Can India bite into the $ 680-billion EPC market?

The Government has recognised that the economy is suffering and needs a strong booster dose – placebos just won’t work. Today, all the ministers are brainstorming over revitalising the economy. For our part, CONSTRUCTION WORLD, along with Foundation of Infrastructure Research Studies Training (FIRST), took up the challenge and presented Union Minister of Commerce & Industry Suresh Prabhu with solutions to inject adrenaline into the economy. The overall intent is evident: bring in foreign exchange, enhance employment, contribute taxes and plan for long-term positive development for the country.

One of our solutions is to strategise to attract the ‘engineering research and design’ industry to India. This $ 680-billion industry is projected to move $ 170 billion – 25 per cent of total revenues – to Asia. Companies like Bechtel, AmecFoster & Wheeler, Black & Veatch and others are based in India, employing thousands of engineers creating engineering designs for complex multibillion infrastructure projects around the globe. This brings in foreign exchange, tax payments and employment. In fact, India has a talent pool of nearly 500,000 engineers graduating every year; such companies can help boost their skill sets and hone them as worthy assets for the country’s future technical talent pool. The stakes are high-$ 170 billion as mentioned above – and India should stake a claim. Back home, we have such skill sets in public-sector companies like Engineers India, RITES, IRCON, MECON, Engineering Projects, WAPCOS, and so on. Going forward, our EPC companies can create SPVs with such projects to forge future alliances as the home infrastructure market opens up to these global giants from the design and engineering space.

Our recent exercise in analysing India’s Fastest Growing Construction Companies has thrown up new names into the orbit that have grown geometrically over the past three years. These have shot to challenge the erstwhile fastest growing companies, indicating that new money has found its way to supporting companies that do not carry ‘legacy baggage’. Our jury comprising India’s top three rating companies debated the merits of excluding companies on grounds of questionable governance practices; therefore, some companies had to miss their spot of glory. This issue, bearing an element of surprise, we also present the nominees of this exercise. In our view, to be nominated is an important milestone in itself.

Early this year, CONSTRUCTION WORLD launched a new logo that intended to depict the increase in mechanisation, scale of infrastructure projects, project management expertise and adoption of technology. After scouring over the responses and suggestions received, we have conceded that our old logo stands tall with its leadership image well-entrenched in the minds of our readers and followers! Therefore, we have decided to bring it back amid the festivities of the month. On behalf of the entire team, I wish you all Happy Diwali and a prosperous new year!

Don’t stymie equipment & technology

The recent inauguration of the 9.15-km Dhola-Sadiya Bridge, India’s longest bridge above water, by Prime Minister Modi coincided with the completion of three years of his government in office. Apart from underscoring the government’s emphasis on infrastructure, it also reaffirmed its resolve in improving connectivity to the Northeastern region. Built at Rs 1,000 crore under PPP with Navayuga Engineering over rivers Bramhaputra and Lohit, the bridge cuts travel time by four hours.

In fact, the Nitin Gadkari ministry has awarded 16,800 km of highway contracts and constructed around 8,500 km for the year ended March, taking the count up to 23 km per day. The 135-km Eastern Peripheral Expressway, being constructed to decongest Delhi, is scheduled for completion in the next few months. Similarly, other expressways to take off include Delhi-Meerut, Mumbai-Vadodara, Dwarka Expressway, Bengaluru-Chennai and Delhi-Jaipur. With HAM not being popular yet, EPC is the easier way to accelerate road development. The 43-km, 12-lane Dedicated Freight Corridor costing Rs 3,000 crore from JNPT (Navi Mumbai) to Panvel, being built to ease container traffic is also under construction. Further, the UDAN scheme envisages 45 new airports and 70 regional routes, and caps ticket fares at Rs 2,500 for one-hour flights. Six new ports are being developed, and automobile and leather clusters have been planned alongside. Indeed, infrastructure bottlenecks are being addressed like never before and the pace is surely picking up.

However, the recent rate slabs announced under GST are likely to undermine infrastructure plans as construction equipment has been put under the same category as luxury cars! The rate applicable is 28 per cent; given the fact that 70 per cent of buyers of construction equipment are small entrepreneurs, small rental companies and hiring small setups, their capacity to buy will be affected and may deter the pace of execution. A pace of 40 km per day from the current 23 km would require extensive mechanisation and the government must consider a slab that encourages adoption. Categorising it with luxury cars is unfair – if the government thinks this equipment is purchased by companies that will pass on the tax impact, it is ill-advised. The Budget has allocated a spend of Rs 3.96 lakh crore on infrastructure in 2017-18 and this GST rate will result in inflating the cost, apart from affecting rightful demand. Even the ‘Make in India’ initiative that is helping the industry gain its status as an export hub will take a beating with the GST dampener. Given the importance of building infrastructure at a reasonable cost and easing the pressure of high financial costs hurting the infrastructure industry, a rate of 12 per cent for GST is being proposed.

Set for growth

Last month, in a swift move at the recommendation of  NITI Aayog, the government reversed the misery of construction and infrastructure companies. In this column last month, I had pitched for a resolution to the impasse on matters stuck in arbitration, disputes and appeals. So while the ruling has now provided that the company in question is not squeezed to death of its finances and left to dry, and this takes care of the financial disease such companies come down with, the core attitudinal shift causing this legal pileup has not been addressed.

That said, the ruling has led to the rerating of construction and infrastructure stocks at the bourses. Companies planning InvITs will see better valuations. Huge funds are likely to come back into the system to companies like HCC, Patel Engineering, Sadbhav, IRB, etc. While this augurs well for equipment companies, there is also likely to be a shift in the list of bidders for EPC and hybrid annuity contracts issued by MoRTH
and NHAI.

Meanwhile, real-estate companies are experiencing rough weather as the consumer protection movement is gaining momentum. Several companies like Unitech, Supertech and Parsvanath have been instructed by courts to return the money invested by those who have booked flats where either the companies have not presented a ´true and fair´ picture of the offering when they raised investments from buyers or violated deadlines for delivery. The Real Estate Regulation Act (RERA) has sent a shiver down the spines of developers as rulings have begun to send developer after developer behind bars for violations and misrepresentations, non-delivery and unfair practices. Consolidation is already in progress in this sector as several stressed developers have made alliances with financially stronger partners to bail them out. Ajay Piramal´s real-estate fund initiatives have rescued many of them too. New money is coming in under changed conditions seeking fresh rules for play.

The Smart Cities mission has released 27 additional cities, taking the total number of cities selected under the mission to 60. The new cities are from 12 states and have proposed to invest a total of Rs 66,883 crore under their respective city development plans. The amount includes Rs 42,524 crore in area-based development (79 per cent of the total) and Rs 11,379 crore (21 per cent) in technology-based pan-city solutions. With this, the total investment proposed for the 60 cities selected has now gone up to Rs 144,742 crore. Several of these cities are now readying DPRs; RFPs for some projects have already been readied and launched by Pune, Jaipur, Ahmedabad, etc. Another Rs 45,935 crore has been approved by the Ministry of Urban Development under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT). In addition to 68 projects launched in 14 smart cities this June, another 134 projects have been identified, of which 114 are under bidding. The pace of urban renewal has been stepped up under these initiatives and is likely to accelerate in the coming year.

Growth has been initiated by eliminating bottlenecks and making structural changes. Liquidity released through the Pay Commission, OROP and government spending will add to the buoyancy likely to emerge as a result of the above normal monsoon, which will hopefully provide a bountiful harvest in the coming season. Obstacles are being eased with the initiatives enumerated above and the scenario is set for a revival. It indeed augurs well for the festive season ahead  Happy Diwali!

Let´s Get Parliamentary

When, a couple of years ago, CW raised the question of whether India could be considered a construction equipment hub, many scoffed at the idea as our delivery on manufacturing was not considered competitive. Over the years, the logic morphed from addressing the needs of neighbouring countries to developing models specific to the needs of Indian terrain and then exporting such models to other countries requiring them. At this year´s EXCON, which just concluded in Bengaluru, the fact that India has established itself as a sourcing hub was very clear. This is an essential pillar of the ´Make in India´ campaign within the construction segment. With a current size of $2.8 billion, the Indian construction equipment industry is expected to grow to $5 billion by 2019-20. Even the after-sales spares market is about $800 million.

The roads sector has clearly been prime among the islands of solace, closely followed by contract mining, irrigation and power. Minister for Roads Nitin Gadkari has proven to be a dependable ally for the construction sector owing to his dogged determination in resolving issues afflicting progress.

He, along with his team, has initiated several measures to counter reticence, paving the way for resurgence in orders for the sector. However, as Robert Frost said, ¨The woods are lovely, dark and deep. But I have promises to keep, and miles to go before I sleep.¨ The finances are showing no indication of improvement.

Aggregate sales, operating profit and net profit of over 300 companies from core sectors fell in the September 2015 quarter, making it the third consecutive quarter of a dismal performance. Half the operating profit was spent on servicing debt indicating pressured balance sheets. The performance of core sectors (including capital goods, cement, construction, metals, mining, and power) is indicating that the decline has not been arrested conclusively and a turnaround in the economy may take longer than expected. The performance of core sector companies in the September quarter has seen net sales fall year-on-year by 5.5 per cent while net profit has dropped by 7.1 per cent. Operating profit skidded 12.6 per cent, which was steeper than the drop in sales, reflecting pressure on margins. If a comprehensive view of the entire sample of over 1,800 companies across sectors excluding banking, finance, oil and gas is taken, we find a modest improvement in net sales by 1.5 per cent and net profit by 1.6 per cent while operating profit slipped by 2.3 per cent. Companies are weighed down under a $640-billion debt burden, which is more than 30 per cent of India´s GDP. The strain lies in the stressed debt of over $50 billion in the banks and a rise in bond defaults. Gammon India is the sixth company where bankers have decided to take majority control by converting debt into equity. Previously, lenders to Electrosteel Steels Ltd, Lanco Teesta Hydro Power Pvt Ltd, VISA Steel Ltd, Jyoti Structures Ltd and Monnet Ispat and Energy Ltd have invoked conversion of debt into equity giving them majority control. Gammon´s T&D and EPC businesses have already been scheduled to change hands by incorporating them into separate SPVs.

Government spending will need to continue to accelerate the momentum in the economy. The passing of GST would also greatly help. Politically, an atmosphere of cooperation is needed; this appears to be emerging as the ruling party seems to have decided to work with the opposition than have a standoff. Enough un-parliamentary communication across the country – Parliament at work will augur well for closing the year on a positive note.

The growth mantra

The ¨ease of doing business¨ rankings released by the World Bank have indicated a minuscule improvement for India to a rank of 130 owing primarily to better points in ¨starting a business¨ and ¨getting an electricity connection¨. However, there has been no change in our abysmal ranking as far as ¨obtaining construction permits¨, ¨enforcing contracts¨ and ¨registering property¨, highlighting the morass real-estate entrepreneurs have to navigate to survive.
If one has to secure over 55 permits over a two-year period before starting a simple building project, how long will it take to realise the dream of smart cities? The multiplicity of authorised departments working in silos has made it difficult even for a chief minister to ensure the creation of single-window clearance. Year after year,CW´s awardees have bemoaned the apathy of the administration in this regard. Take for instance, the recent suicide note of a builder – it indicated that while he was not in a debt trap, running a reasonably successful operation off Mumbai, the trying demands of the administrative powers drove him to death.

Today, states seeking investments are wooing companies from overseas and corporate giants from other states to set up their factories. Telangana is wooing Foxconn and Microsoft while Andhra Pradesh is touring Silicon Valley to attract investment to Amaravati, its new capital, while the Singapore and Japanese governments fund its master plan. The Maharashtra chief minister has sought funding from Japan and Tamil Nadu recently held a Global Investor Summit, to be followed by Rajasthan. Then, why on earth would you neglect your state´s regular investors: its entrepreneurs? It could possibly be because one assumes they have no choice – this, however, is not true as so many of them have set up businesses in other states and overseas. The other reason is that big brand names make the job easier – but then, we have situations like POSCO that have been hanging fire around Odisha forever. The idea of smart cities is a compelling one owing to urban migration and the ultimate input-output ratio of a city. But when we arrive at the stage of issuing tenders for EPC works to be carried out for trunk infrastructure and housing, we will need IT-enabled, one-window clearance and a transparent application process. EPC of smart cities will serve as a huge multiplier across all realty markets in India. Even the 500 larger towns and districts would benefit immensely, leading to inclusive economic impact. However, it will be possible only with smart clearance administration and procurement processing.

The 13th CW Annual Awards were a celebration of entrepreneurship that defied all odds. Our winners from across India under the ´Top Challengers´ segment beat the slowdown by miles. Their growth proves that there is possibility of success despite gloom all around. These companies are an inspiration to others. Our ¨Top Challengers¨ tracker for last year indicates that these companies often fare well at the stock markets too with their ability to create wealth for investors. Finally, our winners in the ¨Fastest Growing¨ category continue to highlight that there is no moment of ¨zero growth¨ in India. Each of these winners have cracked the code of growth by outshining others over a period of six financial years, indicating their tenacity in keeping the growth mantra resonant. Here´s wishing you season´s greetings and a prosperous new year ahead!

We will be at EXCON in Bengaluru on November 25-29, at Stall No. 582 in Hall 3 Lower Level. As many of our editorial members will be present, do stop by and say hello!