News Analysis

Road construction companies to gain from Bharat Mala

Muthukumar K BL Research Bureau | Updated on January 08, 2018 Published on October 24, 2017

90% land acquisition rules can slow down project awards

The Union Cabinet’s approval to invest ₹6.9 lakh crore over the next five years is likely to see action in the mid-cap counters of infrastructure and construction companies.

Ashoka Buildcon, IRB Infrastructure, Sadbhav Engineering, PNC Infratech and KNR Construction are among the companies that are expected to capitalise from bidding of these projects.

In 2016-17, about 50 per cent of the road contracts awarded was under the Hybrid-Annuity Model (HAM) model.

Road operators benefited from the new regulation of 2016, which allowed HAM-based projects to be floated.

HAM effectively reduced the equity burden on developers and acted as a good trade-off, spreading the risk between developers and the government. As the name suggests, HAM’s a hybrid — a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models.

Interestingly, in 2016-17 most of the projects given under the new HAM model were in the range of ₹1,000-2,000 crore, making it too small to attract larger players.

Therefore small and mid-size road construction companies such as, IRB Infrastructure developers and Ashoka Buildcon, were able to put up a strong performance in 2016-17. While IRB infrastructure improved its sales and net profit by 14 per cent and 12 per cent respectively in 2016-17, Ashoka Buildcon managed to reduce losses significantly in 2016-17 and also double its profit in the June quarter of 2017-18. The company’s fortunes were largely led by stronger execution.

Land acquisition

While the government’s road thrust improves prospects for mid-sized road construction players, NHAI (National Highway Authority of India)’s 90 per cent land acquisition requirement is also slowing down awarding of projects, according to Spark Capital.

As per the rule at least 90 per cent of the land has to be acquired before the road projects are put out for bidding. About 1,068 km of National Highway projects were awarded during the first quarter of 2017-18 as against 16,271 km during 2016-17. It worked out to a paltry 12km/day as against 45km/day achieved in FY17.

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