Road execution to grow 5-8% in FY25: ICRA

Road execution is expected to witness a growth of 5-8% to 12,000-13,000 km this fiscal after recording a robust expansion of approximately 20% in FY24, rating agency ICRA says in its latest report. The pace of execution in this fiscal will be supported by a healthy pipeline of projects, increased capital outlay by the central government and focus on the completion of projects by the Ministry of Highways, as per the report.

According to ICRA, the ministry's project award pipeline is healthy at above 45,000 km as of March 2024. ICRA notes that in the first six months of the last fiscal year, the road had been impacted owing to the prolonged monsoon in certain geographies, which affected productive days, resulting in muted growth during that period.

"The execution situation started improving from September 2023 with road construction witnessing a YoY surge of 30% in H2 FY2024, enabling an overall growth of ~20% in FY2024 (to 12,349 km from 10,331 km in FY2023), slightly higher than ICRA’s estimate of 12,000 km for that fiscal. This increase was supported by the ministry’s focus on the completion of projects ahead of the General Elections. ICRA expects the road construction momentum to sustain in FY2025 as well, with a growth of 5-8% to 12,500-13,000 km," says Vinay Kumar G, Vice President & Sector Head—Corporate Ratings, ICRA.

The report highlights that in FY2024, the projects declined by 31% to 8,551 km from 12, 375 km in FY23 amid a delay in approval from the cabinet for the revised cost estimates of Bharatmala Pariyojana Phase 1 (BMP). ICRA points out that a similar trend was observed before the last general elections in 2019 when the project awarding had declined by more than 67% on a year-on-year (YoY) basis.

The rating agency says that the engineering, procurement and construction (EPC) mode continues to be the mainstay of this process, accounting for 70-75% of the awards in FY24, followed by build, operate, transfer (BOT)-Hybrid Annuity Mode (HAM) accounting for 25-30% per share.

"The EPC and HAM project bidding process in FY2024 witnessed intense competition, as reflected in the consistently discounted bids (with respect to the authority’s base price) since FY2021. The maximum and median discounts in 11M FY2024 stood at 46% and 21%, respectively, against 51% and 25%, in FY2023," it adds.

The rating agency, however, observes that there were no awards under BOT-Toll in FY24 despite a recent amendment in the model concession agreement in March to improve its attractiveness.

"Despite the recent changes in the model concession agreement for capacity augmentation of BOT-Toll projects, given the higher equity commitment and the inherent traffic risks in BOT-Toll projects, a material shift in the overall project awards towards BOT-Toll in the near to medium term is unlikely. ICRA expects the BOT-Toll awards’ share to increase to around 10% in FY2025 compared to less than 5% of the orders in the last five years," says Kumar G.