Road awarding gains momentum in July 2023: Nuvama

According to the report, the combined road awards by NHAI and the Ministry of Road Transport and Highways reached 514 km in July 2023, which is a significant jump from the 229 km awarded in June 2023

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In its recent infrastructure sector report, Nuvama highlighted an improvement in road awarding activity during July 2023, with a focus on the National Highways Authority of India (NHAI). The report sheds light on the trends in road awards and construction, offering insights into the current state of India’s road development efforts.

Road awards surge in July

According to the report, the combined roads awarded by NHAI and the Ministry of Road Transport and Highways (MoRTH) reached 514 km in July 2023, which is a significant jump from the 229 km awarded in June 2023. The month-on-month increase can be attributed to the ramp-up in NHAI’s awarding activity.

The report reveals that after a remarkable awarding spree in March 2023, NHAI paused its Letter of Acceptance (LoA) issuance for road projects in April and May. However, the agency resumed its awarding momentum, granting contracts for projects spanning approximately 87 km in June and 314 km in July. The collaborative efforts of NHAI and MoRTH contributed to the construction of 420 km of roads during July 2023.

Positive fiscal outlook drives growth hopes

The report highlights a 25 percent year-on-year (YoY) increase in the allocation for road outlay in the current fiscal. This boost in budgetary support, as outlined in the Union Budget, has reinvigorated hopes for growth in the road sector during FY24. The allocation increase lays the foundation for continued infrastructure development, creating opportunities for both awarding and construction activities.

Monsoon challenge

While road awarding demonstrated a positive trajectory, road construction faced challenges during July 2023 due to adverse weather conditions brought by heavy monsoons. The total road construction, involving both NHAI and MoRTH, amounted to 420 km in July, a decline from the 785 km constructed in June 2023. The impact of monsoons was evident in the slowdown in construction activities.

Of this, NHAI was responsible for constructing 241 km of road in July, down from 262 km in June. The year-to-date (YTD) figures for road construction in FY24 reached around 2,670 km, with NHAI’s contribution totalling approximately 1,085 km.

Mixed outlook and recommendations

Nuvama’s report underscores a mix of hope and caution for the road sector. The disappointing awarding activity by NHAI in FY23 is in contrast with the increased budgetary support for roads in the current fiscal year. While lower commodity prices have provided some relief, the report highlights ongoing challenges posed by high competition, which could affect margins in the future.

The recent pause in interest rate hikes by the Reserve Bank of India (RBI), the government’s continued focus on road development, and improved credit availability from banks are cited as positive factors that could drive growth in the sector.

The report suggests that road developers should consider diversification strategies to navigate challenges and maintain healthy order books. Nuvama favours road companies with strong financial foundations, particularly highlighting PNC Infratech and KNR Constructions as preferred choices for investors. Both companies are rated as ‘BUY’ options in the road sector. Nuvama believes that these companies are well-positioned to secure contracts for Hybrid Annuity Model (HAM) projects, bolstering their order books and contributing to the sector’s growth.

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