Road projects attract infra cos as other sectors dry up

More and more infrastructure companies are bidding on low margins for road projects, thanks to the slower pace of construction projects in other sectors. Though it helps the National Highways Authority of India (NHAI) to save on project costs, it is impacting the bottom line of the infrastructure companies.

Till about a year ago, these companies were reluctant to quote a premium on projects put out for bidding, but the trend has changed in the past nine months. Quoting premium amounts to committing an annual payment to the government over a period of time, instead of seeking a grant for building the road.

“A lot of infrastructure companies are bidding aggressively for highway projects which will ultimately impact their profit margins. Earlier, their profit margins used to be in the range of 20 to 25 per cent, which has come down to 8-9 per cent because of aggressive bidding,” said a senior NHAI official, who did not want to be identified.
 

PREMIUM HIGHWAYS
Project/Length	Project Cost	Premium*
Barwa Adda-Panagarh (122.8km)	1,665	106
Dankuni-Kharagpur (111.4km)	1396.1	126
Beawar-Pali-Pindawara (244.1km)	2,388	251
Ahmedabad-Vadodra (102.3km)	2,125	309.6
(Figures in Rs  crore)  * Premium increases at a rate of 5 per cent every year till the  concession period (up to 20 years).

Infrastructure companies also say since construction projects in sectors like power have dried up, they are shifting to highway building, increasing competition.

“All of us are bidding for highway projects because that is a sector which is providing opportunity. This has increased competition and we are forced to take a cut on our profit margins,” said a senior executive of a Mumbai-based infrastructure company.

The executive explained the power sector was no more lucrative, as it would be difficult for the government to fix a higher tariff that the industry was demanding though fuel costs had increased. “Airport, railways and shipping are not offering much for the private sector,” he added.

In the current financial year, NHAI has announced to award 59 projects covering 7,994 km with a total cost of around Rs 60,000 crore. The NHAI projects, which earlier attracted up to 20 bidders at the qualification level, is now getting up to 40 bids.

“Various companies new to the highway sector are bidding aggressively to improve their portfolio. One needs a decent amount of experience to bid for bigger projects and many new players are doing this to improve their portfolio even if they are making losses,” he said.

An executive in another company, however, sees no difficulty in achieving viability for projects. The reason is the growth in traffic, he says.

“The project cost and concession period are based on projections. Projections in road projects are normally made two years in advance and the traffic numbers have seen an increase of as high as 39 per cent during the period. The premium paid are on the basis of those projections.”