HAM ensured that 40 per cent of the project cost would be borne by the government and the remaining the construction company had to provide.
ET INTELLIGENCE GROUP: Select construction companies that were market favourites a few years ago are now facing two key hurdles: slow pace of project execution and a likely funds crunch. The genesis of these two problems can be traced to the manner in which companies are executing orders, and how they had secured them in the first place.
After grappling with scanty order books, stretched balance sheets and stiff competition in the past few years, the government’s Hybrid Annuity Model (HAM) brought much-needed relief. HAM was introduced keeping in mind stretched balance sheets of construction companies and thin order books.
HAM ensured that 40 per cent of the project cost would be borne by the government and the remaining the construction company had to provide. This model received an extremely favourable response.
But in the past year, things have changed for HAM players. Banks have been cautious in funding HAM projects and analysts point out that lenders have been funding only select construction companies. As a result, the number of bidders for HAM projects has fallen.
Analysts estimate that bidders for HAM projects have reduced to four or five from 9-10 players. Since most well-placed construction companies have order books sufficient to provide revenue visibility for the next two to three years, competition is likely to shift to pure EPC projects wherein the project is fully funded by the government. Given this situation, analysts foresee the funding of HAM projects a key determining factor in re-rating of construction stocks.
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Besides funding, another issue that has disturbed the pace of execution is subcontracting of construction work to players that lack the execution capability and bandwidth to execute those projects. Analysts point out that companies that are also into developing roads and have secured construction orders are finding it difficult to execute as they subcontract construction work to companies smaller in size than them.
These smaller players that lack experience and execution capabilities have been unable to complete assignments, which in turn has hurt the pace of overall execution. Consequently, these companies that are not pure construction players but have construction orders are lagging behind in the pace of execution in comparison with pure construction companies.
Analysts point out that pure construction player such as Dilip Buildcon is the best placed, followed by other players such as Sadbhav Engineering and KNR Constructions are placed well in executing their projects at a brisk pace.
