January 2019

The construction industry and its value chain and ancillaries depend heavily on infrastructure activity for growth. The sector is also the largest employment generator outside of agriculture. The past two years have seen improvements in the operational parameters across several areas but concerns remain.

The dependence on the government has always been high but it has increased further due to the lack of private investment in this sector in the past few years. The sector has survived structural shocks such as the implementation of GST and demonetisation. Consumption of steel and cement has picked up, indicating that activity is increasing.

The pace of project execution has probably increased with the easing of pre-construction bottlenecks. But revenues for companies in this sector remained flat in 2017-18 and in the first half of 2018-19 with a slowdown in growth rates in 2018-19. Net profits improved considerably and many companies managed to reduce their gearing ratio. But the sector remains highly and dangerously debt-laden and the recent IL&FS crisis has contributed to an ultra-cautious mindset of lenders.

In the near future, projects in the airport, road and urban infrastructure sectors will provide significant opportunities. The government remains the driver with initiatives such as the Bharatmala Pariyojana, Sagarmala, Housing for All, the Smart Cities Mission, NABH Nirman, the dedicated freight corridor project, metro projects, and the Mumbai-Ahmedabad high speed rail project playing a pivotal role in generating construction activity.

The switch to a focus on EPC and HAM has helped corporates cut down on debt sourcing because these models enable an asset-light approach. The PPP model ran into problems due to land acquisition issues and delays in clearances, leading to a swell in stressed assets and the reluctance of banks to provide credit. Apart from IL&FS, other big players such as Larsen & Toubro, Reliance Infrastructure Limited and the GMR Group have all embraced the asset-light approach.

While this government has shown a degree of commitment to the infrastructure sector by outlining ambitious plans and objectives, the upcoming general elections introduces a degree of policy uncertainty. The actual execution of ongoing projects as well as progress on projects in the pipeline will hinge on the next government continuing to display political will in this regard, as well as more robust financing arrangements, and continuing improvement in the debt-equity ratio of players. Hand-holding by the government will remain crucial.

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