Subdued road orders pose threat to revenue traction of infra firms

The road sector was slow- moving in 2019. The lull in order activity, seen during the elections earlier this year, is still to revive. In fact, with deepening of the overall economic slowdown and weakening of the government's fiscal health, analysts are sceptical about order ramp-up in the near term.

According to Icra Ltd, road project awards from the National Highways Authority of India (NHAI) will be 3,200-3,500 km in FY20, far lower than the target of 6,000km. As such, the pace of ordering has fallen from the peak of 7,397km in FY18. On top of it, activity in road projects by the ministry of road transport and highways has slacked, too.

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Analysts say FY20 order flows may be at 7,000-8000km, a marginal improvement over a year ago. Therefore, it is not surprising that shares of infrastructure companies, such as PNC Infratech Ltd, Dilip Buildcon Ltd, Ashoka Buildcon Ltd and KNR Constructions Ltd, are trading at price-to-earnings multiples that are below the five-year average. "Weak awards are likely to impact the order book of infrastructure companies.

The book-to-billing ratio will be depressed, which in turn will reduce the revenue visibility for these companies," said Rajeshwar Burla, vice president and associate head (corporate ratings) at Icra Ltd. Of course, for now, infrastructure companies are sitting pretty on order books that are twice to thrice their annual revenue. The problem arises if weak ordering prolongs.

A report by Emkay Global Financial Services Ltd said: "Over the past year, the government (both the Centre and states) has seen worsening of fiscal stress, driving a slowdown in public infra capex. As per the Sep-19, Reserve Bank of India report on state finances, it is expected that state infrastructure spend will fall by 4.5% compared with about 16% compounded annual growth rate over FY16-19 (not assuming further worsening since the presentation of the state budgets)." This is not good news for the sector as it could continue to see weak order flows.

Land acquisition hurdles continue to delay projects, albeit to a lesser degree than a decade ago. This means the robust pace of execution is likely to moderate in FY20 due to delays in land acquisition, project clearances or funding from financial institutions. "The working capital borrowings have increased for many entities owing to elongated working capital cycle resulting in marginal increase in the company's gearing (debt:equity ratio)," added Burla. To sum up, the road sector, which was the most robust in the infrastructure universe, is facing hurdles.

Companies can do their bit in timely execution and managing the balance sheets well.

Over the next year, much will depend on how well the government can put its house in order in terms of economic growth, liquidity and NHAI's ability to acquire land to bump up the pace of ordering.

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