Hybrid projects help bleeding road builders

Mumbai: The policy shift towards awarding more highway projects under hybrid annuity model (HAM) and engineering, procurement and construction (EPC) model from the earlier build operate and transfer (BOT) route have helped lot of medium-sized infrastructure firms to significantly improve their operating margins and credit profile over the last three years.

Aggressive bidding, leverage, and a slowing economy had affected the credit profiles of companies in the sector in the past few years. The Ministry of road transport and highways (MoRTH) and the National Highways Authority of India (NHAI) have increasingly bid out projects through the HAM or the pure EPC model.

“In each of the past three years, over 80 per cent of the highway projects went to bidders under these models. Not surprisingly, 50 EPC companies rated in the investment-grade by Crisil have benefited from the trend, their revenue growing at a compounded annual growth rate (CAGR) of 20 per cent in this period,” Crisil said.

This, along with better working capital management and capital structure, sharp focus on execution, and judicious bidding has led to a significantly improved credit ratio — or ratio of upgrades to downgrades – at 2.0 last fiscal, up from 0.11 in fiscal 2014.

Around 80 per cent of these companies have revenues below Rs 1,000 crore.

Crisil expects these firms to grow their revenues by 15 per cent this fiscal, building on the gains so far and benefiting from government spending on infrastructure. The combined order book of these 50 firms is likely to touch Rs 1 lakh crore this fiscal, driven largely by increased government spending in the roads sector.

The revenue scale-up was complemented by steady rise in profitability. Operating margin in fiscal 2017 was estimated at 12.5 per cent.

While some of the larger EPC players burnt their fingers due to aggressive bidding, and delayed land acquisition and clearances, these firms have sustained their credit profiles while bidding conservatively for new projects and focusing on completion of the existing projects.

Consequently, equity commitment or support requirement for these projects remains low.

The rating agency believes players will sustain operating profitability at 12.5 per cent, with an expected return on capital employed of 19 per cent this fiscal.

They are also expected to sustain the improvement in their credit profiles over the medium term, given strong and diversified order books and proven execution capabilities.