High cost inflation for road projects, cash flow challenges for road EPC companies and elevated debt levels for NHAI mean that road awards will continue the muted trends seen in FY23 and April 2023. Analysts have said that awarding of projects may slow down ahead of the general elections in 2024.
If the recent trends of cashflow challenges and weak orders are anything to go by, Prime Minister Narendra Modi’s government’s thrust on road and highway projects will continue on a muted footing until the 2024 general elections.
A report by Nomura Research on Monday showed that the pace of highway awarding by state and central governments has been weak in the last financial year and also in April this calendar year. It may continue to be so in the ongoing fiscal, the foreign brokerage said.
The tenders awarded by the Transport Ministry (MoRTH) in FY23 fell to 12,376 km from 12,731 km in FY22, which however was higher than in FY20 and FY21.
That said, in April 2023, tenders for only 114 km tenders were awarded, which is down by 43 percent on an annual basis, and lowest since FY20.
“We note that the ordering of roads and highways had lost pace ahead of parliamentary elections in FY09, FY14 and FY19. In our view, FY24 is also likely to witness a similar trend,” said Nomura.
National highway (NH) constructions in India reached a record high of 37 km per day in FY21 but slowed to 30.11 km per day in FY23 due to elevated commodity prices as well as prolonged monsoons.
The construction of NH in 2022-23 was 10,993 kilometres, falling 13.70 per cent short of the government’s target of 12,500 km. The ministry awarded highways of 12,375 km in length in the last financial year.
Ahead of the general elections, the central government intends to accelerate the construction of roads in FY24 by 16-21 per cent, with a focus on execution of projects under various stages of execution, ICRA had said in a report earlier in May.
However, with the model of conduct deployed in Q4FY24 due to the elections, the awarding activity is expected to take a hit in FY24. ICRA expects an overall decline to 9,000-9,500 km from 12,375 km in FY23.
High inflation, high debt, lower orders
Owing to a sharp rise in the cost of land acquisition, Nomura says, the road projects have witnessed significant cost inflation. With the cost of all key raw materials elevated in comparison to pre-Covid levels, the cost of construction has also seen a sharp rise.
The prices of steel, cement, diesel and bitumen are 50 per cent, 14 per cent, 36 per cent and 46 per cent higher than the pre-COVID average, data shows.
Nomura estimates that the cost of the Bharatmala project is now perhaps over 2 times the original estimates by the NHAI.
The NHAI’s elevated debt levels coupled with rising project costs may further contribute to the slowdown in project slowdowns, the report said
Key road EPC companies too have seen a rise in net debt levels and a decline in operating cash flow. “Amid a scenario of a potential slowdown in ordering which can limit the rise in earnings, debt levels may remain elevated, posing further risks to the sector,” Nomura said.
