,935 crore. The deal marked the end to a year of a steady flow of single asset deals with increasing numbers of private equity funds interested in owning road assets in India. The industry continues to be challenged by the usual issues of land acquisition but the equally important problem of procuring finance for such projects seem to have been resolved, at least for now. The numbers bear this out, as road developers with good execution track records and strong balance sheets continue to win projects as well as secure financing for them under HAM. Based on the much-improved performance in 2017, the industry is in for even better times in 2018. However, Shubham Jain, vice-president at ratings and research agency ICRA, advises caution.
He says the government may be constrained by its own fiscal deficit target, especially considering the increase in compensation under the Land Acquisition, Resettlement and Rehabilitation Bill (LARR) 2013, which provides for compensation of four times the value of the land being acquired in rural areas. Jain told Fe,“Considering the private sector’s involvement is going to be limited to about 15-20%, the government’s asset recycling programme under the toll, operate, transfer (TOT) model is going to be critical for them to raise the funds required.”
This might play a spoiler, but all else seems in place for speeding ahead in 2018.