The domestic construction sector is expected to get a major boost from Indian Railways’ (IR) capex plans, estimated at over Rs 650 billion per year, over the next three to five years. The IR is in the midst of a transformational journey to upgrade its infrastructure and gain the lost market share from the roads sector. The IR capex plans for the five-year period 2015-2019 involves a capital outlay of Rs 8.56 trillion. To meet this target, the annual capital outlays for FY2016-FY2018 were increased significantly from ~Rs 0.6 trillion in FY2015 to Rs 1.31 trillion in FY2018BE. The majority of the planned capex is towards decongestion of the existing network, laying of new lines, electrification of network, station modernisation and development, etc. The IR is also working on a high speed rail corridor (HSR) project.
According to Shubham Jain, Vice-President and Sector-Head, Corporate Ratings, ICRA: “The opportunities for the construction sector remain robust in the medium term with both the railways and road segments being the key contributors. The railway infrastructure development in the last decade has been lagging in comparison to roads and they now plan to incur significant capex to catch up. While funding of this capex will be primarily arranged by the Railways, the private sector’s expertise in project execution and management can help improve the execution pace, quality, and efficiency.”
Railway electrification is likely to be a focus area for the Indian Railways, which has recently shifted towards the EPC mode of contract execution, from the hitherto conventional methodology or turnkey contracts, which is expected to improve the execution pace and provide sizeable opportunities for the private players. About 38,000 route km of railway lines are proposed for electric traction in the next five years, entailing a capex of ~Rs 400 billion. This is sharply higher when compared with the average execution pace of 2,580 rkm involving expenditure of Rs 30 billion per year during the last three years. IR has already awarded the first two contracts on an EPC basis, which were won by L&T. Similarly, station modernisation and redevelopment is another focus area for the Railways with plans of upgrading 100 railway stations across the metro and major cities over the next five years. These are planned to be developed under the PPP model with the private sector getting revenues from real estate. Few stations have been chosen to start with and execution has started on the Habibganj (Bhopal, Madhya Pradesh) and Gandhinagar (Gujarat) railway stations.
The other big ticket project being undertaken by IR is the HSR corridor or bullet train project between Mumbai to Ahmedabad. The project, which is expected to cost Rs 1.08 trillion, will be primarily (~81 per cent) funded by low cost debt from Japan and is expected to start execution in 2018. Project completion is targeted by 2023-24.
Apart from the capex plan, IR has also taken steps to improve the pace of project execution and funding. Some of the key initiatives include securing the line of credit from LIC, merger of the Rail Budget with the Union Budget, delegating powers to the zonal level, reducing the project approval process timelines, awarding projects on an EPC basis, etc. These initiatives are expected to increase private sector participation and improve the pace of execution.
The credit profile of construction companies was impacted to an extent by the demonetisation exercise and the GST implementation. With both the events behind us, the construction sector is expected to witness a gradual improvement. However, any significant improvement in the liquidity profile and credit metrics of construction companies will take time and will be contingent on the improvement in the working capital cycle and in the pace of execution. For construction companies which are struggling with high leverage, the ability to timely monetise assets or raise equity funds will be crucial in improving liquidity and capital structure. Construction companies which have stronger balance sheet are well placed to benefit from the large Government spending on infrastructure and are likely to see faster growth and improved credit metrics.
