Revenue growth of road developers in the engineering, procurement, and construction (EPC) segment could halve in 2019-20 (FY20) and 2020-21 (FY21) to 15 per cent, compared to 30 per cent in 2018-19 (FY19), according to a CRISIL study.
Slower project awarding and delayed receipt of “appointment date” (on which projects are kicked off) from the National Highways Authority of India (NHAI) are the main contributors to this decline.
“The NHAI awarded 7,400 km in FY18, which slowed the following year to about 2,200 km. In the current financial year (FY20) and the next (FY21), this is expected to be 4,000 km a year,” said Sachin Gupta, senior director, CRISIL Ratings.
He added, “Delay in declaring appointed dates for the projects awarded is primarily due to issues in land acquisition. CRISIL’s analysis of 119 hybrid annuity model (HAM) projects shows almost 30 per cent of these have not received appointed dates more than a year after these were awarded.”
CRISIL, in its study of 75 companies, said this would not affect the credit profiles of the EPC companies. There are several reasons for this.
First, in FY19, these companies had a healthy order book of Rs 2 trillion. This is thrice their revenue and provides a high revenue expectation for the next two years.
Then, these firms have kept a check on their debt levels while pursuing growth. At the consolidated level, the capital structure was robust as on March 31 this year.
The improvement was largely because of focus on awarding through EPC and HAM routes, which entail lower equity requirement. Additionally, renewed interest from global funds gave a fillip to the sector, and divestment of special purpose vehicles through infrastructure investment trusts or asset-level sale supported the improvement in capital structure.
Third, while a delay in receipt of appointed date may lead to a delay in recognising revenue for some of the projects, there is an assurance that a project, once started, will not be stalled.
This is because the NHAI notifies the appointed date only when most of the land (80 per cent for HAM projects) has been procured.
Thus, once a project is under construction, there is limited risk of delays because of non-availability of land and thereby minimal impact on credit profile of the EPC companies.
There is a risk that any further delay in declaring appointed dates could result in termination of some of the awarded projects.
“The concession agreement for HAM allows for mutual termination of a project in case the appointed date is not received within a year of signing of this agreement, and a few projects have indeed been terminated on this ground recently. An increase in project terminations would further impact the revenue growth of these companies,” Sushmita Majumdar, director, CRISIL Ratings.