The year 2019-20 was an odd one for highway construction in India, with the pace of work slowing down for the first time since 2014. While market sentiment has not been favourable for several sectors, inherent issues pertaining to costly land acquisition, weak order flows, general elections, slow execution and liquidity crunch have taken a toll on the overall performance of highway developers. The ongoing COVID-19 pandemic too has severely hit the road sector, with a strong impact expected on the financial performance of road developers during the ongoing fiscal year.
India Infrastructure Research tracked select financial indicators of 12 key highway developers that have a strong presence in the sector. While financial results for 11 of the players have been considered for 2018-19 and 2019-20, the results for MEP Infrastructure Developers Limited is available only up to December 2019.
Order book and capital structure
The order books of the players considered reflect diversified portfolios. Since most of the companies considered primarily deal in highway construction, and operations and maintenance, a major portion of their overall order book pertains to the road sector. With regard to capital structure, although most of the companies are earning profits, they remain highly debt-laden. As of March 31, 2020, the average debt-to-earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio for 11 players (excluding MEP Infrastructure Developers) was as high as 7.2, a slight increase from about 7.05 in 2018-19. The ratio is a measure of a company’s creditworthiness. A value above 5 is considered high and becomes a cause for concern for investors and rating agencies. Companies such as AshokaBuildcon Limited, IRB Infrastructure Developers Limited, L&T Limited, Welspun Enterprises Limited, Sadbhav Engineering Limited and Gayatri Projects Limited posted debt-to-EBITDA ratios above the average of 11 firms.
Income and expenditure
With regard to the total income of the 12 selected companies, the aggregate revenue for 2019-20 was Rs 1,944 billion as compared to Rs 1,832 billion in 2018-19, registering an increase of about 6 per cent. The majority of the companies under consideration registered a growth in their total income during the year, with the exception of Gayatri Projects, Sadbhav Engineering and MEP Infrastructure Developers. The highest growth was recorded by PNC Infratech Limited, which recorded an increase of over 51 per cent.
As far as total expenditure is concerned, the companies registered an increase of about 7 per cent in aggregate total expenditure incurred during the period, rising from Rs 1,659 billion in 2018-19 to Rs 1,776 billion in 2019-20. Of the companies under consideration, PNC Infratech recorded the maximum increase of around 46 per cent in total expenditure incurred during the period.
Profits
Considering profit after tax (PAT) of the companies under review, aggregate net profit increased by about 12 per cent, from Rs 137 billion in 2018-19 to Rs 122 billion in 2019-20. While seven companies registered a growth in net profit during the period, the remaining five registered a decline. The sharpest growth was experienced by Sadbhav Engineering, which registered a profit of Rs 11.1 billion in 2019-20, after a net loss of Rs 0.5 billion in 2018-19.
Outlook
The overall decline in construction activity during the economic slowdown in 2019-20 has been further exacerbated by the COVID-19 pandemic. The nationwide lockdown imposed in March 2020 resulted in a halt in highway construction as well as a decline in toll collections by highway developers. Besides, according to industry experts, the revenue earned by engineering, procurement and construction companies in the road sector is expected to contract by 8-10 per cent in 2020-21. The pickup in project execution and easing of supply chain disruptions after complete lifting of the lockdown is also expected to be slow. However, with the gradual uptick in economic activity after a slump of nearly three months, road operators have finally started witnessing toll revenues pick up since June 2020. The overall impact on the financial performance of road developers in the next fiscal year will be contingent on the speed of traffic recovery and the extent of delays in project execution on account of the pandemic.