Construction - Competition shows signs of easing; :: Edelweiss

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NHAI recently awarded nine projects spread over ~1,050 km worth INR106bn. Our analysis of bids reveals a definite moderation in competitive intensity, which has been a major concern over the past year.  We believe the highway authority is on track to award ~7,000 km projects in FY12 with ~4,500 km already awarded. We reiterate Sadbhav Engineering (Sadbhav) and IL&FS Transportation (ITNL) as our top picks. 

NHAI awards ~1,050 km worth INR106bn

NHAI has awarded nine projects spread across ~1,050 km, worth INR106bn recently. Listed players have won six projects; their share in terms of length (km) and project cost stands at 68% and 63%, respectively.

Definite signs of receding competitive intensity …

We believe competition in NHAI projects has definitely moderated compared to bids submitted six-nine months ago. This is evident in the lesser number of bidders (10-15 in most cases and in single digits for some projects opposed to 18-20 players earlier). Also, the difference between L1 and L2 bids has dipped.

… due to concerns on project funding

The large number of projects already awarded and concerns over financial closure have forced developers to be more rational while bidding. With capital markets continuing to remain weak, there are concerns with regards to equity infusion for some companies. The government, concerned about high premiums promised by developers, is planning to meet banks to get their perspective on financial closure of the projects awarded. We expect banks to become more cautious going ahead with road projects funding; this will lead to developers being more circumspect while bidding.

Road projects spanning around 4,500 km awarded in FY12 till date

NHAI has so far awarded projects spread over ~4,500 km amounting to ~INR450bn. We believe it will award ~7,000 km of projects in FY12 (against 5,083 km in FY11 and 3,351 km in FY10).

Our top picks: Sadbhav Engineering and IL&FS Transportation

We like Sadbhav for its superior execution and working capital efficiency. We like ITNL as it is a high quality infra company with a well diversified project portfolio and remains one of the best plays on peaking interest rates.  Additionally, both companies have been cautious in bidding for new projects in the past few months given the aggressive bidding by peers. Both these companies stand a good chance to bag a few projects over the next four-five months as competition eases.