ICRA: Limited opportunities from States and private sector post Covid will drive more EPC players towards NHAI/MORTH projects

ICRA Ratings expects the central government spend on infrastructure to be maintained given the positive multiplier affect which infrastructure building would have on overall economy, notwithstanding the adverse impact of Covid-19 induced slowdown on economic activities and thereby the revenues of both central and state governments. The state governments in particular are staring at a huge revenue deficit in current financial year; and therefore, the headroom available to them for incurring capital expenditure has reduced substantially. The private sector capex and the interest in public private partnership (PPP) based infrastructure projects is also expected to be limited in near term, due to increased risk averseness and limited capital availability. As a result, NHAI/MORTH EPC projects are expected to witness heightened competition. As per a study done by the ratings agency covering 160 EPC projects awarded by National Highway Authority of India (NHAI) during FY2017 – 20 spread across 22 states covering 6260 km, the average number of bidders per project for the EPC segment ranged between 4 to 10.

Elaborating further, Mr. Rajeshwar Burla, Vice President, Corporate Ratings, ICRA says, “These 160 projects were awarded to as high as 69 EPC players which shows the competition in this segment. While the tier-II EPC contractors graduated to development segment with launch of hybrid annuity model (HAM), the erstwhile sub-contractors (who used to execute for tier-I & II principal contractors) have started participating in EPC bids directly after gaining adequate technical expertise over the last one decade; resulting in increased number from of bidders vying for the EPC contracts. Given the limited fiscal bandwidth for states, new tenders are likely to remain significantly muted in the near term. Similarly, real estate and the industrial segment would witness contraction in new order inflows over the medium term as the private players, amid the uncertainty on the demand, are likely to scale down/defer their capex plans. This will drive more EPC players towards infrastructure projects, especially road, which is already overcrowded.”

As per ICRA study, out of total 160 projects, 69% were awarded at a discount to NHAI’s base price (median discount of 11.2%), 3% were awarded at par to base price and remaining 28% were awarded at a premium (median premium of 7.7%). The top 10 players bagged around 62 projects totaling 2713 km which is 43% of total awards in length at a cost of Rs. 33,665 crore for which the median discount stood at 6.8% to NHAI’s base price.

“With securing new credit becoming a challenge, provision for mobilisation advance is also a motivation to secure EPC contracts. Of the 69 EPC contractors who won projects over last four years, 10 of them have been facing liquidity-related issues (rated in default category). Three in four projects bagged by these defaulting entities were at a discount to NHAI’s base price,” Burla added.