Road Construction Firms Face Challenges in Securing New Orders: Ind-Ra
By Rediff Money Desk, New Delhi Dec 16, 2024 16:09
India Ratings and Research (Ind-Ra) predicts challenges for small and mid-sized road construction companies in securing new contracts due to a shift towards BOT and HAM models.
New Delhi, Dec 16 (PTI) Small and mid-sized road construction companies could face challenges in securing new contracts in the medium term, given the reduced flow of engineering, procurement and construction (EPC) orders from NHAI, India Ratings and Research (Ind-Ra) said on Monday.
The Ministry of Road Transport and Highways (MORTH) in recent times has increased reliance on built, operate and transfer (BOT) and hybrid annuity mode (HAM) projects.
"This is likely to increase the competitive intensity in the EPC segment with large players having strong balance sheets benefiting at the expense of small and mid-sized players," it said.
Furthermore, Ind-Ra said the ability of small and mid-sized players to bid for HAM and BOT project would entail significant upfront capital outlay, which could limit their participation and will also expose them to execution and funding risks.
"This could be exacerbated by the toll risks in BOT projects," the rating agency said, adding that financial closure for these projects has been slow.
However, according to Ind-Ra, BOT and HAM models also require developers to stay in the business for the entire length of the concession period (usually 15 years), leading to steadier business profiles and balance sheets than in the EPC business.
Some mid-sized road EPC developers hence have started making a gradual move towards HAM projects and have won some orders, it added.
As the government once again moves back to the old tried and tested, but revamped, BOT/HAM method of awarding projects, Ind-Ra said it believes the long-term stability of small and mid-sized EPC players will be impacted as the focus will now be on the quality of construction as well as obtaining financial closure before construction commences.
Mid-sized EPC players typically exhibit a moderate to high level of geographic and client concentration, often operating in specific states or sub-sectors with varying levels of order book sustainability.
The Ministry of Road Transport and Highways (MORTH) in recent times has increased reliance on built, operate and transfer (BOT) and hybrid annuity mode (HAM) projects.
"This is likely to increase the competitive intensity in the EPC segment with large players having strong balance sheets benefiting at the expense of small and mid-sized players," it said.
Furthermore, Ind-Ra said the ability of small and mid-sized players to bid for HAM and BOT project would entail significant upfront capital outlay, which could limit their participation and will also expose them to execution and funding risks.
"This could be exacerbated by the toll risks in BOT projects," the rating agency said, adding that financial closure for these projects has been slow.
However, according to Ind-Ra, BOT and HAM models also require developers to stay in the business for the entire length of the concession period (usually 15 years), leading to steadier business profiles and balance sheets than in the EPC business.
Some mid-sized road EPC developers hence have started making a gradual move towards HAM projects and have won some orders, it added.
As the government once again moves back to the old tried and tested, but revamped, BOT/HAM method of awarding projects, Ind-Ra said it believes the long-term stability of small and mid-sized EPC players will be impacted as the focus will now be on the quality of construction as well as obtaining financial closure before construction commences.
Mid-sized EPC players typically exhibit a moderate to high level of geographic and client concentration, often operating in specific states or sub-sectors with varying levels of order book sustainability.
Source: PTI
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