Pick-up in infra playing out differently for large and small players

Larsen & Toubro
Last week when Larsen & Toubro (L&T) announced it had bagged Rs 28.64 billion contract from the Railways for constructing a 222-km track for the eastern dedicated freight corridor, it was the twenty sixth order announcement that the infrastructure major made in the past six months. 

The pace of project award from the government, whether it is more metro construction, railways or highways, is bringing in some signs of recovery in corporate order books. A clear divide is, however, visible between the small and big companies in the kinds of contract they are picking up. For companies like L&T, which are not struggling with pressing debt concerns but are yet not participating in the public private partnership projects (PPP), it is a strategy call to stick to government-funded contracts.

Having burnt their fingers with the PPP model of build operate transfer (BOT) in the past, companies have been cautious in choosing projects. Larger conglomerates such as GMR, GVK and Reliance Infrastructure are struggling to bring down their debt. 

“We do not intend to touch PPP projects and this is true of our peers, too, as all larger companies are concentrating on reducing debt. That explains our absence from hybrid annuity and toll operate transfer projects. We will continue to look at EPC projects that are funded by the government,” said an official from an engineering, procurement and construction (EPC) company, which in the past has executed some of the marquee infrastructure projects in the country.

R Shankar Raman, chief financial officer for L&T, at the company’s third quarter earning press conference, stated TOT (toll-operate-transfer) places a higher risk on the operator making it unviable for L&T to consider participation in such projects. At the same time, smaller companies stand to gain from the opportunities thrown open by newer models like HAM (hybrid annuity model) and TOT in the PPP space, due to greater flexibility. “Small to mid-size EPC companies have a more nimble cost structure compared to bigger ones,” said Nitin Bhasin, managing director and Head of Equities Research, Institutional Equities, Ambit Capital. Bhopal-based Dilip Buildcon, for instance, reported over 63 per cent increase in year-on-year order book to Rs 175.68 billion as on March 31, 2017.

HAM projects are expected to form 65 per cent of the project mix in terms of award in 2018-19 followed by EPC at 25%. The remaining 10% would be awarded on BOT (Build-Operate-Transfer).

For the smaller companies planning to opt for an initial public offering (IPO), there is an added pressure to beef up order books before going to the market. “In the EPC space faces a lot of competition, sometimes with companies planning for an IPO, the bidding is aggressive to ensure an order book is built,” said Bhasin.

Industry analysts also point out there is considerable reduction in the order size, making projects more attractive for smaller companies while larger companies shy away from exposure to below Rs 10 billion worth of projects. A larger number of projects bid out under the HAM model were below the Rs 10 billion value.

Companies MEP Infrastructure are scripting a transformation for their order book profile but TOT is not yet not attractive for them. “The company is looking at a transformation from a tolling company to a highway construction company. For TOT projects, if the size of project bundle is reduced then mid-sized companies can look at investing in them,” said Jayant Mhaiskar, vice-chairman and managing director for the company.

In the first lot of TOT projects, a joint venture of Macquarie and Ashoka Buildcon last week emerged as the wining consortium with a bid Rs 96.8 billion. “At the moment, there is a level of maturity in the market, where companies are taking a calculated decision and not high risks before bidding for projects," said Vasistha Patel, managing director, Sadbhav Infrastructure Projects.

Companies like Sadbhav Infrastructure see the current level of maturity in the EPC market as conducive for aspiring for more projects. “We will actively look at HAM projects but have not participated in TOT. We will look at TOT if a good opportunity comes up later on. We did not bid in the earlier rounds because of the size of the projects and given it was the first round we would like to see how it works. 

Even as smaller companies emerge as the flag-bearer of the current revival in infrastructure, there is a word of caution. “If we look at a longer history, those companies which grow rapidly in this space can also go bust. In the last cycle, we saw a number of companies rise fast and then suffer due to one wrong project or decision” said Bhasin from Ambit Capital. “There is a new set of players now but we one cannot rule out if a similar fate awaits some of them. However, few like Sadbhav Engineering have managed to grow the order book steadily and balance sheet healthy," he said. 

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