Construction
Construction
Construction
Gradual uptick in
fortunes
Investments in Infrastructure
Key conclusions
2
2
Methodology
3
3
Strong increase in government allocation towards
infrastructure sectors
Increase in allocation towards infra sectors in Union Budget 2017-18
Rs 5.1 tn
Rs 4.8 tn
29%
28%
Rs 3.5 tn
26%
16% 15%
18%
23% 24%
21%
4
4
Construction spends to grow by 1.26 times over
the next two years
Roads, Irrigation and urban infra to lead the way for increased spends
Rs. billion
Rs 26.6 tn
9,202
7% 6%
4%
7,200 7%
7% 14%
5%
1.7 x 39%
88% 38%
In past 2 years, share of public spending close to 65-70%, set to rise over 70% in the next 2
years, driven by infra
Private spending declines as many asset heavy sectors face low capacity utilization levels
5
5
Within infrastructure, roads to lead the way
Key segment Past 2 yrs Next 2 yrs Increase/decrease Sector wise outlook on investment
6
6
Suboptimal capacity utilization to delay industrial
capex revival
Optimal utilisation levels for each sector
90
79 79 80 80 79
80 77 77 77 77 78
73 73
71 70 71 70 71 71
70 68
65
62 62
60 60 61
50
40
30
20
10
0
Tractors Cars & UVs Commercial Two- Wheelers Cement Paper Fertilisers Steel Aluiminium
Vehicles
7
Investments in roads to rise 2 times over next 5 years
Policy reforms will boost NH investments, rural roads to receive boost from PMGSY scheme
Rs 10.7 tn
18%
45%
Rs 5.5 tn
17%
Investments in state roads to grow at a steady pace; major states like UP, Maharashtra, Rajasthan and
MP lead investments. A few projects are expected to be bid out on HAM in these states.
‾ Budget allocation by Centre to PMGSY increased by Rs 50 bn in 2015-16 mid year, another 26% in 2016-17 and is
maintained for 2017-18
8
Investments in Railways rolling in…
Construction spends expected to rise by 2.4 times over the next years
Rs bn
2.4 x
1,513
Railways consistently spending almost entire budgeted amount in the last few years
Budgetary support increased ~9% to Rs 1310 bn over the FY17 revised estimate
LIC to provide Rs 1.5 tn over next 5 years. Rs 70 bn has been released in 2 tranches.
Tax free bonds to play a big role in funding the sector; Rs 95 bn raised through these
bonds in FY16
9
9
Irrigation investments to increase 1.7 times in the
next 5 years
Investments estimated to rise by 1.7 x in next five years (Rs. Bn)
2,311
1.6 x
Top six states (AP & Telangana, Maharashtra, Karnataka, Gujarat, MP,UP) to account for ~75% of total investments
Most of the investments will be towards major and medium irrigation projects.
Centre to play a more active role in monitoring progress of projects.
A bottom up approach rather than a top down approach followed before.
99 major and medium projects prioritized under AIBP, to be completed by 2019-20
10
10
Major states to stick to their budgeted targets
Top six states account for ~75% of overall irrigation investment
120%
Maharashtra Madhya Pradesh
110%
90%
60%
50%
0% 10% 20% 30% 40% 50% 60%
Note: Achievement Ratio is average of 2015-16 (Actual over BE) and 2016-17 (RE over BE). Size of the bubble indicates total irrigation spends in each state over next 2
years
Source: CRISIL Research
GFD/GDP for these six states below 3% except AP, Telangana and MP
11
11
Metro, WSS to drive urban infra investments
Construction spends in urban infra to grow by 2 times over next 5 years
12%
12
12
Key policies under urban infra segment
Policy Date of launch Key focus area and status
National Mission for Aug-11 For pollution abatement through construction of STPs, Common Effluent Treatment
Clean Ganga Plants, Ghat Development,.
97 projects on sewerage and sanitation have been sanctioned till now of which 32
are complete.
13
13
PMAY, Swachh Bharat schemes show good progress
(Rs billion)
1000
PMAY
Investments over next 2 years
800
NMCG
0
0 100 200 300 400 500 600 700 800
14
Revival in revenues to begin slowly
Revenue growth to improve, pick up in execution
20%
17%
15%
10%
6-7%
5-6%
4%
5% 2%
0%
-10%
-15%
-21%
-20%
-25%
Revenue growth to improve in 2017-18, driven by policy initiatives and govt. funding push
Order inflows and execution to continue to pick up for companies with comfortable liquidity
15
15
Profitability pressures at net level to persist
Recovery in margins in 2017-18
17-17.5%
16.5-17%
16.3% 15.9% 16.2%
15.7% 15.4%
16
16
Stark difference in performance of highly leveraged
companies
Revenue, margins differ significantly for leveraged companies
17%
4%
-15%
Cos with gearing > 2.5 Cos with gearing < 2.5
-33%
Note: 24 companies included in set of companies with gearing>2.5 times and 75 companies included in set of companies with gearing<2.5 times. All
financials on standalone basis
Source: CRISIL Research
High gearing and elongated working capital cycle hampering execution capability
Large scale debt restructuring underway (HCC, Gammon, Ramky, IVRCL, Unity Infra)
- Stressed financial position making it difficult to bag new projects
17
17
Operating cash flows unable to support interest
cost
Operating cash flows consistently below interest cost, however the gap reduced in 2015-16
Rs Billion
144
111 115
100
93
Cash flow from operation (CFO) have consistently fallen short of interest costs
In the last few years, gap between CFO and interest costs has increased to an alarming
level
However, cash flows have shown improvement, a replication of project closures.
Going forward, the gap is expected to decline with rising revenues and SDR
18
18
Gap between CFO and Interest costs higher for
leveraged firms
Companies with gearing > 2.5 unable to generate cash flows to
Companies with gearing < 2.5 have better CFO support interest payments
Rs bn
60
68
53 54
49
46 46 45
40 46
36 36 41 40 41
33 34 36
29 30 29 29
27
CFO has come down due to increase in receivable days and unbilled WIP
Gap between CFO and interest costs significantly higher for companies with higher gearing.
Players looking at monetization of operational assets and equity infusion to lower debt
For high gearing companies, interest expenses expected to stabilise as most of these companies are into
SDR.
19
19
Working capital remains stretched
Gross working capital days continue to rise on account of growing receivables
300
250
0
2012-13 2013-14 2014-15 2015-16 2016-17
Loans & Advances (days) Cash and Bank Balances (days) Inventories (days) Receivables (days)
20
20
Financial flexibility is constrained
Gearing to improve in 2016-17 and 2017-18 Interest coverage ratio estimated to improve in 2016-17
4.7
4.4
3.9 2.5
3.7 2.4
3.1 2.1
2.8 1.9 1.9
1.8
21
21
Investment growth to continue, credit profile key to
execution
Construction investments pegged at ~Rs 9 tn over next 2 years (FY18 to FY19), 13% higher
p.a than past 2 years
– Albeit ~70% of the investments in the low margin segments
Credit profile for most companies remains stretched through 2016-17, improvement
expected in 2017-18
– Profitability to improve with better fixed cost absorption.
– Marginal improvement expected in net margins with lower interest cost, conversion of debt to equity
– Working capital estimated to improve in 2016-17 and 2017-18 with government focus on infrastructure
2
About us
CRISIL Limited
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the
foremost provider of high-end research to the world's largest banks and leading corporations.
CRISIL is majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity
markets worldwide.
CRISIL Research
CRISIL Research is India's largest independent integrated research house. We provide insights, opinion and analysis on the Indian economy, industry, capital markets
and companies. We also conduct training programs to financial sector professionals on a wide array of technical issues. We are India's most credible provider of
Disclaimer
CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained by CRISIL from
sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible
for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered
in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research
operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS),
which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s
Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval.
23
Thank you