In what can be seen as soft signs of revival of positive sentiment, public sector undertakings and several government departments have begun planning investments.
In what can be seen as soft signs of revival of positive sentiment, public sector undertakings and several government departments have begun planning investments. Fresh tenders have been floated by PSU firms and government departments in sectors like roadways, power T&D, mining equipment, community services, hospitals and water projects. However, analysts reckon that pending a full-fledged recovery, challenges relating to execution and working capital cycle will continue to persist.
The number of tenders issued in the first four months — April-July of FY16 — was 35.1% higher year-on-year, while the value of tenders more than doubled during the period. Emkay Research puts the total value at R1.68 lakh crore.
This is somewhat a reversal from the situation in the last three years, when the government and PSUs were constrained by the lack of finances, and companies too were not really keen to take on new projects. However, during April-July of FY16, the total value of contracts awarded jumped sharply by 38.4% to R1.17 lakh crore, according to Emkay Research. Growth was witnessed in project awards in power equipment, roadways, irrigation and pipeline, but community services and hospital segment witnessed a decline. The project award activity was limited to the domestic market, with no major international awards recorded during the period.
Also, this initial spurt in activity is limited to only infrastructure sectors, while most macro indicators such as growth in freight traffic through rail, road and ports, as well as energy consumption through power supply, coal, LNG and gasoline, are still witnessing weak business momentum, after a spurt in the six months post-elections, Bank of America Merrill Lynch observed in a September 8 report.
“Demand for most base industrial products has decelerated,” the report says. The foreign brokerage says that “a recovery in industrial capex is likely to be back-ended vs infra capex”.
Larsen and Toubro, which is considered a bellweather for the Indian economy, suffered a decline of 37% y-o-y in its consolidated profits for the quarter ended June, amidst weak investments climate. R Shankar Raman, chief financial officer, Larsen & Toubro had said that the “speed and scale of reforms” required to push the economy towards an “investment-rich momentum” was of much higher order than what was being seen.
However, S N Subrahmanyan, senior executive VP (construction and infrastructure), L&T, said that even as there is a lag between the announcements being made and them reflecting on the pace of tenders or orders, the infrastructure sector continues to perform well. This would include buildings and factories, transportation, heavy and civil engineering, power T&D and water. Interestingly, these segments now form half of L&T’s consolidated revenues of R92,761.66 crore.
NHAI, for example, awarded projects amounting to R21,400 crore for 1,653 km in April-August. The NHAI awarded EPC contracts worth R10,600 for 850 km and awarded BOT contracts worth R10,760 crore for 803 km.
However, the participation in the bidding process across sectors continues to remain weak. Lack of participation forced tender issuing authorities to extend the last date of submission of 656 project tenders and cancellation of around four tenders during July 2015 alone, Nitin Arora, who tracks the construction space at Emkay, points out.
Varun Mehta, deputy general manager (finance), Sadbhav Engineering, which constructs roads, irrigation facilities and works in the mining space, says changes by NHAI in working capital requirements and quality parameters has forced some companies to stay away.
Mehta points out that NHAI is fixing the design and maintenance requirements but has tightened working capital requirement for companies, which some contractors find difficult to meet. “In the initial construction phase, contractors can bill NHAI only after certain benchmarks are met. This effectively means that the earlier billing cycle of 40-45 days has now become 80-85 days, forcing contractors to have more working capital,” he explains.
In sectors such as roads, aggressive bids in the past, which predicated on a stronger growth in the economy, have resulted in projects needing to be altogether scrapped since the estimates have gone awry. That has made construction firms a lot more cautious since many of them are over-leveraged.