With the general elections around the corner, the country may expect frantic execution as well as awarding activity in March 2019 quarters. Meanwhile, within the infrastructure sector, roads and railways continue to garner a larger share of investment pie.
Calendar 2019 is going to be a paradoxical year for the infrastructure sector, thanks mainly to the general elections scheduled to be held in the middle of the year. On one hand, contractors and the present regime would like to complete ongoing projects at the earliest, and on the other, election code of conduct is likely to slow down the project awarding process and land acquisition will come to a halt. So, the country may expect frantic execution as well as awarding activity in March 2019 quarter followed by a temporary lull. Within the infrastructure gamut, it is expected that the roads and railways to continue to garner a larger share of the total investment pie.
During FY18, Ministry of Road, Transport and Highways (MoRTH) along with NHAI awarded 17,055 km and constructed 9,829 km roads. During FY19, the target is to achieve 20 per cent growth over FY18 in terms of awarding and 45 km a day in terms of construction. Given that many projects awarded during FY18 have struggled to achieve financial closure, current year targets will be tough to achieve, but we expect awarding activity to start again in H2CY19.
That said, the Bharatmala Pariyojana aims to bridge critical infrastructure gaps through corridor-based development which is a more scientific approach, desirable in the long-term, as it takes a holistic view on the overall network. Therefore, the Bharatmala programme has the potential to change the entire landscape, if implemented as per plan. With an estimated average spend of upwards of Rs 1 trillion per annum (excluding land cost), the order book additions will remain healthy for both, large and mid-sized road contractors over the next four to five years.
While the cash conversion cycle for road contracts is relatively shorter when compared to other infrastructure sectors, the non-fund based limit requirements are high. Rajeshwar Burla, Assistant Vice President - Corporate Ratings, ICRA, says, "The total value of the government-funded projects under the new programme is estimated to be around Rs 4.70 trillion (excluding land cost) over a four-year period implying peak bank guarantee requirement of around Rs 350 billion (average execution period of two years)." Therefore, Burla suggests, "providing necessary collateral security for securing additional non-fund based limits could be a challenge, especially for mid-sized contractors."
Constructing ring roads worth Rs 362.90 billion across 28 major cities including Delhi, Lucknow, Bengaluru, Ranchi, and Udaipur. Detailed project reports (DPRs) are in progress for projects worth Rs 211 billion. DPRs for projects worth Rs 47 billion will be awarded soon.
Development of greenfield corridors across the construction of the DelhiûMumbai Expressway is expected to start in December this year with a completion period of three years. The cost of the project is estimated at Rs 1 trillion.
NHAI has significantly streamlined the arbitration process by introducing the Society for Affordable Redressal of Disputes (SAROD). In addition, as per its latest standard operating procedures, NHAI is completing its arbitration processes in a time-bound manner. In fiscal 2017, NHAI was able to settle claims amounting to Rs 8.63billion.
For railways, electrification, station development and port connectivity projects will continue to offer large opportunities. The pace of highway construction has accelerated in the past four years. The MoRTH want to expand the network of highways in the country to 200,000 km. This will have an implication for the railways' freight income. If it has to stem the revenue loss to roads, Jagannarayan Padmanabhan, Director and Practice lead - Transport & Logistics, CRISIL Infrastructure Advisory urge the government to operationalise the two freight corridors, viz Eastern and the Western Dedicated Freight Corridor urgently and fast-track the implementation of the others. Also, he suggests, "it needs to decongest routes and lay new tracks on a priority basis. Some of the basic aspects such as the availability of wagons and the investment to procure them are being given a miss. This is beginning to hurt the railways now."
That said, railways is pushing for complete electrification, which is likely to save at least Rs 110 billion annually on fuel expenses. This will help in improving railways" operating ratio and enable electric locomotives to run in any part of the country. In fiscal 2018, the railways electrified 4,000 km of route and in this fiscal, it targets to electrify 6,000 km.
Given the sizeable approved metro projects and a large number of projects which are under evaluation or approval stage, the order inflows to the construction sector from the metro rail development segment are expected to remain robust, feels Abhishek Gupta, Assistant Vice President - Corporate Ratings, ICRA. Many contracts are yet to be awarded in the on-going approved metro rail projects. Apart from the operational and under implementation metro projects, another 15 cities have proposals for the development of metro which has a potential of over 1,400 km of the metro rail network.
Currently, the metro rail projects worth Rs 2, 000 billion of project cost is under the approval stage. Assuming 400 km of the metro network is taken up for the development over next five years, this would involve a total capital investment of Rs 1,000- billion, thereby providing large construction opportunity. The metro rail network is operational (including partly operational) in 10 cities in India while projects on new or the expansion of metro rail network are under implementation in 11 cities (including cities with operational metro). In total, close to 950 km of the network is either operational or under various stages of implementation. These projects have an approved cost of Rs 2.5 trillion of which funding from the Government of India is close to Rs 598 billion. The overall cost of the projects being upwards of Rs 2.5 trillion, the construction contractors have benefited from the proliferation of the metro rail projects in India.
As much as Rs 3-3.5 trillion needs to be invested by 2030 to achieve the target set by the government for the sector. However, with its limited resources, the government cannot make such a huge investment. Hence, increased investment from both the government and private players to achieve the sector's holistic development is the need of the hour. Private players can invest in commercially attractive airports and the government can divert funds towards the development of Tier 2 and 3 non-profitable airports.
The NextGen Airports for Bharat (NABH) Nirman initiative, announced in the 2018 budget, aims to expand airport capacity by more than five times to handle a billion trips a year in the next 10-15 years.
Recently, the government announced the development of 100 airports at a whopping estimated cost of Rs 4.2 trillion in the next 10 years to meet the NABH Nirman initiative's objective.
According to the Economic Survey 2017-18, in-principle approval has been granted to develop 18 greenfield airports. These include Mopa (Goa); Navi Mumbai, Pune, Shirdi, and
Sindhudurg (Maharashtra); Bijapur, Gulbarga, Hassan, and Shimoga (Karnataka), Kannur (Kerala); and Bhogapuram airport (Andhra Pradesh)
Apart from this, the AAI will invest ~Rs 180 billion over the next four years to upgrade airports. Rs 150 billion of the investment will be made this fiscal to expand existing terminal buildings and construct new ones.
The Sagarmala Programme is based on the four key pillars for port-led development and comprises 577 projects across 19 states. Out of the 577 projects, more than 70% of the projects are in various stages of implementation.
Projects have been identified to increase the capacity to 3,500+ million metric tonne per annum (MMTPA) to cater to the projected traffic of 2,500 MMTPA by 2025.
116 initiatives have been identified across 12 major ports to unlock 100 MTPA capacity, out of which 96 initiatives have been implemented unlocking 80 MTPA.
112 road projects with length of 8,584 km, which will enhance last-mile connectivity, have been identified.
More than 20 per cent of the projects are in various stages of implementation.
15 multi-modal logistics park projects have been identified, out of which 10 are under implementation.
57 industrialisation projects have been identified, out of which 18 are under implementation
Port-linked special economic zone is under implementation at JNPT, which is expected to attract investment of ~Rs 120 billion. However, progress on other coastal economic zones have been slow.
How's the Budget
The total capital outlay for infrastructure in fiscal 2020 is Rs 4.7 trillion, a meagre 5 per cent increase versus the fiscal 2019 revised estimate (RE) and 16 per cent higher than the fiscal 2019 budget estimate (BE). Among the infrastructure segments, railways and roads are the biggest beneficiaries for fiscal 2020, accounting for two-thirds of the investment outlay. However, Crisil believe the infrastructure sector would need additional funds. For instance, the railways would miss the Rs 8.5 trillion capex target over fiscals 2016 to 2020, as the overall capex during this period is projected close to Rs 6.5 trillion.
Also, budgetary support to the NHAI has fallen marginally, though the increase in internal and extra budgetary resources (IEBR) supports outlay growth in fiscal 2020 versus the fiscal 2019 RE. Industry leaders expect NHAI execution to grow 15 per cent to ~4,300 km in fiscal 2020, but a marginal fall in the budgetary support would imply an increase in its dependence on borrowings.
Meanwhile, there has been a sharp decline in the fiscal 2020 outlay (versus the fiscal 2019 RE) for the civil aviation and power segments. Civil-aviation outlay dropped a sharp 37 per cent versus the fiscal 2019 RE, primarily because of the removal of budgetary support extended to turn around Air India. The outlay for power declined 39 per cent versus the fiscal 2019 RE, largely due to lower IEBR in Power Grid Corporation of India. Rural-development outlay stood at Rs 262 billion, 79 per cent higher than the fiscal 2019 RE, largely because of higher IEBR in NABARD. What's more, the budgetary allocation to Pradhan Mantri Gram Sadak Yojana, at Rs 190 billion for fiscal 2020, has remained flat over the past four fiscals.
As mentioned earlier, general elections remain a key event for the infrastructure sector. Continuity of government is likely to lead to continuation of policies and, thus, result in lesser hindrances and speed in execution. On the other hand, a change in government might result in a temporary blip.
Luckily for the industry, most construction companies are going in to this event with their order books at 4-6 times trailing revenues, which suggest even if there is a draught in project awards temporarily, under-construction projects will take care of near-term revenue growth and, thus, earnings impact will be negligible.