Infra Construction - Positives Outweigh Negatives
Demand for construction equipment in India stems from the various infrastructure activities in roads, airports, ports, railways and metros.
Pavethra Ponniah, Vice President and Sector Head - Corporate Sector Ratings, ICRA Ltd.
For a large part of the current up-cycle which started in CY2016, road work has largely been the biggest demand driver, followed by railways/metro.Notwithstanding the general slowdown in public/private infrastructure work during the election period, the road sector has an adequate pipeline of projects for development/upgradation in national highways and state highways which can keep execution high during CY2019. While real estate and power have also been strong demand drivers in the past, the current outlook on demand from both the sectors is relatively muted.
Demand for CE grew by a robust 24-27% during CY2018, supported by road and railway work throughout the country. Growth stayed strong through the initial 9M of CY2018, barring seasonal lows. However, growth started tapering off in Q4CY2018 and was muted in Q1CY2019, impacted by the NBFC liquidity crisis, and the ensuing elections. ICRA expects demand in the industry to moderate to 4-6% during CY2019, before demand revives.
Roads: Post elections activity to revive
As in the past three years, road construction activity will continue to be the largest driver for construction equipment demand in India, going forward also. Although project awards and construction fell during FY2019 in the run up to the Union elections, urban and rural roads under the Pradhan Mantri Gram Sadak Yojana (PMGSY), doubling of highways and work under the Bharatmala scheme will keep road activity robust. While the strong unexecuted pipeline of roads will support the execution of projects in FY2020, the impact of Union elections and new NHAI norms which impacted the awarding in recent quarters, could temporarily impact execution in FY2021.
Airport: Sizeable investments on the anvil
Strong growth in air traffic over the last few years has resulted in capacity constraints at most of the airports in India; industry-wide capacity utilization for airports stood at 106% in FY2018. As per ICRA’s estimates, passenger traffic would exceed 750 million in a decade, more than two times the existing traffic. To meet the higher traffic load, substantial investment in capacity creation is required.
In the Union Budget 2018, the Government of India announced the NABH-Nirman initiative, aimed at increasing the number of airports and their capacity to handle traffic. The project aims at construction of 100 new airports over the next 10 years, investing ₹2 trillion. This will require increased interests by the private sector as well. With strong capex envisaged, construction equipment demand is expected to increase in airports considerably, going forward.
Ports: Execution under Sagarmala programme is under progress; to benefit over the long term
Under the Sagarmala project, the GoI had set out an ambitious target under four verticals: port modernization (including new port development); port connectivity enhancement; port-linked industrialization and coastal community development for phase-wise implementation over the period 2015 to 2035. Of the initial 700 projects identified for development under the sagarmala scheme, about 577 projects are at various stages of execution. Only about 61 projects have been completed (March 2019) and another 162 projects are in implementation, while the balance are either at tendering or DPR preparation stage. While the scheme has the potential to throw up considerable construction equipment demand, several large projects are still at conceptual/feasibility stage and may still take about 3-5 years to start construction.
Metro and Railways: New metro projects to keep demand strong
Completion of dedicated freight corridors, re-development of railway stations and an expanded pan-India coverage of metro are some of the large infrastructure targets for India over the medium term. Under the National Rail plan 2030, the Indian Railways envisages investment of ₹35,000 billion translating into annual investments of ₹2,500 billion. Capital budgetary allocation to the Railways increased by 17% in Union Budget 2020; while total outlay increased by 7%. Metro work has been a strong driver for equipment demand in recent years. This trend is expected to continue, going forward.
Power: Thermal capacity addition to remain muted
While the share of thermal power in generation remains high at ~65%, the share of renewable energy has increased with sizeable capacity addition in solar power during FY2018 and FY2019. Net capacity addition from the thermal segment is low with slowdown in fresh investments and decommissioning of older units. Given the relatively low MCE intensity in solar power capacity creation, compared to the wind or the thermal power segment, capacity addition in the solar segment is unlikely to translate into significant demand for construction equipment.
Real Estate: Near term outlook muted
The residential real estate segment continues to go through a prolonged slowdown although listed realty players recorded considerable traction in sales during 9m FY2019, thus improving their market share. Improved sales velocity resulted in increasing pace of project launches; new launches grew by 112% during 9m FY2019. Nevertheless, ICRA’s outlook on the residential real estate market continues to remain negative because of the large inventory overhang and cash flow pressures in the industry. On the other hand, commercial real estate segment continues to do well, aided by stable demand levels and moderate supply growth, which has translated into declining vacancy level and stable rentals across several markets. Overall, construction equipment demand from the real estate sector is expected to remain modest over the near term.
Pavethra Ponniah, Vice President and Sector Head - Corporate Sector Ratings, ICRA Ltd.Demand for CE grew by a robust 24-27% during CY2018, supported by road and railway work throughout the country. Growth stayed strong through the initial 9M of CY2018, barring seasonal lows. However, growth started tapering off in Q4CY2018 and was muted in Q1CY2019, impacted by the NBFC liquidity crisis, and the ensuing elections. ICRA expects demand in the industry to moderate to 4-6% during CY2019, before demand revives.
Roads: Post elections activity to revive
As in the past three years, road construction activity will continue to be the largest driver for construction equipment demand in India, going forward also. Although project awards and construction fell during FY2019 in the run up to the Union elections, urban and rural roads under the Pradhan Mantri Gram Sadak Yojana (PMGSY), doubling of highways and work under the Bharatmala scheme will keep road activity robust. While the strong unexecuted pipeline of roads will support the execution of projects in FY2020, the impact of Union elections and new NHAI norms which impacted the awarding in recent quarters, could temporarily impact execution in FY2021.
| Exhibit 1: Demand drivers for Construction Equipment | ||
| Industry | Updates | Impact on Construction Equipment demand |
| Airports | Amidst capacity constraints, NABH-Nirman (initiative to increase the number of airports with increased private participation) to boost MCE demand | Positive |
| Roads | While project executions continue at good pace, fall in new project awarding (due to elections) to keep MCE demand under check in FY2021 | Positive |
| Ports | Demand potential from Sagarmala programme continues to be high | Positive |
| Power | Net capacity addition from the thermal segment is low with slowdown in fresh investments, decommissioning of older units and focus on renewable energy (especially solar) | Negative |
| Real Estate | Near-term outlook negative although performance of larger players remains strong | Negative |
| Railways | Steady growth in freight and passenger earnings; sharp rise in capital budgetary allocation for FY2020 | Positive |
| Metro | Commercial operations of delayed projects to happen in March 2019; progress of most of the under-construction projects is satisfactory; increasing focus on next phases of the project | Positive |
Airport: Sizeable investments on the anvil
Strong growth in air traffic over the last few years has resulted in capacity constraints at most of the airports in India; industry-wide capacity utilization for airports stood at 106% in FY2018. As per ICRA’s estimates, passenger traffic would exceed 750 million in a decade, more than two times the existing traffic. To meet the higher traffic load, substantial investment in capacity creation is required.
In the Union Budget 2018, the Government of India announced the NABH-Nirman initiative, aimed at increasing the number of airports and their capacity to handle traffic. The project aims at construction of 100 new airports over the next 10 years, investing ₹2 trillion. This will require increased interests by the private sector as well. With strong capex envisaged, construction equipment demand is expected to increase in airports considerably, going forward.
| Exhibit 4: Key under-construction airport status | |||
| City | Cost (Rs. Crore) | Status | Developer |
| Mopa, Goa | 3,000 | Phase I construction which started in 2018, stopped in January 2019 with the Supreme court ordering suspension of construction on environmental clearance (EC) issues. In early May 2019, the Ministry of environment, forest and climate change (MoEFCC) has submitted a report recommending EC but with more stringent conditions. Hearing scheduled for July 2019. |
GMR (awarded in Sep-16) |
| Navi Mumbai | 16,700 | Revised COD of mid 2020 (revised from December 2019) due to the delays in obtaining clearances for the commencement of construction work - According to CIDCO, despite the requisite permissions and ongoing work at the site, delay in tendering procedures and the issue of project-affected persons could impact progress |
GVK (won in Feb-17) |
| Jewar, Noida, NCR | 30,000 in phases | PPP model; stone laid in Mar’ 19, project to be developed in 2,200 acres. Proposed to be operational by 2023 - UP government allots Rs. 800 crores for land acquisition and has invited bids for the project (May 2019) |
NA |
| Pune | 14,000 | DPR now expected by June 2019 (discussion started in August 2013) - Land acquisition continues to be delayed |
NA |
| Rajkot | 1,400 | Mar’19: Reliance Infrastructure Ltd receives LOA from AAI | NA |
Ports: Execution under Sagarmala programme is under progress; to benefit over the long term
Under the Sagarmala project, the GoI had set out an ambitious target under four verticals: port modernization (including new port development); port connectivity enhancement; port-linked industrialization and coastal community development for phase-wise implementation over the period 2015 to 2035. Of the initial 700 projects identified for development under the sagarmala scheme, about 577 projects are at various stages of execution. Only about 61 projects have been completed (March 2019) and another 162 projects are in implementation, while the balance are either at tendering or DPR preparation stage. While the scheme has the potential to throw up considerable construction equipment demand, several large projects are still at conceptual/feasibility stage and may still take about 3-5 years to start construction.
Metro and Railways: New metro projects to keep demand strong
Completion of dedicated freight corridors, re-development of railway stations and an expanded pan-India coverage of metro are some of the large infrastructure targets for India over the medium term. Under the National Rail plan 2030, the Indian Railways envisages investment of ₹35,000 billion translating into annual investments of ₹2,500 billion. Capital budgetary allocation to the Railways increased by 17% in Union Budget 2020; while total outlay increased by 7%. Metro work has been a strong driver for equipment demand in recent years. This trend is expected to continue, going forward.
| Exhibit 7: Progress under various metro projects | |||||
| City | GoI Approval | Cost (Rs. Billion) | Planned Completion | Progress | Progress as of March 2019 |
| Mumbai 2 | Oct-15 | 74 | 2019 | Moderate delays | To be completed by 2020 |
| Mumbai 3 | Feb-12 | 244 (revised to 300) | Jul-05 | Progressing well | Tunneling underway; project to be completed by December 2021 |
| Mumbai 4 | Sep-16 | 145 | 2021 | Pace picking up | Early stage of construction; to be completed by 2022 |
| Mumbai 6 | NA | 67 | Jul-05 | Under construction | Project kicked off in December 2018; construction underway |
| Mumbai 7 | NA | 62 | 2020 | Progressing well | Expected completion in 2020 |
| Lucknow Ph- I | Dec-13 | 70 | Jun-17 | Progressing well | All stations in Line 1 are operational from March 2019 |
| Chennai Ph-II | NA | 850 | NA | Progressing well | Land acquisition has begun |
| Ahmedabad | Oct-14 | 108 | Dec-17 (for 6 km) | Progressing well | Phase I commercial operations started in March 2019; Cabinet approval for Phase II received in Feb 2019 |
| Pune Ph-I | Sep-15 | 114 | Dec-21 | Progressing well | Around 30% of work completed till December 2018 |
| Bangalore Ph- II | Jan-14 | 264 | Mar-23 | Pace picking up | Land acquisition for most part; first line targeted to be completed by 2020 |
| Hyd. Ph- I | Sep-10 | 141 | Dec-18 | Pace picking up | Construction progressing well |
| Navi Mumbai | Apr-10 | 41 | Jun-17 | Slow pace | Trial runs in December 2019; commercial operations from May 2020 |
Power: Thermal capacity addition to remain muted
While the share of thermal power in generation remains high at ~65%, the share of renewable energy has increased with sizeable capacity addition in solar power during FY2018 and FY2019. Net capacity addition from the thermal segment is low with slowdown in fresh investments and decommissioning of older units. Given the relatively low MCE intensity in solar power capacity creation, compared to the wind or the thermal power segment, capacity addition in the solar segment is unlikely to translate into significant demand for construction equipment.
Real Estate: Near term outlook muted
The residential real estate segment continues to go through a prolonged slowdown although listed realty players recorded considerable traction in sales during 9m FY2019, thus improving their market share. Improved sales velocity resulted in increasing pace of project launches; new launches grew by 112% during 9m FY2019. Nevertheless, ICRA’s outlook on the residential real estate market continues to remain negative because of the large inventory overhang and cash flow pressures in the industry. On the other hand, commercial real estate segment continues to do well, aided by stable demand levels and moderate supply growth, which has translated into declining vacancy level and stable rentals across several markets. Overall, construction equipment demand from the real estate sector is expected to remain modest over the near term.
NBM&CW July 2019
