Slowdown In New Orders Won’t Hit Road Developers, For Now
Road developing companies order book remains at the highest level in four years.
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India’s six largest listed road developers by market value won fresh highway orders worth Rs 2,500 crore in the three months ended June. Three of them didn’t get any.
Yet, the slow order inflow is unlikely to impact their revenue, at least for now. That’s because the order book is at the highest level in four years. The average consolidated order book of 13 road and infrastructure developers, including the top six, was a little over four times their revenue at the end of March, more than twice the level four years ago, according to Asian Market Securities.
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The surge in orders was largely driven by a near seven-fold jump in contracts awarded by the National Highway Authority of India over the last four financial years. The central road authority gave out total orders worth Rs 1.3 lakh crore over the past two years alone.
Strong orders by the NHAI in the previous two financial years should keep the revenue robust for road companies in the ongoing and the next financial years, said Amber Singhania, senior research analyst at Asian Market Securities. To see the growth momentum continuing beyond 2018-19, an uptick in tendering and awarding from the NHAI and the Ministry of Road Transport and Highways is essential over the next few quarters, he said. The authority is expected to award orders for 8,000 kilometres of roads during the rest of the ongoing financial year, he said.
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Highway construction more than doubled to record 25.21 kilometers a day in two years to March. With the pace expected to pick up in coming months, it could cross 30 kilometers per day by March 2018, said Alok Deora, an analyst at IIFL Private Wealth. While this may be behind the government’s target of 41 kilometers per day, “it would be a commendable achievement”.
Achieving a run-rate of 41 km a day would depend on how quickly land acquisition issues are cleared. The government has decided to award road contracts only after 80-90 percent of the land is acquired.
The change in land acquisition norms primarily slowed down fresh orders by the NHAI in April-May to Rs 1,000 crore, according to the data on its website. That’s a fourth of the contracts given out during the two months last year. The NHAI has not released the list of contracts awarded in June. Data for orders handed by state governments and the highway ministry is not available for the two months.
While the new orders could remain subdued in the second quarter as well, they are expected to pick up in the second half of the financial year, said T Raghupati Rao, executive vice president at construction and engineering company PNC Infratech Ltd. “We expect fresh orders of Rs 10,000 crore by the end of the financial year,” said Rao. PNC has an unexecuted order book of Rs 4,154 crore to be added for which it has to achieve financial closure, he said.
The potential for highway developers is huge as India’s spending on highways is expected to double to Rs 6.8 lakh crore ($100 billion) over the next three years, a July report by Nomura said. More than half of it will come from states. Poor quality of roads and growing traffic would drive the demand for more highways, it said.
“We are seeing good orders. In the second quarter, we have already bagged orders worth Rs 2,000 crore,” said YD Murthy, executive vice president, finance at NCC Ltd.
The sector is at the cusp of a renewed growth phase, driven by a determined government push through favourable policy and regulatory measures and an ambitious road map to improve road execution in the country, Edelweiss Securities said in its recent road sector report.