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More state projects may offset NHAI ‘hit’ for road builders

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ET Intelligence Group: More state-road projects in the next five years should help offset the slowing pace of contract awards at the National Highway Authority of India (NHAI), which is building the grid of arterial roads to underpin economic expansion north of 7 per cent. Since a large part of these state projects would involve construction, companies with proven balance sheet strength and execution capabilities should benefit.

Among these are KNR Constructions, PNC Infratech, Sadbhav Engineering, Ashoka Buildcon and NCC, which are likely to report incremental growth in their order books. So, these companies may get re-rated in the coming quarters as their EPS could climb in the range of 15-20 per cent for the next two to three years. In the construction industry, stateroad projects generally do not generate high interest from investors, given their relatively smaller size and investments compared with national highway projects.

So, state roads projects have hitherto had lukewarm response from well-placed companies.

But recent government estimates show that in the next four years, cumulative investments in state projects would exceed allocations for the national grid. According to a Crisil estimate, in the next four years ending FY23, investments in state roads projects are expected to be close to Rs 7.7 lakh crore, almost 80 per cent higher than what states invested in roads in the four years ending FY18.

Investments in state projects would be higher than what is being invested in national highway projects in FY20 – about Rs 1.5 lakh crore. Among states, Uttar Pradesh is likely to see the highest expenditure.

Estimates show that the state is expected to invest close to Rs 1 lakh crore on building expressways.

By 2022, the state is expected to construct about a 2,500-km super-fast road network comprising eight expressways. States have tied up with multilateral agencies such as World Bank and the Asian Development Bank (ADB) for financing these projects.

Besides this, the involvement of state governments in funding these projects will be crucial.

According to estimates by Crisil and domestic brokerage Edelweiss Securities, a large portion of public funds (chiefly taxes collected) would be allocated to state-road projects. About 54 per cent of public funds would be invested in constructing state roads.

A state government would create a public limited company in which a large portion of investments will be met through bank-financed debt, and the respective state government will invest the rest. Experts say that this model will work on the attractiveness of projects in terms of geography, social and economic demographics, and traffic estimates.




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