Road EPC firms' order book shrinks as highway tendering hits slow lane

Order books and order inflow of multiple road-building companies are showing signs of shrinkage as the tendering activity for highways has taken a hit.

A mix of diversification, piggybacking on healthy order backlog, and hopes of a tendering trend reversal in the next financial year, is expected to help companies tide over the predicament, company executives said.

Of those who bid for engineering, procurement, and construction (EPC) and Hybrid Annuity Model (HAM) of highway projects, multiple have either reported a shrinkage in the order book or no order inflows for the current year.

Company executives from HG Infra Engineering in a call with analysts earlier this month noted, “In the nine months, hardly there were orders of about Rs 75 crore,” according to a transcript made available of the call.

A senior executive from KNR Constructions made a similar statement to analysts, “No, we have not received any order in FY24.”

GR Infraprojects has also trimmed its order inflow guidance for the current financial year.

“Muted awarding by NHAI has compelled the company to lower its order intake guidance for FY24 to Rs 6,000-7,000 crore, from Rs 10,000 crore earlier (Rs 20,000 crore initially),” noted analysts with Nuvama in a note on the company.

The lack of orders is neither causing worry over credit-worthiness nor dampening enthusiasm.

“The orders seen in the past two years, have made up for the lull in the last six months. We are hopeful things will pick up post-elections, yes order books have shrunk but it is not a concern,” said a senior executive from the industry.

Vinay Kumar, vice president and sector head at ICRA Ratings agreed.
 

“At present, the order book to revenue ratio is still healthy at around three times, so we do not expect a revenue hit for FY25.” He added, “The stress will start showing from FY26 if the current trend of a lull in orders continues for road EPC projects. A trend reversal in FY25 for orders could help, however, the first two quarters will see the election impact on tender awards."

The road sector executive quoted earlier in the story also expects new tenders under the Build-Operate-Transfer (BOT) model will bring opportunities for Road EPC players either as EPC partners or sub-contractors.

Some are already contemplating this move.

Executives from KNR Constructions informed analysts to tide over the slump in NHAI ordering, the company has placed bids for micro irrigation projects and is discussing with major BOT players like Cube Highways and a few others to bid along.

Typical of infrastructure companies, diversification is again gaining momentum with many of these companies. For those such as Ashoka Buildcon, it is also reflected in the order book composition.

Power transmission and distribution (T&D)’s share in the company’s total order book has risen steadily over the last four quarters.

As of December 2023, the segment was the highest contributor at 47 per cent, according to Nuvama Research data.

This, however, is not the case for all road EPC companies, where roads continue to dominate more than half of the total outstanding order book.

“Many of the road players had already started to diversify in the last few years, but roads continue to be a large portion of their order book due to healthy awards in the road segment. Meaningful reflection of the diversification on order book numbers will take time,” said Kumar from Icra.

There are other changes on the anvil for maintenance guarantee tenures. This, both sector experts and company executives agree, will not lead to any cost escalations.

“We do not expect an extension of the maintenance liability from five to ten years to have any cost impact for contractors, as the same will be reimbursed by the authority. It should help improve the quality of roads,” the Icra official added.

The road sector executive quoted earlier noted: “The only concern is seeking a longer bank guarantee to that effect."