Increased competition in road sector and subsequent aggressive bidding has the potential to build-up of stress on working capital cycle resulting in projects getting delayed or stuck, a report on the sector has showed.
According to a ICRA report, with the entry of new players in the road sector, competition had heated up with bidders quoting a discount of as high as 30-35 per cent to the NHAI’s base price. The BOT (HAM) has also witnessed heightened competition resulting in average premium to NHAI cost reducing to around 15 per cent from 25-30 per cent earlier and even negative O&M bid in some cases.
All this points to potential of putting stress in sector as discounted bids are coming at a time of high commodity prices (steel, cement etc).
“Discounted bids to NHAI’s base price are coinciding with the period of high commodity prices (steel, cement etc). Consequently, the impact on the profitability of the contracting companies could be substantial,” said Rajeshwar Burla, Co-Group Head & Vice President, Corporate Ratings, ICRA.
“While price escalation is covered in EPC contracts, the fact that NHAI’s base price itself is based on dated DPRs implies that the escalation clauses may not mitigate the impact of rise in input prices to a large extent. Bidding discipline therefore remains a key for road contractors to maintain adequate profitability and avoid build-up of stress on working capital cycle.”
The lowering of bids has come in the wake of increased competition with number of bidders surpassing 40 participants (of which qualified were 30) for some of the EPC projects and 10-15 participants (around 5-10 earlier) for HAM projects.
One of the reasons for increased competitive intensity is relaxations in the eligibility criteria of bidders for HAM/EPC projects provided by the Ministry of Road Transport and Highways (MoRTH). There has been entry of new players in the road sector from other sectors (stadium, hospitals, hotel, smart city, warehouses/silos, oil and gas) as well as increase in bidding eligibility for existing players.
Lower state capex, muted private sector opportunities and higher opportunities in road sector has pushed more entities towards road sector, ICRA said.
“Competition in road sector is expected to remain at an elevated level with more contractors fulfilling the relaxed eligibility criteria,” Burla said.
ICRA expects the central government’s spend on infrastructure building to be maintained given its positive multiplier effect on the overall economy, notwithstanding the adverse impact of Covid-19 induced slowdown on economic activities.
The budgetary allocations for MoRTH increased at a CAGR of 21 per cent to Rs 1,08,230 crore in FY2022 BE from Rs 41,193 crore in FY2017, and is expected to remain robust considering the large Bharatmala Program. This apart, NHAI has been actively trying to monetise assets through TOT and InvIT modes.
The aggressive bidding for the projects may also lead to projects getting delayed or stuck or under dispute as lower profitability in the projects would constrain the contactor’s ability to absorb time and cost overruns in the project. The time and cost overruns could be due to various reasons, including steep increase in commodity prices, change in scope, delays in land acquisition and approvals; and force majeure events among others.