ICRA RESEARCH SERVICES

Corporate Ratings

Indian Construction and Infrastructure Sector

Revival expected with measures to ease project funding;
Initiatives like InvIT are long term positive and can revive private sector participation

Contacts:
Rohit Inamdar
+91 124 4545 847
rohit.inamdar@icraindia.com
Shubham Jain
+91 124 4545 306
shubhamj@icraindia.com
Abhishek Gupta
+91 124 4545 863
abhishek.gupta@icraindia.com
Rajeshwar Burla
+91 40 4067 6527
rajeshwar.burla@icraindia.com

April 2015

Sector Feature: Construction and Infrastructure

April 2015

WHATS INSIDE?
1. Overview
2. Trends: New Projects and Projects under Implementation
Trend in Construction GDP/GVA and GFCF
Execution-related stresses continue with implementation-stalled projects at high levels though pace of stalling has slowed
3. Governments reform initiatives and focus on infrastructure
Major initiatives undertaken like relaxation of FDI norms, diesel deregulation, coal block allocation

4. Funding Issues for the Construction/infrastructure sector

Trend in Banking credit to infrastructure sector
Measures taken to support infrastructure financing from banks
Other avenues explored for funding infrastructure projects like Infra Debt Fund and InvITs
5. Performance of Companies in the sector
6. Outlook for the sector
7. Focus Area: Infrastructure Investment Trusts (InvITs)
8. Quarterly performance trend of publically-listed construction / infrastructure companies
Consolidated Construction Consortium Limited
ERA Infra Engineering Limited
Hindustan Construction Company Limited
NCC Limited
Pratibha Industries Limited
Sadbhav Engineering Limited
Simplex Infrastructures Limited

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Sector Feature: Construction and Infrastructure

April 2015

Overview

Governments reform and

infrastructure building initiatives
helping the sector though on-ground
challenges remain

Resolution of sizeable stalled

projects could provide fillip to the
construction sector

Steps taken to ease Infrastructure

funding issues

Budget 2015-16 laid focus on

infrastructure development

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The construction/infrastructure sector is likely to get major boost from the Governments focus on
development of infrastructure in India. While the recovery in the sector is likely, it would be gradual as
majority of players are still burdened with leveraged balance sheets and stalled or slow moving projects.
Furthermore, if structural constraints like uncertainty in land acquisition, delays in approvals, and inadequacy
of long term funding avenues are not tackled swiftly, the project implementation on the ground may not
gather momentum, thereby delaying recovery in the infrastructure sector. In addition, aggressive bidding in
the past and inability or limited ability to raise equity for BOT projects have also impacted viability of
infrastructure projects. These impediments need to be overcome for project implementation to gather pace.
Difficulty in achieving financial closure and overall weak macro-economic environment had also reduced the
risk appetite of developers towards new projects. These factors, amongst others, have resulted in relatively
modest growth in Gross Fixed Capital Formation (GFCF) and Construction GVA (Gross Value Added) in 9mFY15. With the political stability, sharper focus on infrastructure development and improvement in economy,
new projects announcements by both the public and private sector are likely to pickup in FY16.

Movement in Stalled Projects

The quantum of stalled projects continued to remain high during FY15 though the pace of new project
stalling came down and revival of stalled projects increased in H2FY15. In January 2013, Project Monitoring
Group (PMG) was set up in the Cabinet Secretariat to help such projects, both in the public and private
sectors, by way of support in clearing the implementation bottlenecks. Till March 2015, PMG had accepted
511 projects with estimated investments of Rs. 25.4 trillion which were facing implementation hurdles. With
the help of Cabinet Committee on Investment (CCI) issues related to 204 such projects worth Rs. 7 trillion
have been resolved as per PMG data. However, another 307 projects with an investment of Rs. 18.4 trillion
are still facing various bottlenecks which is impacting their progress. Apart from reviving stalled projects,
plans to award major projects after acquiring land and requisite approvals under the plug and play model will
significantly reduce execution delays and also attract higher private sector participation.
Steps taken towards easing funding issues in Infrastructure sector
Many steps have been taken to improve funding avenues to the infrastructure sector. The key policy
measures include easing of FDI norms for Construction, Railways, and Defence, liberalization of ECB policy,
and providing incentives to promote REITs and InvITs. RBI has also taken multiple steps to ease funding
availability to infrastructure project. Some of the key ones include providing incentives to banks in the form
of exemption from CRR/SLR for long term bonds raised to lend to infrastructure sector, flexibility in
refinancing norms for infrastructure projects by way of 5/25 structure etc. Besides, the Union Budget has also
allocated higher funds towards public sector infrastructure projects.
Provisions for Infrastructure sector in Budget 2015-16
In the Budget 2015-16, the capital outlays for roads, and railways have been increased by Rs. 140.3 billion
and Rs. 100.5 billion respectively which along with significantly higher Road Cess will enable higher public
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Sector Feature: Construction and Infrastructure

April 2015

spending towards these infrastructure projects. In total, investment in infrastructure is proposed to increase
by Rs. 700 billion in FY16 (BE) over FY15 (RE). Recognizing the need of reviving private sector participation in
infrastructure projects, Budget has proposed rebalancing of risks in PPP projects with Government taking up
major risks, appointing an Expert Committee for analysing the possibility of and replacing multiple prior
permissions with a pre-existing regulatory mechanism, and rationalizing dispute resolution mechanism. The
budget also proposes to set-up 5 UMPPs totalling 20 GW in the plug-and-play mode wherein all clearances
and linkages will be obtained before the award of project. It has also announced its intent towards some
large infrastructure projects like building 100 smart cities and Sardar Patel Urban Housing Mission, which will
provide long term infrastructure opportunities. In the railways sector, the focus is on faster execution of
Dedicated Freight Corridor (DFC) which is an important on-going project.

Gradual improvement in
profitability, though growth in
operating income remains muted
Weak cash flows and leveraged
balance sheets continue to pose
challenges for many construction
and infrastructure players

Performance of Construction Companies

The growth in operating income of construction companies (ICRA sample of 15 exchange-listed construction
companies) during this period had remained muted which implies that execution is yet to pick up in a
meaningful manner. This can be partly attributed to stretched financial position of many construction
companies which has constrained resources for speeding up execution. In terms of profitability however,
there has been gradual improvement observed in 9m-FY15, led by subsiding cost pressures particularly on
subcontracting, raw-material and labor related costs. While the sustainability of improvement in operating
profitability remains to be seen, without ramp-up in the scale of operations, the operating profits will not be
sufficient to cover the interest expenses for most of the construction companies as has been the case in the
last six quarters. The interest coverage ratio for sample of 15 companies had improved marginally to 0.62
times in Q3FY15 from 0.42 times in Q2FY15. The reversal in the interest rate cycle and lowering of interest
rates will help ease the debt servicing burden; however, this alone will not be sufficient for improving credit
metrics. Any significant improvement in liquidity profile and credit metrics of construction companies will
take time and will be contingent on improvement in working capital cycle (by way of faster execution and
release of stuck receivables/retention money), improvement in pace of execution and ability to raise long
term funds by way of stake sale or equity placements. Some large players have raised and many are planning
to raise funds via Qualified Institutional Placement (QIP)/Rights Issue/warrants/preference shares or sale of
stake in subsidiaries.
Outlook
The recovery in the construction sector is expected to be gradual and would be linked with on-ground impact
of the policy measures as well as availability of funding. With high leverage, ability to raise funds via stake
sale in subsidiaries, monetization of assets, or dilution of equity will be key in improving liquidity and capital
structure of construction companies that have been aggressive in the BOT space in past. Many companies
including GMR Infrastructure, Jaiprakash Associates, NCC Ltd, IVRCL etc. have either raised or have plans of
raising funds through equity route like Qualified Institutional Placement (QIP)/Rights
issue/Warrants/Preference shares or sale of stake at the SPV or holding company level to reduce overall
indebtedness at the Group level. The likely reversal in the interest rates cycle would also provide some
respite.

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Sector Feature: Construction and Infrastructure

InvITs can act as a longer term

funding alternative for infrastructure
sector

April 2015

Focus Area: Infrastructure Investment Trusts

In order to improve funding options, alternate funding sources like Infrastructure Debt Funds (IDFs),
Alternate Investment Funds (AIFs) were introduced in the past to tap into other source of savings like
Insurance and Pension Funds so as to accelerate and enhance the flow of long term funds. In this regard, the
recent initiative in the form of Infrastructure Investment Trusts (InvITs) may help in channelising long term
funds into the sector and in releasing developers capital for further deployment in new projects. Moreover,
InvITs could play a pivotal role in providing wider long-term refinance avenue thereby providing headroom
for banks for new funding requirements.
InvIT is proposed on the same lines as Real estate Investment Trust (REIT) and are dedicated towards
infrastructure sector. However, in comparison to REIT, the capital appreciation aspect is limited in the case of
InvITs as majority of the infrastructure assets have a finite life and low residual value at the end of the project
life (except the accumulated cash). Unlike REITs where the investors also benefit from capital appreciation,
the NAV of an InvIT is expected to decline gradually over the concession period of the underlying asset unless
there is significant increase in revenues like toll collections in case of a toll road project. Due to this, the
annual yield offered by an InvIT includes partial return of capital deployed by investors into InvIT. The
marketability of InvITs will depend on the effective yield (adjusted for NAV) which can be offered. InvITs will
face competition from REITs and other fixed-income products as well as high dividend-yield stocks.
Investors in InvITs will benefit in the form of better liquidity by virtue of being publicly traded, while Sponsors
will have better scalability (fund raising through follow-on offers) and access to capital markets. The
challenge now is to make InvITs a more attractive option for parking operating infrastructure assets. This in
turn will increase the ability of developers to undertake more infrastructure project development. The
success of InvITs also depends on tax regime. As majority of the infrastructure projects are developed on PPP
(Public Private Partnership) framework, they can only be indirectly held by InvIT through stake in the SPV
holding the project. However, as taxation for SPVs are not pass-through and SPVs have to pay corporate and
dividend distribution taxes, the efficiency of distribution of profits is constrained. Some respite in case of
infrastructure projects can be the ten year tax-holiday which could result in savings during this period.
Furthermore, some efficiency can be brought in by leveraging the SPV by way of InvIT infusing funds in SPV in
the form of debt.
The path for establishing REIT/InvITs has not been easy in other Asian countries also as it takes time to gain
market acceptance. For an investor, InvIT provides opportunity to own a different asset class, though
adjusted returns would be the key criterion for inflow of money towards InvITs. The success of InvIT in Indian
context will also depend on alternatives available for sponsors as well as valuations and taxation aspects.

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Sector Feature: Construction and Infrastructure

April 2015

Please contact ICRA to get a copy of this report

CORPORATE OFFICE
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Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
Fax; +91-124-4545350
REGISTERED OFFICE
1105, Kailash Building, 11th Floor,
26, Kasturba Gandhi Marg,
New Delhi 110 001
Tel: +91-11-23357940-50
Fax: +91-11-23357014
MUMBAI
Mr. L. Shivakumar
Mobile: 9821086490
3rd Floor, Electric Mansion,
Appasaheb Marathe Marg, Prabhadevi,
Mumbai - 400 025
Ph : +91-22-30470000,
24331046/53/62/74/86/87
Fax : +91-22-2433 1390
E-mail: shivakumar@icraindia.com

GURGAON
Mr. Vivek Mathur
Mobile: 9871221122
Building No. 8, 2nd Floor,
Tower A, DLF Cyber City, Phase II,
Gurgaon 122002
Ph: +91-124-4545300, 4545800
Fax; +91-124-4545350
E-mail: vivek@icraindia.com

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CHENNAI
Mr. Jayanta Chatterjee
Mobile: 9845022459
Mr. Leander Rayen
Mobile: 9952615551
5th Floor, Karumuttu Centre,
498 Anna Salai, Nandanam,
Chennai-600035.
Tel: +91-44-45964300
Fax: +91-44-24343663
E-mail: jayantac@icraindia.com
leander.rayen@icraindia.com

HYDERABAD
Mr. M.S.K. Aditya
Mobile: 9963253777
4A, 4th Floor, Shobhan,
6-3-927/A&B, Rajbhavan Road, Somajiguda
Hyderabad 500 082.
Tel: +91-40-40676500
Fax: +91-40- 40676510
E-mail: adityamsk@icraindia.com

KOLKATA
Ms. Vinita Baid
Mobile: 9007884229
A-10 & 11, 3rd Floor, FMC Fortuna,
234/ 3A, A.J.C. Bose Road,
Kolkata - 700020
Tel: +91-33-22876617/ 8839,
22800008, 22831411
Fax: +91-33-2287 0728
E-mail: vinita.baid@icraindia.com

PUNE
Mr. L. Shivakumar
Mobile: 9821086490
5A, 5th Floor, Symphony,
S. No. 210, CTS 3202,
Range Hills Road, Shivajinagar,
Pune-411 020
Tel : +91- 20- 25561194,
25560195/196,
Fax : +91- 20- 2553 9231
E-mail: shivakumar@icraindia.com

AHMEDABAD
Mr. Animesh Bhabhalia
Mobile: 9824029432
907 & 908 Sakar -II, Ellisbridge,
Ahmedabad- 380006
Tel: +91-79-26585049/2008/5494,
Fax:+91-79- 2648 4924
E-mail: animesh@icraindia.com

BANGALORE
Mr. Jayanta Chatterjee
Mobile: 9845022459
'The Millenia', Tower B,
Unit No. 1004, 10th Floor,
Level 2, 12-14, 1 & 2, Murphy Road,
Bangalore - 560 008
Tel: +91-80-43326400,
Fax: +91-80-43326409
E-mail: jayantac@icraindia.com

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Sector Feature: Construction and Infrastructure

April 2015

ICRA Limited
An Associate of Moody's Investors Service
CORPORATE OFFICE
nd

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Tel: +91 124 4545300; Fax: +91 124 4545350
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3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065
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