Chennai: In FY25, an average 8000 km of road projects are expected to be awarded by the Ministry of Road Transport and Highways.
The Ministry of Road Transport and Highways (MoRTH) awarded an average of 12,500 km projects between fiscals 2022 and 2023, but the number dropped to 8,581 km last fiscal and is seen modest at 8,000 km this fiscal. This will be on account of lower project awards, finds Crisil.
Procedural issues linked to the approval of cost estimates of projects and restrictions under model code of conduct before elections to transition-linked issues as the government explores build-operate-transfer (BOT) toll model for future projects in addition to its currently dominant modes of EPC and the hybrid annuity model (HAM) are some of the reasons behind the slowdown.
Consequently, the order books of road construction companies is seen declining to two times their annual revenue by the end of this fiscal from 2.3 times at the end of last fiscal and 2.6 times in fiscal 2023. This, in turn, will slow their revenue growth in this fiscal and the next.
As a result, revenue growth of road engineering, procurement and construction (EPC) companies is expected to moderate to 5-7 per cent next fiscal after a compound annual growth rate of 13 per cent over the past five years.
However, there would be some respite as prices of key raw materials — steel and bitumen —are down 5-17 per cent from their peaks in fiscal 2022. Since most projects are awarded on a fixed-price basis, this will keep operating profitability steady at 13-14 per cent even after factoring in increased competitive intensity at the time of awarding of these projects.
Going forward, while highway projects with a total length of 936 km were approved by the Cabinet Committee on Economic Affairs recently, timely approval of additional projects and their awarding will be essential for the sector.
