India's National Highway Construction Faces Slowdown Amidst Challenges

India's national highway construction is predicted to slow down by 7-10% in FY25, from 12,350 km in FY24 to around 11,100-11,500 km, mainly due to execution challenges and competition. Delays in project awards and financial strains among EPC contractors are contributing factors, projected to impact revenue and profitability.

India's national highway construction pace is expected to decelerate by 7-10% in the financial year 2025 (FY25). The slowdown will see construction rates decrease from 12,350 kilometers in FY24 to an estimated 11,100-11,500 kilometers. This translates to a daily construction rate of nearly 31 kilometers, according to CareEdge Ratings. The downturn is largely attributed to execution challenges, growing competition, and significant delays in receiving appointed dates after project awards.

Maulesh Desai, Director of CareEdge Ratings, highlighted that among the under-construction projects, worth Rs 1.83 lakh crore, 55% with a cumulative bid project cost (BPC) of Rs 1 lakh crore, have been delayed by over six months. This is due to escalating execution difficulties, an increasingly competitive industry landscape, and delays in post-award appointed dates.

A financial analysis by CareEdge Ratings of 17 sponsors and EPC contractors involved in Hybrid Annuity Model (HAM) projects revealed a compound annual growth rate (CAGR) of 14% in total operating income (TOI) from FY21 to FY24, thanks to timely execution. However, a decline in project awards in FY24 and the first half of FY25 has reduced revenue visibility significantly. The order book-to-TOI ratio dropped from 2.78x in FY22 to 2.15x in FY24 as many projects await appointed dates, resulting in a lower executable order book. Furthermore, operating profitability is forecasted to decrease by 200 basis points in FY25 compared to FY23 due to heightened competition and increased overhead costs.

The cessation of the Atma Nirbhar Bharat scheme for monthly payments is anticipated to extend the working capital cycle by 15-20 days in FY25, adding strain to developers. Despite challenges, the Hybrid Annuity Model (HAM) continues to be predominant in highway project awards, comprising approximately 55% of total projects awarded between FY21 and FY24.

CareEdge Ratings' analysis encompassed 374 HAM projects awarded by the National Highways Authority of India (NHAI) from 2015 to 2024, covering 16,000 kilometers with a total BPC surpassing Rs 4.03 lakh crore.