01 Mar 2019
EPC awards are trending in roads
Going forward, EPC will remain the preferred mode of bidding.
Source: Equirus Capital
According to Vijay Agrawal, Executive Director, Equirus Capital, “In the past, lenders have given bank guarantees (BGs), which have been devolved owing to workmanship issues and dispute with authorities. Hence, now bankers are cautious in issuing BGs.” Around nine public sector banks (PSBs) are in Prompt Corrective Action (PCA). Hence, there is delay in receiving BGs or working capital because of a liquidity-starved banking system growing increasingly discomforted by recent market events. Banks are thus looking for healthier credits.
Nonetheless, Agrawal believes many financial instruments and credit enhancement comfort structures are available in the market today for players to survive this temporary glitch. “Further, EPC is the short term way to go forward as fresh equity tie-ups take some time and banks are not willing to lend to BOT or HAM projects,” he reasons. Hence, the mindset has temporarily changed in favour of the EPC model.
Non-fund based (NFB) exposure to the construction sector has grown at a CAGR of 11.5 per cent over the past four years and stands at over Rs 1 trillion at present, compared to Rs 900 billion of fund-based exposure. Over two-thirds of the NFB exposure is from public-sector banks, of which more than 20 per cent is from the 11 banks under PCA at present. Including the infrastructure sector, the total NFB exposure of banks is close to Rs 4 trillion. Further, the change in national highway EPC contracts since 2014 involving a longer defects liability period (increased from two years to four years) will also elongate the BG release cycle.
Sharing ICRA estimates, Rajeshwar Burla, Assistant Vice President & Associate Head-Corporate Ratings, ICRA, predicts the construction sector will require incremental BGs of Rs 150-200 billion per annum over the next three to four years. This will require additional collateral of Rs 30-60 billion. “Given that many mid-sized players have been able to secure multiple projects, getting the BG limits enhanced and arranging adequate collateral could become challenging and constrain them from taking up additional projects,” he reasons. “At the macro level, limited availability of BGs could also constrain pace of infrastructure development.”
SHRIYAL SETHUMADHAVAN
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