Road execution to grow by 5-8% in FY2025 to 12,500-13,000 km: ICRA

Road construction is poised to experience a growth of 5-8%, reaching between 12,500 to 13,000 kilometres, following a robust expansion of 20% in FY2024, according to ICRA. The agency adds that the share of private investments through the Build, Operate, and Transfer (BOT)-Toll model is expected to improve, but a significant shift toward it is unlikely.

The pace of execution in this fiscal year will be supported by a healthy pipeline of projects, increased capital outlay by the Government of India (GoI), and a focus on completing projects by the Ministry of Road Transport and Highways (MoRTH).

ICRA noted that road execution had been impacted in H1 FY2024 due to prolonged monsoon in certain areas, which affected productive days, resulting in muted growth during that period.

"The execution situation started improving from September 2023, with road construction witnessing a year-on-year 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 completing projects ahead of the General Elections," said Vinay Kumar G, Vice President & Sector Head - Corporate Ratings, ICRA.

The Ministry’s project award pipeline remains healthy, standing at over 45,000 km as of March 2024. This is despite the significant impact on awarding in FY2024 due to delays in approval from the Cabinet for the revised cost estimates of Bharatmala Pariyojana Phase 1 (BMP).

Consequently, overall awards declined by 31% to 8,551 km in FY2024 from 12,375 km in FY2023. A similar trend was seen in FY2019 before the last General Elections when project awards declined by over 67% year-on-year.

Despite government efforts to increase private investment in highway construction, the Engineering, Procurement, and Construction (EPC) mode, primarily funded by the center, continues to be the mainstay, accounting for 70-75% of awards in FY2024, followed by the BOT-Hybrid Annuity Model (HAM), accounting for 25-30% share.

The National Highways Authority of India (NHAI) has been seeking to attract private players in the segment and has held several rounds of discussions with companies to streamline the BOT-Toll model.

It used to have a major share of over 90% about 10-15 years ago but has decreased to almost nil in the last few years due to several construction companies being heavily in debt owing to delays in land acquisition, obtaining necessary clearances, and an increase in project costs over time.

There were no awards under BOT-Toll in FY2024. Recently, in March 2024, the Ministry amended the BOT-Toll model concession agreement 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,” he added.

The EPC and HAM project bidding process in FY2024 witnessed intense competition, as reflected in 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%, respectively, in FY2023.