Competition for construction projects to intensify due to bidding from sub-contractors

ET Intelligence Group: India’s construction industry is likely to see increased competition in this financial year as more bidders enter the segment. The range of bidders is likely to go up to eight to 15 this fiscal from four to 10 in the past three years, said a study by rating agency ICRA. Competition is likely to intensify in the construction segment owing to a few reasons. First, sub-contractors who have been working for established players in the past three-four years and have acquired sufficient technical expertise are likely to independently bid for construction projects.A key aspect to note is that only pure construction or non-hybrid annuity model (HAM) projects are likely to see intense competition. Pure construction projects refers to projects where the government bears the complete cost of a project while in HAM projects, the government bears 40% of a project’s cost and the company bears the remaining cost. Second, the appetite for HAM projects is expected to be low among players since they face cash flow constraints and may not be able to raise funds in the present business environment. Hence, the competition in the pure construction or non-HAM segment is likely to go up further. According to a study by ICRA, in the past three fiscals, 160 pure construction projects were awarded (covering 6,260 km) to 69 different construction companies, indicating the intensity of competition in the segment. As much as 60% of the total projects awarded by the government have been pure construction projects, 35% HAM projects and rest roads-toll projects.Third, of the 160 pure construction projects awarded by the National Highways Authority of India (NHAI) in the past three years, 69% were awarded at a discount to the base price of projects. This may encourage more bidders to bid in the fresh awarding of projects. In this fiscal, reliance on national projects is likely to go up as state governments do not have enough balance sheet strength to award incremental roads projects. In this context, construction players such as PNC Infratech, Dilip Buildcon, KNR Constructions and Ashoka Buildcon, which have balance sheet strength and superior execution capabilities, are likely to benefit.
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