Growth to Continue: Infrastructure activity sets the ball rolling for construction

Infrastructure activity sets the ball rolling for construction

The Indian economy has been on a high- growth trajectory during the past three to four years, notwithstanding structural shocks such as the implementation of the goods and services tax and demonetisation causing a blip in growth for a few quarters. GDP growth remained strong in the current fiscal year as well, especially in the April-June quarter. Though GDP growth benefited from the low base effect, the contribution of the construction sector cannot be ignored. The increased pace of project execution, enabled by easing of pre-construction bottlenecks, has driven construction activity. Going forward, upcoming projects in the airport, road and urban infrastructure sectors will provide significant construction opportunities.

Growth trends

The construction sector has exhibited an impressive performance in the past 12-15 months. Witnessing an upturn in the second quarter of 2017-18, the growth rate peaked to 11.5 per cent in the fourth quarter of 2017-18. Growth, however, dropped to 8.7 per cent and further to 7.8 per cent in the first and second quarters of 2018-19. Despite the mild slowdown, the construction sector, coupled with an uptick in manufacturing activities, bolstered GDP growth in the first half of 2018-19. In 2017-18, the share of the construction sector in the overall gross value added was 7.4 per cent, the same as that recorded in 2016-17.

Key indicators of the construction sector, namely, production of cement and consumption of finished steel, registered growth rates of 12.5 per cent and 7.2 per cent, respectively, during the second quarter of 2018-19 as compared to 0.6 per cent and 7.6 per cent, respectively, in the corresponding quarter of 2017-18.

Mega programmes

The government’s flagship programmes such as the Bharatmala Pariyojana, Sagarmala, Housing for All, the Smart Cities Mission, NABH Nirman, and big-ticket projects such as the dedicated freight corridor (DFC) project and the Mumbai-Ahmedabad high speed rail project are playing a pivotal role in driving construction activity. The government has also focused strongly on infrastructure spending. Beginning with a Rs 1.81 trillion allocation in 2014-15, government expenditure towards infrastructure reached Rs 4.94 trillion in 2017-18.

Infrastructure activity gained pace in terms of projects under implementation but new project announcements remained subdued across both the public and private sectors. There were several noteworthy achievements, though. In the road sector, the sustained growth in construction of national highways and the length of roads awarded was a silver lining. The foundation for the Mumbai-Ahmedabad bullet train project was laid and works on the eastern and western DFCs progressed. Though the slump in real estate was a drag, robust demand for affordable housing, particularly from rural areas, gave a big push to construction activity.

Contractor performance

Engineering, procurement and construction (EPC) companies were able to maintain a strong order book in 2017-18. As the government is increasing expenditure on infrastructure every year and project award is gaining momentum, the order books of companies will provide earnings visibility for the next three to four years. Most of the growth in new order inflows was fuelled by public sector orders, while private sector orders were conspicuously absent. The orders were scattered across sectors and largely government-driven. For instance, in the power sector, order wins were largely those for plant modernisation and not capacity expansion.

Companies with exposure to the infrastructure sector continue to suffer from high debt and poor profitability, despite a pick-up in growth in the past two years. Although the asset-light approach is helping companies contain their debt, debt woes of firms such as Hindustan Construction Company Limited, Patel Engineering Limited, Punj Lloyd, etc., continue to be in focus. In contrast, companies such as KNR Constructions Limited, PNC Infratech Limited and Dilip Buildcon Limited have a debt-equity ratio between one and two, implying that they are better placed to service debt. These companies have clocked over 15 per cent growth in revenues in the ongoing fiscal year. The speedy execution of projects is expected to provide them with the necessary cash flows to pay interest expenses and enhance earnings.

The recent Infrastructure Leasing & Financial Services (IL&FS) crisis has triggered panic in the market. The company plunged into a crisis after it defaulted on payment of some bank loans and deposits. Following this, the government appointed a new board to steer the group out of its predicament. The company is sitting on a debt of over Rs 900 billion, most of which is at the project level, including road, power and water sector projects. A major reason behind IL&FS’s troubles is complications in land acquisition. As IL&FS has been the flag bearer of the public-private partnership (PPP) programme, the crisis highlights some of the intrinsic challenges of the PPP model.

Material and equipment providers

According to the Indian Construction Equipment Manufacturers’ Association, the demand for construction equipment grew by 24 per cent in 2017-18 over 2016-17 and the sector crossed 90,000 units for the first time. The increase in infrastructure spends continued to drive demand. The emerging trends in the construction equipment segment include a growing focus on precast technology, slow growth in the adoption of technically advanced equipment and increasing focus of equipment manufacturers on enhancing customer experience in a bid to retain their market share. While there are issues pertaining to stiff competition from cheaper imported equipment and the non-availability of spare parts, these are being overcome by the players, albeit at a slow pace.

With respect to construction materials, the cement industry, for instance, produced 297 million tonnes (mt) in 2017-18, registering an increase of 6.4 per cent over the previous year. Cement production during the first half of 2018-19 stood at 162 mt, 14 per cent higher than the 142 mt produced in the corresponding period of 2017-18. On the consumption side, India’s per capita cement consumption stands at 210 kg, much lower than the global average of 580 kg.

For steel, production and consumption stood at 126.85 mt and 90.71 mt, respectively, in 2017-18. Between 2013-14 and 2017-18, steel production witnessed its highest year-on-year growth of 32 per cent in 2016-17, when it surpassed the 100 mt production mark. This was on account of the imposition of a minimum import price which encouraged steel producers to increase their output. The steel industry is undergoing a churn at present as large companies battle it out to acquire debt-laden assets put up for sale by banks for cleaning up their books. Tata Steel completed the acquisition of Bhushan Steel after outbidding JSW Steel. The company also took over the steel business of Kolkata-based Usha Martin. Meanwhile, a consortium of JSW Steel and stressed assets investment firm AION Capital acquired Monnet Ispat and Energy. With the steel sector being one of the highest contributors to the banking system’s non-performing assets, banks are hopeful of cleaning their books through the bankruptcy resolution process.


The PPP model has not been quite successful for infrastructure due to land acquisition issues, delays in clearances, poor health of sponsors, problem of stressed assets and reluctance of banks in providing credit. Besides IL&FS, other big players such as Larsen & Toubro, Reliance Infrastructure Limited and the GMR Group that had entered the PPP space in the past have decided to become asset-light. This has brightened the outlook for the EPC space. In fact, almost all mega infrastructure projects, such as the Mumbai trans-harbour link project, are being offered on an EPC basis, providing the much-needed cash to otherwise cash-strapped companies. The road sector, for instance, has witnessed scaling up of the proportion of EPC projects, and going forward, under Bharatmala, EPC is expected to be the dominant mode of project award.

In the run-up to the general elections, the government will continue to lay emphasis on agriculture in order to boost rural sentiment. This augurs well for the irrigation sector, translating into construction of field canals. Overall, the National Bank for Agriculture and Rural Development has sanctioned Rs 656.35 billion for 93 projects that have been prioritised under the Pradhan Mantri Krishi Sinchayee Yojana.

It is expected that government and industry focus will move to project execution and away from new orders. In the medium term though, industry experts are confident about improvements in new orders, albeit some disruption is expected due to the upcoming elections. In the January-March 2019 quarter, hectic bidding is expected across sectors, including roads, airports and urban infrastructure, as companies intend to shore up their order books before the elections. Net, net, growth of the construction sector and allied industries is expected to remain sturdy on the back of the upswing in infrastructure activity.