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Road projects may hit slow lane in near term

December 21, 2023 11:36 IST

A  25 per cent year-on-year (Y-o-Y) increase in budget allocation tow­ards the roads sector for FY24 has led to renewed interest among investors.

Road

Photograph: Rupak De Chowdhuri/Reuters

However, a combination of escalating costs for Bharatmala and unseasonal rains to some extent have impacted progress.

Bharatmala’s cost has nearly doubled from Rs 5.35 trillion to Rs 10.6 trillion and the finance ministry has asked MoRTH to go slow until Cabinet approval is received.

The National Highways Authority of India (NHAI) did not award any projects in April and May but awards revived in Jun-Aug ’23 followed by a slowdown in September, a pickup in October, and some progress in November.

 

In the YTD FY24, construction stands at 2,111km (2,075km in the same period last year). In FY23, the NHAI constructed a total of 4,882km of roads (versus 4,325km in FY22) at 13.4km/day.

The ministry of road transport and highways (MoRTH) is looking to increase the FY24 road construction target for NHAI to 6,000km and MoRTH targets awarding of 13500km-13800km in FY24.

The Dedicated Freight Corridor (DFC) projects are now expected to be completed by December 2024.

But the slow pace of awards with only 350 km awarded till November makes this look like a steep target.

HAM (Hybrid Annuity Mode) projects remain popular with 137km awarded worth Rs 4,500 crore over April-October 2023).

In terms of margins, commodity prices have softened, but competition remains intense which means tight margins for road companies.

Companies with healthy balance sheets have an edge.

The RBI’s continued pause on policy interest rates, coupled to the Budget’s infra focus and better credit availability from banks are encouraging factors.

Toll colle­ctions have improved, with Fastag-based collections at Rs 41,900 crore (Apr-Nov’23) and a daily run rate of Rs 170 crore, which is up 14 per cent Y-o-Y. Higher toll collections are crucial in enabling monetisation of road assets apart from revenue.

The NHAI’s focus on asset monetisation had led to awards of two TOT (Toll-operate-transfer) bundles, totaling 400km, at a cost of Rs 6600 crore in Oct’23.

For FY24, NHAI aims at a monetization target of Rs 45,000 crore with a list of 46 projects, spanning 2,612km.

Among the key construction materials, steel prices have decreased 25 per cent, while aluminium prices have dropped 32 per cent in the last 18 months but cement prices have increased 9 per cent from their lows in July 2022, due to input cost pressures.

Given the higher construction activities and stability in comm­odity prices, road contractors anticipate some improvement in margins in H2FY24.

A robust pipeline of tenders is in place.

Entities with significant order backlogs, and strong financial standings, are better poised to benefit from NHAI's project allocation in H2FY24.

Road construction is however populated by many relatively small players and listed companies have only around 35-40 per cent market share.

Apart from L&T, where roads form a small portion of the overall order flow, the corporates in the sector include Ashoka Buildcon, KNR Constructions, PNC Infratech, HG Infra, Dilip Buildcon, IRB Infra, and NCC.

But there’s certainly optimism for the sector although the time­frame for a pickup in the pace of awards and construction may be extended due to the upcoming elections which may lead to freezes.


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Devangshu Datta
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