Road-building companies, hit by crushing competition at home, should explore greener pastures abroad

June 2, 2012

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Ask a foreigner about his perception of Indian roads, and chances are he will tell you they are bumpy, littered with potholes and don’t allow for a smooth ride. Same is likely to be the plight of companies that make them: they are in for a bumpy ride, and perhaps driving towards a dead end.

At the turn of this century, roads was one of the most attractive sectors: National Highways Authority of India (NHAI) was building the golden quadrilateral and the national corridors spanning more than 14,000 km, competition was modest and returns were attractive. Alas, the sector has lost its sheen: intense competition, abysmally-low return expectations, over-reliance on NHAI as the primary client are some of the challenges plaguing the players.

Intense competition is perhaps the sector’s biggest bane. From 2007 to 2011, the average number of players shortlisted per bid have increased from six to 30, bids are being won at abysmally-low return expectations – often below cost of capital – and numerous frustrated players haven’t won a single bid from the dozen-odd they have participated in the last 1-2 years. Sector veterans are bidding ‘irrationally’ to defend their turf, new entrants are bidding low to build their order books and credentials and smaller companies flush with private equity funds are bidding aggressively to deploy their funds – and in this game, NHAI seems to have benefited the most.

On a present-value basis, while NHAI had estimated an expenditure of Rs 661 crore towards grants for projects awarded since April 2011, actual bids should provide it with receipt of Rs 15,371 crore from successful bidders. If you ask winners, they will all give you good reasons for their bids; but they do need to ask if they are in for a winner’s curse. And their private equity investors should ask if they will recover their investments if their investee companies continue to win bids at these rates.

Another bane plaguing the sector continues to be excess dependence on NHAI as the primary client. Poor NHAI target achievement remains a key issue with only 40% of project award target being realised in the last two years. Economic slowdown, land acquisition issues and senior management vacancies have led to significant delays in NHAI awards. A reduction in new NHAI project awards will further increase competitive pressure to win projects.

Other construction sectors are facing similar issues with increasing competition for a shrinking pie. Environmental issues, lack of next-generation reforms and more restrictive regulations like land acquisition and mining Bill will further reduce the opportunity in other construction sectors.

In this situation, what should Mr Roads Magnate, who has built a Rs 2,000-crore empire, do? If he wants to grow his revenues by 30% per annum, he needs to build an order book of ~ Rs 30,000 crore in the next five years – a tall task given the above challenges. He has three options: (a) stay put and wait for sanity to return to the sector, (b) enter other infrastructure sectors in India, or (c) build roads in more attractive global markets. Option 1 suffers from uncertainty around the length of the winter that has set upon roads and the construction sector in general. While consolidation opportunities may arise, ‘wait-and-watch’ may not be the most prudent strategy to meet the organisation’s growth objectives. While option 2 is interesting, does there exist a ‘virgin’ infrastructure sector that offers attractive returns, low competition and a relatively certain policy environment? It is unlikely that Mr Roads Magnate will be able to find one; perhaps he could take a cue from Warren Buffett, “Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” The next vessel could be Africa.

SOURCE : http://economictimes.indiatimes.com

Written by ITW Editor · Filed Under Uncategorized

One comment on “Road-building companies, hit by crushing competition at home, should explore greener pastures abroad” Post your comment

Bharat Bhushan on June 4th, 2012 12:17 pm

It is seen that Centre Govt’s dept related to National Highways have less coordination in between i.e. NHAI or MORTH with Forest Ministry for forest clearance. Similarly like with Sate Govt for acquisition of land, unlike DMRC as seen in NCR or metropolitan city. Like DATR (Reliance Infrastructure)
The above 2 are main cause for delay in construction of Highways and progress to achieving 20Km/day.