Monday, 11 May 2015

Slump in infra projects belies recovery story

India’s public-sector corporations and the government aren't really spending as much as might be needed to revive the economy; tenders for projects to build roads, railways, mining infrastructure, irrigation systems, water supply systems and power plants were far fewer last year than in FY14.

The number of tenders issued last year, across sectors, was 26% smaller with the value lower by 23% than in the previous year and Emkay Equity Research puts the total value at just under Rs 4 lakh crore.

While the Centre and PSUs may have been constrained by the lack of finances, companies too were not really keen to take on new projects. As a result, the value of projects awarded dropped by about 13% in FY15 to Rs 3.53 lakh crore. Among the segments that saw a fall were power equipment, railway equipment, pipelines, water and irrigation systems and real estate projects. Either companies in the private sector opted to complete projects on hand before taking on new ones or perhaps they were not able to cobble together the necessary finances.

R Shankar Raman, CFO, Larsen & Toubro, points out that while a few PSUs have been calling for bids - ONGC and NHAI for instance - others such as Coal India might take a while to do so.

However, according to Raman, what’s really hampering business for engineering firms is that private sector isn't willing to add capacity just yet, given there’s surplus capacity.

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 parametres has forced some companies to stay away. That is borne out by evidence.The 43 kilometre Udhampur-Ramban, for instance attracted just three bidders while for the 51km Ambala Kaithal-I and 36 km Ramban Banihal there were two contenders each. “There are only about four or five bidders on average for EPC projects and most projects have been bid significantly higher than NHAI’s cost estimate,” Lokesh Garg analyst at Credit Suisse observed in a note.

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 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.

One way out of this, industrialists suggest, is to break up larger projects into smaller ones and parcel them out; that way engineering companies may be able to bid for them since the costs involved would be smaller. However, there remains the problem of delays in getting clearances; a slew of projects are stalled for want of either land, environment and forest clearances or local licences. Moreover, while few want to voice their concerns, companies are wary about the regulatory environment. One CEO of a private sector firm said decision-making in the government remained not simply slow but was also arbitrary resulting in frequent changes. ‘We are not confident of bidding since we're not sure the terms and conditions won't be changed,” he told FE.

As Nitin Arora who tracks the construction space at Emkay points out, in many instances, the government departments have extended the timelines for submitting bids to ensure enough participation. “Despite that some projects have been cancelled,” he pointed out.

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