Roads: the old order changeth

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Undoubtedly, road construction activity is on the fast track. After 10,000km of road contracts awarded last fiscal, FY17 looks to be another year of opportunity for construction firms.

What’s noticeable, however, is that a relatively new breed of mid-sized firms is stepping on the gas to bag orders, leaving the older giants behind.

On top of the pecking order now are firms such as Sadbhav Engineering Ltd, IRB Infrastructure Developers Ltd, Ashoka Buildcon Ltd, KNR Constructions Ltd and Dilip Buildcon Ltd. In the past six to eight quarters, these firms have been bidding aggressively for orders. On an average, the current order book of these firms is nearly three times their annual revenue clocked in FY16.

In contrast, the construction stalwarts of the previous infrastructure boom that disintegrated with the economic slowdown post-2008 are not in the race for new orders. With bulging debt burdens, most of them retired hurt. They are caught in a quagmire, with legacy projects, and battling clearance hurdles, project delays and related cost overruns.

For example, the one-time hot favourite on the bourse, IVRCL Ltd, that outperformed street expectations year-after-year for over a decade is weighed down by interest cost that is about one-fourth of its net revenue. Another such example is Punj Lloyd Ltd that ended up with sticky orders both on home ground and international waters, which finally ended up in legal battles and cost overruns.

That’s not all. The New Age firms are more nimble-footed on execution, too. So, the front-runners with a decent order book have clocked decent revenue growth in the past eight quarters. Sadbhav’s net revenue (FY16) has doubled since FY12. The same is true of firms such as Pratibha Industries Ltd and KNR.

Again, in contrast, the revenue of some older firms such as IVRCL, Punj Lloyd, Patel Engineering Ltd and Ramky Infrastructure Ltd have shrunk due to weak execution or project delays. A few diversified giants such as Larsen and Toubro Ltd may be exceptions.

Newer firms, who perhaps gained from the learning curve of the large-sized firms, have fewer such problems.

Operating margins, on an average, have steadily improved while those of older firms have slipped over the past five years.

Weak operating cash flows and mounting interest costs have together dragged these firms into the red. So, they would need to mend their balance sheets through asset sales before they could bid for new projects. The government is also trying to address the woes of these firms to get them back on track.

Stocks such as IVRCL, Punj Lloyd and Jaiprakash Associates Ltd have fallen from grace in the past few years. Investors have perhaps switched to stocks such as Sadbhav, Ashoka Buildcon and IRB Infra, which is mirrored in the price rally over the past two years.

To use the Tennysonian adage, “the old order changeth, yielding place to new…”