Infrastructure industry hopes history to repeats itself in H2FY23
The H1FY23 akin to previous two last fiscals have been slower than expected. The slowdown this time has arisen on grounds of extended rains, spiralling construction costs, delays in land acquisitions and environmental clearances.
The construction equipment market in India anticipates a rebound in road building and other infrastructure-related activities in the second half of the current fiscal year, following the recent trend of past two years.
The change appears to be evident because the rate of road construction has increased significantly over the last three months, from a meagre 19.5 km per day in the first half (H1) of FY23 to almost 23 km per day today, as per data obtained from industry stakeholders and the transportation ministry. Up until November, nearly 4,766 km of high construction had been completed, which is still only about 39% of the 12,200 km goal set for the fiscal year.
According to the industry data, a similar trend was also seen in the previous two fiscal years. In spite of the pandemic being at its worst, the NHAI approved the most projects in a fiscal year in FY 2021, awarding contracts worth Rs. 1,30,000 crores over 4,818 km. Following suit, 4,970 km of roads worth more than Rs 1,40,000 crores were built in FY2022, which was the following year.
Despite all the efforts, industry insiders estimate that it would require daily road construction of at least 50 to 60 km to hit the annual goal, which they describe as more of a "day dream." They contend that even if the rate of road construction slows to around 30 km per day, it should still be commended.
Commenting on the trend, Dimitrov Krishnan, MD, Volvo Construction Equipment (India) and current President of Indian Construction Equipment Manufacturers’ Association (ICEMA) said, " The rural demand which was slow to pick up and generally involves earthmoving equipment has begun to move slightly up now and we hope to see a stronger second half on the rural demand as well."
Before the start of COVID19, the goal of road construction, according to Sandeep Singh, MD, Tata Hitachi, was approximately 40 km per day. However, the pace decreased by almost 32 km per day in FY 2021 before dropping to a bare minimum of 19 km per day in FY 22. "The pace has increased over the past three months from 19 km per day to levels of 23–24 km per day. One explanation is that the monsoon has ended "Singh continued, predicting that it will pick up in the second half of the current fiscal year.
The development appears significant given that, despite its many disadvantages, road transportation remains one of the most practical and affordable forms of transportation for both freight and passengers due to its high penetration level and door-to-door delivery. Prior to the increase in fuel prices, OEMs frequently shipped cars by road to their warehouses and dealerships, but some companies, like Maruti Suzuki are now increasingly choosing to ship cars by railroad.
Road transportation currently accounts for about 90% of passenger traffic and 65% of freight, making it the second-largest mode of transportation in the world behind the United States, which has 66.45 lakh kilometres of roads. Spending on infrastructure needs to be increased, especially when it comes from the government because of the "anti-poverty effect" that government spending has on the economy, the industry observers opine
Following the construction industry's slowdown, the heavily reliant CE sector—particularly the earth movers—seems to have also slowed down during HIFY23. To be fair, however, a lot of projects that were in the works have stalled for a number of reasons, such as increasing project costs, an extended and higher monsoon, and difficulties with land acquisition. “If the road construction rate turns faster, then we will see a much higher increase in the earthmoving equipment space", Dimitrov of Volvo CE.
The industry experts claim that the sales of CEs grew by approximately 10% during H1FY23, which they now anticipate to increase to 15% in before the end of FY23.
The demand to scale up in H2FY23 is not limited to the CE companies. It appears that the infrastructure development companies are planning their recommendations along similar lines. For instance, the Mumbai-based Larsen & Toubro (L&T) company registered its highest-ever order book value of Rs 372000 crore during H1FY23 thanks to a 23% YoY revenue growth. The company informed investors that the order prospects for 2HFY23 were at Rs. 630000 crores as of September, with infrastructure accounting for a significant share of roughly 72%.
Likewise, publicly listed Ahluwalia Contracts (ACIL), a major integrated construction company with headquarters in Delhi, provided guidance for order wins in the range of Rs 2500–3000 crore for FY23. But now, almost nine months later, the company asserts that it has already earned Rs 3770 crore. Without taking execution during Q3FY23 into account, the development has increased its book-to-bill to 3.2x. In industry parlance, the percentage of orders received to work completed and billed for a given period, typically a month or quarter, is known as the book-to-bill ratio. The company management now expect its guidance to reach over Rs 4000 crore threshold.
Government to introduce first surety bonds insurance to ease liquidity for road contractors
Although funding problems have significantly subsided over the past two years, the liquidity crunch still occasionally appears, especially for smaller developers, which has slowed down project execution. It is essential to note, for context's sake, that the Reserve Bank of India (RBI) raised its key repo rate, or the key lending rate, by 35 basis points in December, from 5.90% to 6.25%, in an effort to address persistent inflation concerns. Since May of this year, the key lending rate has increased five times in a row by 225 basis points.
In order to mitigate the problem, at least to some extent, the road transport and highways ministry hope to introduce the first surety bonds insurance product offered to highway contractors by general insurance companies. It is expected to kickstart on December 19.
Surety bonds are payment guarantees offered by insurers; however, they are different from bank guarantees in that a sizable portion of the project funds supplied by contractors are not frozen. As the liquidity requirements for capital-intensive infrastructure sectors grew urgent during the Covid-19 crisis, the Centre first promoted the idea.
Furthermore, in order to encourage private capital and efficiency in execution and operation of infrastructure projects, the Ministry of Finance in November notified a scheme for financial support for project development expenses of PPP Projects. Christened as India Infrastructure Project Development Fund Scheme (IIPDF Scheme), the new scheme which is applicable both for Central as well as State projects. It includes for providing financial and technical support to the private sector in meeting the cost of transaction advisors and consultants engaged in the development of PPP projects.
While industry participants attempt to forecast the future by analysing historical patterns, the volatility of geopolitical situations, lockdowns resulting from a resurgence in Covid19 cases similar to what is occurring in China, rise in commodity prices, among other factors, may change the situation on the ground.
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