Government's road projects find the going tough in first half
The government’s road projects awarding bodies, NHAI and Ministry of Road Transport and Highways, have awarded just 268 km of road projects in the first half of FY19, which is 8.8% of the target of 3,028 km for the period.
In the past, after build, operate, transfer (BOT) model lost its viability due to weak traffic and leveraged balance sheets, competition among players intensified to grab more assetlight engineering, procurement and construction (EPC) projects. This resulted in higher debt among EPC companies. It prompted the government to announce hybrid-annuity model (HAM) which generated high interest as the government bore 40% of project costs and players would have to secure equity commitment for the remaining portion of the cost.
This again met with aggressive participation but, a large number of HAM projects are yet to secure financial closure due to selective sanctioning of loans by banks. It is estimated that close to 56% of total HAM projects have not yet secured financial closure.
Analysts believe there will be low appetite among infrastructure companies to bid for projects in the coming quarters. There may also be a shift in awarding of roads projects on pure EPC basis in which 100% of the cost would be borne by the government.
This may increase the government’s financial burden. For investors, in the wake of these factors, it would be advisable to be invested with select companies such as PNC Infratech, KNR Constructions and Ashoka Buildcon, which are placed well in terms of balance sheet, order book, and securing financial closure of projects.