India Ratings and Research reported that small and mid-sized road construction firms may struggle to secure new orders in the medium term due to a decline in government-issued engineering, procurement, and construction (EPC) contracts.
The agency attributed this trend to the government's increased preference for build-operate-transfer (BOT) and hybrid annuity model (HAM) projects over traditional EPC contracts. The shift is expected to intensify competition in the EPC segment, favoring large players with strong financials. Smaller firms, often lacking the significant upfront capital required for BOT and HAM projects, may face barriers to participation, coupled with heightened execution and funding risks.
BOT projects, in particular, pose additional challenges such as toll risks and slow financial closures. Although 80% of the required right of way is typically available in advance, delays in clearing remaining sites have caused discomfort among lenders.
However, the BOT and HAM models also demand a long-term commitment from developers, often spanning 15 years, which fosters more stable business profiles compared to the EPC model. Some mid-sized EPC developers are gradually transitioning to HAM projects and have begun securing orders under this framework.
"The government's pivot to BOT and HAM models will transform the sector's dynamics," noted Abhash Sharma, Senior Director and Group Head Ratings Mid Corporates at Ind-Ra. He emphasised that companies with strong credit profiles and long-term strategies are better positioned to endure, while others may need to act as EPC contractors for larger developers, facing increased competition and margin pressures.
For mid-sized EPC firms, geographic and client concentration remains a key concern, with 40–60% or more of their revenue often tied to a few top clients, heightening customer-related risks. Additionally, these firms frequently grapple with stretched working capital cycles and heavy reliance on creditor-backed letters of comfort, particularly among lower-rated entities.
As the government reverts to a refined BOT/HAM project model, India Ratings foresees a challenging future for small and mid-sized EPC players, as the focus shifts to construction quality and achieving financial closure before project initiation.
(ET)
