Construction Industry

Comprehensive Pack

1
Table of Contents

• Industry Characteristics :3

• Demand Analysis : 26

• Profitability Analysis : 54

• Long-term Investments : 66

• Investment by Sectors : 75

2
Industry Characteristics

3
Institutional framework

• Each segment of the construction industry is regulated and

implemented by different apex authorities: roads by National
Highway Authority of India (NHAI), airports by Airport Authority
of India (AAI), etc.

4
Institutional framework - Sector wise

5
Industry characteristics
• The construction industry involves building civil structures across
infrastructure and industrial sectors.
• Some broad characteristics are discussed below:

6
Industry characteristics
Construction industry a major job creator

• The construction industry accounts for more than 8% of India's

gross domestic product (GDP).
• The industry also generates huge employment opportunities, due
to its constant requirement for skilled and unskilled labourers.
• Moreover, growth in construction is also positive for sectors such
as steel and cement, which are key raw materials.

7
Industry characteristics
Low entry barriers keep industry fragmented

• The construction industry is highly fragmented, as low fixed

capital requirements for construction contracts, remove entry
barriers.
• Capital expenditure is only required for procuring necessary
equipments unlike a manufacturing business, which requires
plants and machinery for production.

8
 Industry characteristics
Possibility of payment delays heightens working capital intensity
• Construction projects are mainly funded and managed by the owner.
• Apart from the initial advance, contractors receive payments after each
project milestone is completed.
• However, timely payments also depend on the owner's credit profile and
the nature of the project.
• Most projects, especially infrastructure, have a gestation period of more
than a year.
• Any delay in payments can push up receivables.
• Such a scenario makes the construction industry working capital intensive.
• The average gross working capital days for a sample of 19 companies on a
standalone basis rose to 354 days as of 2014-15 from 282 days as of 2011-12.
9
Industry characteristics
Possibility of payment delays heightens working capital intensity
• Over the years, a delay in payment by government agencies and
prolonged arbitration proceedings for dispute resolution has
impacted working capital position for both small and large players.
• Debtor days have been rising almost continuously which has
affected project execution and added to the debt pile.

10
Industry characteristics
Projects awarded to lowest bidders, but execution skills crucial too

• Construction projects are awarded through a competitive bidding

process as more domestic and international contractors have forayed
into various infrastructure segments.
• The project is finally awarded to the lowest bidder (L1).
• However, besides bidding qualifications, contractors also need to
have strong project execution and technical skills to avoid cost and
time overruns.
• To make these imperative, National Highways Authority of India
(NHAI) penalises delayed execution of national highway projects,
while awarding timely completion of the same.
• Input-related risks
11
Industry characteristics
Projects awarded to lowest bidders, but execution skills crucial too
• Access to inputs is crucial for ensuring timely and cost-effective
execution of projects.
• The major inputs for a construction project are labour, raw materials
and land.
• Labour: Construction work involves both skilled and unskilled
labour.
• Currently, construction players are struggling with wage increases,
which can be attributed to labour shortages and rising inflation.
• Local job opportunities from government welfare schemes, growth
in the overall rural economy and migration of labourers to Gulf
countries for better prospects are some reasons that have led to a
shortage of construction labourers. 12
Industry characteristics
Projects awarded to lowest bidders, but execution skills crucial too
• To solve labour issues, cut wage costs and improve quality,
construction companies are now increasing the extent of
mechanisation, particularly in highway projects.
• Raw material: The construction industry is raw material-intensive.
• Any change in prices of raw materials like steel, cement, bitumen, etc
impacts players' profitability.
• However, the impact is limited to the extent of the proportion of
fixed price contracts in a company's order book.
• Some construction companies also own quarries so as to ensure
constant raw material supply.
• Land acquisition and government clearances: Land and the related
government clearances are the other important inputs for
13
construction work.
Industry characteristics
Projects awarded to lowest bidders, but execution skills crucial too

• Delays in these may increase the gestation period of projects, which

can impact the profitability of the project.

14
Entities in the contracting process and their roles

• Various entities involved in executing a construction project are

project owner/sponsor/promoter, contractors and sub-contractors,
consultants and suppliers (of equipment and raw materials).

15
Relationship between various entities in an EPC contract

16
Relationship between various entities in an EPC contract
Owner

• An owner is an implementing agency (public or private) executing

the project.
• The owner seeks funds from financial institutions (banks or
government bodies), awards the execution to (public or private)
contractors, and appoints consultants for design.
• While urban infrastructure projects are commissioned and
managed by municipalities, the NHAI and road development
corporations handle road projects.
• Private sector projects including BOT projects, are owned by the
respective promoters.
• Typically, the owner appoints consultants to conduct a feasibility
study for the project. 17
 Relationship between various entities in an EPC contract
Owner

• The project is then awarded through a competitive bidding process

(open tendering system), where the lowest bidder bags the contract.
• The abundance of construction contractors with similar technical and
service abilities provides several choices to owners.
• Owners therefore have a higher bargaining power.
• However, in case of large and more complex projects (power and
ports), it is the contractors who retain the bargaining power.

18
Relationship between various entities in an EPC contract
Contractors

• A contractor is the core executor of a project - from design to

completion - based on owner specifications.
• The qualification criteria for contractors include past experience in
executing similar projects, technical expertise and financial
strength.
• Contractors mobilise construction machinery, employ engineers
and managers, skilled and unskilled workers and procure raw
material supplies.
• Contractors receive payments from owners based on completion of
each project milestone.

19
Relationship between various entities in an EPC contract
Consultants
• A consultant provides detailed project designs and conducts
feasibility studies for a project before its implementation as well as
during its execution.
• Consultants are highly specialised and are available for
architecture, structural designs, soil investigation, preparing
contract documents, financial analysis and viability studies.
• Some of the major public-sector consultants are RITES Ltd,
Telecommunications Consultants India Ltd, Project and
Development India Ltd, Engineers India Ltd and FACT
Engineering and Design Organisation.

20
Relationship between various entities in an EPC contract
Suppliers

• Raw materials
• Main raw materials used in construction projects (cement, steel,
bricks/tiles, sand/aggregates, fixtures/fittings, paints, bitumen
and chemicals) are easily available in India.
• Therefore, the bargaining power of raw material suppliers is
moderate.
• Construction equipment
• These broadly comprise earthmoving, lifting, paving and trucking
equipment, which are imported.
• Contractors are therefore exposed to foreign exchange fluctuations
and customs tariffs.
21
Relationship between various entities in an EPC contract
Suppliers

• Construction equipment
• The Indian construction equipment industry is concentrated with
few large players (domestic and foreign).
• Therefore, equipment suppliers have a high bargaining power.

22
Work approaches
• In the case of large projects, players may adopt two critical
approaches to secure and execute contracts - Joint Ventures (JVs)
and sub-contracting.

23
Work approaches
Joint ventures
• These are contractual obligations between domestic and/or foreign
contractors and are project-specific.
• Besides pre-qualifying for projects, JVs are formed to reduce risks in
large projects and combine specialist skills.
• As initial costs on new projects are generally high, parties in a JV are
able to share the burden as well as the resulting profits.
• Moreover, it gives the JV partners access to mutual resources,
including specialized staff and technology.
• Foreign players enter into JVs with Indian players, who have a
better idea about the business environment and the prevalent local
conditions.

24
 Work approaches
Sub-contracting
• Sub-contracting is adopted by large as well as small contractors.
• In sub-contracting, smaller companies undertake tasks that are not
undertaken by the principal contractor, or specialised tasks through a sub-
contracting arrangement.
• However, profit margins for sub-contractors are lower than those of
contractors.
• Sub-contracting arrangements are widespread in the construction industry
due to the diversified nature of jobs and strong competencies in
subsegments and tasks.
• Sub-contracting arrangements also enables large construction companies to
keep operations flexible, reduce overheads for the client (owner), while
enabling the relatively smaller contractors to gain expertise and increase
their turnover. 25
Demand Analysis

26
Order inflows stay weak in H1 2015-16

• Multiple factors have led to an impasse in domestic order inflows in

the past 3-4 years, as investments in both infrastructure (power and
roads) and industrial sectors remained subdued.
• While land acquisition issues, delays in clearances and developers'
weak financials led to a logjam in the infrastructure sector, muted
demand and low utilisation rates have hit capex in industrial sectors.
• Companies like L&T, NCC and Simplex Infrastructure, which have
forayed into new markets such as the Middle East and South East
Asia have been receiving orders for hydrocarbons, buildings and
transport projects.
• L&T has been entirely driving the industry's order inflows over the
past three years.
27
Order inflows stay weak in H1 2015-16
• Excluding L&T, the industry's order inflows have declined by 4-5 per
cent between 2012-13 and 2014-15.
• In H1FY16, the order inflows excluding L&T declined by almost 41
per cent y-o-y while including L&T, the order inflows declined by 27
per cent y-o-y .
• Weak financials have impacted the ability of companies like HCC,
Punj Lloyd and IVRCL to bag new projects even as inflows in
segments such as urban infrastructure, power T&D and roads have
improved moderately in the past 1-2 years.
• In addition to the order inflows, the industry's order book position
(excluding L&T) declined by 4-5 per cent for the third consecutive
year ending March 2015.

28
Order inflows stay weak in H1 2015-16
• Financial position of several construction companies such as HCC,
Gammon, IVRCL, Madhucon Projects and Era Infrastructure were
severely stretched, which has led them to seek debt restructuring
alternatives.
• Such a distressed financial situation has hampered their execution
capabilities as well.

29
Aggregate order book and order inflows

Note: Growth in order inflows for the period 2009-10 to 2010-11 pertains to NCC, L&T,
Simplex Infrastructure and HCC. The order inflow growth for 2011-12 to 2014-15 is
based on the number available for six companies- NCC, L&T, Punj Lloyd, IVRCL, Simplex
Infrastructure and HCC. 30
Aggregate order book and order inflows

• In 2015-16, order inflows to drop by about 30% as a result of lower

order inflows for L&T in the first half.
• L&T has announced that it would be expecting lower order inflows
for the second half as well.
• Order book will remain flat even though it grew by about 10% in
first half of this year as order inflows were very strong in H2 2015.

31
 Quarterly order book

Note: The quarterly order book growth is calculated on the order book of six companies,
comprising NCC, L&T, Punj Lloyd, IVRCL, Simplex Infrastructure and HCC.
32
Company-wise order book growth in 2014-15

33
 Quarterly order inflows (Rs billion)

Note: The order inflow is for six companies, comprising NCC, Punj Lloyd, L&T, IVRCL
Simplex Infrastructure and HCC.
34
Order book-to-turnover ratio improves, but owing to slow
execution
• The industry's order-book-to-turnover ratio rose to 3.5 times in
2014-15.
• However, this number needs to be examined cautiously as it has not
increased owing to an improvement in order inflows.
• The number has rather risen because of a slow moving order book
and falling revenues owing to tepid project execution.
• In reality, many orders are either stalled or are being executed
slowly, impacting revenue growth for these companies.
• Some instances are:
• Punj Lloyd: Projects totalling more than one-third of its order book
are being executed slowly owing to political turbulence in Libya.

35
Order book-to-turnover ratio improves, but owing to slow
execution
• HCC: Work on its commercial real estate projects is progressing
slowly.
• Gammon India: Large road, power and port projects are being
delayed
• However, companies are slowly clearing their order books by
selling off stalled and slow-moving projects.
• In 2014-15, L&T had cleared orders worth Rs 70 billion, which were
stalled for over two years.

36
 Order book-to-turnover ratio rises in 2014-15

Note: This data is for six companies, comprising NCC, Punj Lloyd, L&T, IVRCL Simplex
Infrastructure and HCC 37
Revenue growth to remain subdued in the near term

• The construction industry has been bogged down by slow

execution of projects and poor financial health of infrastructure
companies over the past couple of years.
• As a result, the industry's revenues continued to decline in 2014-
15.

38
Mounting debt takes a toll on execution, ability to bag new
projects
• Companies with stretched balance sheets are unable to execute
existing projects and bag new ones, as companies with a gearing
of less than 2.5 times recorded a much smaller dip in revenues
than companies with higher gearing.

39
 Revenue growth for companies based on gearing

Note: Set of companies with gearing > 2.5 times includes 16 publicly listed companies, set
of companies with gearing<2.5 times includes 13 publicly listed companies. The revenue
growth in 2014-15 is based on interim results
40
Revenues of companies with better financial flexibility will grow
faster
• Industry's revenues would improve but at a subdued pace of 3-5
per cent in 2015-16.
• Growth will be faster in 2016-17, at 7-8 per cent, as the impact of
recent policy changes and government initiatives will start
materializing from second half of 2015-16.
• However, companies will need financial muscle to take on new
projects.
• It is essential for large construction companies that are undergoing
financial stress to clean up their balance sheets by either selling
some operational assets or infuse equity.
• Companies that are unable to improve on their financial position
could end up losing out on business prospects.
41
Aggregate revenue growth seen gathering pace in 2016-17

Note: Standalone data for 29 companies based on availability in the public domain,the
numbers for 2014-15 are based on interim results
P: Projected 42
Aggregate revenue growth seen gathering pace in 2016-17

• Revenues for the companies considered above grew at 2.6 per cent
y-o-y in H1 2016.

43
Rising debt, falling cash accruals constrain financial flexibility

• Financial flexibility of most companies is currently stressed, as

they are highly leveraged and are unable to repay or take on fresh
debt.
• This has delayed execution of projects.
• Profitability has also declined over the past few years as
borrowings have surged.
• Consolidated gearing of major construction companies rose to 2.5
times in 2014-15 from 1.2 times in 2009-10.

44
 Aggregate gearing

Note: Consolidated data for 22 companies and standalone data for 29 companies based
on availability in the public domain. Debt for Larsen & Toubro has been taking after
excluding debt of L&T finance. 45
Aggregate gearing
• While the increase in long-term debt can be primarily attributed to
loans taken for build-operate transfer (BOT) projects, short-term
debt has also risen considerably, as companies' working capital
requirements increase.
• Their ability to repay existing debt has also declined with a
significant dropin their profitability and cash accruals.
• Banks are being cautious while lending to infrastructure, especially
road projects.
• Moreover, infrastructure companies are looking to improve
financials by reducing debt, selling operational assets and infusing
equity.

46
Aggregate gearing
• Over the last 2 years, many construction companies have entered
into asset sale deals worth Rs 40 billion in sectors like power, roads,
urban infrastructure and commercial real estate, which are at
various stages.
• Going forward, successful monetisation of assets is required to
improve their financial position from the current stressed levels.

47
Key asset sales in recent years

48
Key asset sales in recent years
• Moreover, government policies like premium rescheduling and exit
policy in roads sector and the 5:25 scheme (which will help adjust
the loan tenure with the project life) are expected to provide some
respite to companies.

49
Net cash accruals to debt ratio seen declining over past five years

Note: Consolidated data for 22 companies based on availability in the public domain.
Interest cost for L&T includes finance expenses of L&T finance. However, debt is
excluding borrowings of L&T Finance.
50
 Consolidated debt of construction companies

Note: Represents consolidated data for 22 companies based on availability of information

in the public domain. Debt for Larsen & Toubro has been taking after excluding debt of
L&T finance. Data for 2014-15 is based on interim results 51
Working capital position of construction companies remains
stretched in 2014-15
• A delay in payment by government agencies and prolonged
arbitration proceedings for dispute resolution has impacted
companies' working capital position.
• Debtor days have been rising almost continuously which has
affected project execution and added to the debt pile.
• Companies like L&T, Simplex Infrastructure and HCC continued to
struggle with high debtor days in 2014-15.
• As per, Larsen & Toubro its working capital-to-sales ratio at 25 per
cent as of March 2015 was at its peak levels.
• As per Simplex Infrastructure, its debtor days also rose to 233 days
as on March 2015 as compared to 204 days as on March 2014.

52
Working capital

Note: Represents standalone data for 19 companies based on availability of

information in the public domain

53
Profitability Analysis

54
Profitability remained under pressure in 2014-15, H1FY16
• Though raw material costs were benign, construction companies
profitability stayed under pressure in 2014-15 and this continued
through the first half of FY16.
• While operating margins fell by by about 10 basis points (bps), net
margins deteriorated by 50 bps in 2014-15.
• In the first half of FY16, operating margins declined by 70 bps
while net margins dropped by about 50 basis points y-o-y.
• Though prices of key inputs such as steel and cement remained
more or less stable, lower fixed cost absorption affected
profitability, as project execution slowed leading to cost overruns.
• Similarly, a rise in interest costs owing to players' mounting debt,
hurt net margins.
55
Profitability remained under pressure in 2014-15, H1FY16
• Excluding L&T, large construction companies reported net losses
to the tune of Rs 26.5 billion (5 per cent of total income), which
widened by around 140 bps y-o-y in 2014-15.
• Besides slow execution, many companies' profitability was also
impacted by long outstanding claims.
• Some instances are:
• IVRCL: Provisions of Rs 0.5 billion made towards trade receivables
in the December 2014 quarter pulled down the company's margins
by about 200 bps.
• The company also has unbilled revenues of Rs 1.5 billion for the
past three years.
• Punj Lloyd: Has claims of Rs 7.4 billion as of March 31, 2015 from
ONGC's Heera Redevelopment. 56
Profitability remained under pressure in 2014-15, H1FY16

• It also has unsettled claims and performance security worth Rs 3.8

billion and Rs 1.7 billion, respectively, held up in the Thailand
pipeline project.
• HCC: While Rs 777 crore was awarded to HCC in 2014-15 through
the arbitration process from its various clients, another
approximately Rs 4900 crore is currently under arbitration.

57
Net margins to remain subdued

Note: Standalone data for 29 companies including large and mid-sized players. 2014-
15 numbers are based on interim results 58
P: Projected
Operating margins to stabilise, even as net margins stay under
pressure
• Faster execution of projects amid the government's policy push in
the roads and power sectors is likely to reduce companies' overhead
costs and working capital requirements.
• Competition is also moderating (including for BOT projects) as
financially weak companies are not bidding for new projects as they
are unable to secure bank guarantees.
• While these developments may be positive for profitability, an
overhang of legacy projects will limit a rise in operating margins
until 2016-17, when players reduce debt by monetising assets and
their cash flows rise, owing to an improvement in execution
capacity.
• Divestment of operational assets will also be a key monitorable. 59
Operating margins to stabilise, even as net margins stay under
pressure
• While companies such as HCC, IVRCL,Gammon,GMR, Madhucon
Projects and many others are looking out for buyers for their assets
or have entered into agreements for sale, it will take time to close
these deals.
• Hence, high debt and the resultant interest costs would continue to
constrain players' net margins in 2015-16 as well.

60
 Factors impacting profitability of companies

Note: Set of companies with gearing>2.5 times consists of 13 publicly listed companies and
set of companies with gearing<2.5 times consists of 16 companies on a standalone 61
basis
 Lower profitability affects debt-servicing ability, cos struggle
with weak financials
• Interest coverage ratios of large players have fallen sharply in the past
5 years, amid a fall in profitability and mounting debt.
• In the years ahead, longterm debt levels are likely to reduce aided by
asset sales.
• However, stretched working capital cycles are likely to keep short-
term debt high.
• Given muted revenue growth and flat operating margins, operating
profit is not likely to rise much.
• Hence, interest coverage ratios will remain subdued in 2015-16 as well.
• Companies such as IVRCL, NCC, Ramky and Madhucon Projects
defaulted on their principal and interest payments to banks during the
year, which reflects upon their stressed financial positions. 62
 Lower profitability affects debt-servicing ability, cos struggle
with weak financials
• HCC, Gammon, IVRCL, Ramky and Era Infrastructure are undergoing
debt restructuring.
• The pace of asset monetization of these companies is extremely slow.
• Hence, debt levels remain high.
• Moreover, execution of these players has also been hit due to a stretched
working capital position and their inability to bag new orders.
• Thus, the ability of some of these companies to repay debt at the end of
the moratorium period and even continue operations on an ongoing
basis is questionable.
• In 2015-16, interest coverage ratio to remain at same levels.
• Even though a few asset sales were done this year, debt levels have
increased. 63
Lower profitability affects debt-servicing ability, cos struggle
with weak financials
• This ratio will start improving only from 2016-17 onwards when
more asset sales which are currently waiting for clearances are
completed.

64
Steady decline seen in aggregate interest coverage ratio since
2009-10

Note: Consolidated data for 22 companies based on information available in the

public domain. 2014-15 numbers are based on interim results.
65
Long-term Investments

66
Construction opportunities to build up gradually...
• Opportunities have been drying up for construction companies
over the past couple of years, as their order books and revenues
have stagnated amid an investment logjam in major infrastructure
sectors and a slowdown in industrial sector investments.
• Delays in clearances and developers' poor financials have affected
the execution of large road, power and irrigation projects.
• Similarly, a fall in demand and utilisation rates have shrunk fresh
capital investments in sectors such as automobiles and cement.

67
...aided by policy reforms
• However, over the past one year, various policies have been
announced in sectors such as power and roads, to spur investments.
• These include: 1) coal block auctions to ease fuel supply for power
projects; 2) financial restructuring of state electricity boards (SEBs)
and 3) ensuring speedy execution by delinking forest and
environment clearances; and awarding NH road projects only after
80 per cent of land required is in possession.
• To help developers improve their cash flows and repay debt, the
government also launched schemes for premium rescheduling of
road projects and to permit developers to fully offload their stakes in
BOT projects.

68
...aided by policy reforms
• As bottlenecks related to clearances and land acquisition eased,
followed by a shift to the engineering, procurement and construction
(EPC) model, execution of road projects awarded in 2013-14 sped up.
• Analysis indicates that about 39 per cent of the work on these
projects has been completed as of September 2015, which contrasts
starkly to execution of 3 per cent achieved at a similar juncture for
projects awarded in 2012-13.
• Budgetary allocations on infrastructure (mainly roads, railways and
urban infrastructure) were also hiked by 1.5 times in 2015-16 to Rs
2.8 trillion, as private participation sagged.
• As a result of all the above developments overall construction
opportunities to grow by 7-9 per cent in 2015-16, after growing by a
muted 2-4 per cent during the past couple of years. 69
...aided by policy reforms
• Over the next five years, growth is expected to average at 11 per
cent annually.

70
Long term growth to be driven by infrastructure

• Over the next five years, infrastructure projects will provide the
maximum construction opportunities, contributing to almost 92 per
cent of construction spends during the period.
• The central government's focus on the roads, urban infrastructure
and railways segment will boost infrastructure investments.
• Conversely, spends on industrial projects are expected to be lower
as companies in the metals, cement and automobile sectors slow
down expansion plans amid low utilization levels and muted
demand.

71
Total construction spends (at current prices)

Note: E: Estimated; P: Projected

Real estate not included in the analysis
72
Total construction spends (at current prices)

• Within infrastructure, road projects - both National Highway

Development Programme (NHDP) projects and highway road
projects - will be a key investment driver.
• Moreover, projects such as metro rail, water supply & sanitation and
railways are also expected to be implemented rapidly, given the
sizeable budgetary allocations.
• The table below provides a snapshot of expected construction
opportunities across key sectors, along with a brief reasoning.

73
Sector-wise construction spends

74
Investment by Sectors

75
Roads to lead the way for construction companies

• Over 2015-16 to 2019-20, road projects are expected to provide bulk

of the opportunities for construction firms, as investments in state
roads grow steadily, while those in national highway projects
revive from 2015-16 onwards.
• Urban infrastructure and railway projects would also offer
significant opportunities, as the government's focus spurs
investments in these.
• However, investments in non-renewable power generation projects
could decline, following lower capacity additions.

76
Share of segments in overall construction spends

77
Road investments to drive construction spends
• Investments in road projects augur well for construction players, as
nearly all funds are channelised into construction activities.
• Construction spends on road projects are expected to rise at a healthy
pace from 2015-16, after declining in the previous two years.
• Execution of national highway projects will speed up, aided by policy
reforms and a greater number of EPC projects in the last 2 years.
• Investments will also get a boost from the government's policy
measures to address primary concerns related to delays in land
acquisitions and clearances and improve financial health of road
developers.
• Moves such as premium rescheduling and allowing developers to sell
100 per cent stakes in their projects are expected to improve their cash
flows. 78
Road investments to drive construction spends
• Analysis of 15 national highway projects awarded in 2013-14,
indicates that these steps have helped reduce delays and improve
the execution pace.
• About 39 per cent of work on these have been completed as of
November 2015, which contrasts starkly to execution levels of 3 per
cent achieved at a similar juncture for projects awarded in 2012-13.
• Execution of NHDP under NHAI has increased by a significant 52
per cent in H1 2016 to 899 kms from 590 kms last year.
• A rise in budgetary allocations too will help meet the additional
funding needs to speed up execution.
• In Union Budget 2015-16, the government increased its plan outlay
for national highway projects by 1.8 times to Rs 856.1 billion.
79
Expected spends on construction activities (Rs bn)

• Over the next five years, investment is expected to rise by 2 times.

• Of this, state roads will garner a major share, followed by national
highways.
• However, growth in this segment will be mostly supported by the
national highways where investments are expected to grow by 2.8
times in the next 5 years.
• In comparison, investments in rural roads may remain subdued,
owing to funding constraints and lower budgetary allocations.
• Participation of private players is also expected to be muted, given
their weak financials and the overhang of aggressive bidding in the
past.

80
Irrigation: Eastern states to drive investments
• Irrigation projects mainly include dams, canals and lift irrigation.
• The average construction intensity in irrigation is about 80 per cent,
as bulk of the capital expenditure goes towards civil work,
especially in canal projects.
• At the central level, investments have been driven by programmes
such as the Accelerated Irrigation Benefits Programme (AIPB) and
Command Area Development (CAD), which have helped expedite
the implementation of ongoing projects.
• A new scheme: 'Pradhan Mantri Krishi Sinchayee Yojana' was also
initiated in 2014-15 with an initial corpus of Rs 10 billion.
• Irrigation investments are largely driven by states and the larger
ones such as Andhra Pradesh, Gujarat, Karnataka, Maharashtra and
Uttar Pradesh currently account for a nearly 65 per cent share. 81
Construction spends in irrigation (Rs billion)

E: Estimated; P: Projected
82
Construction spends in irrigation (Rs billion)
• Construction spends on irrigation projects are expected to grow
moderately during 2015-16 to 2019-20, in the absence of significant
incremental investments in large states such as Maharashtra,
Karnataka and Andhra Pradesh.
• Thus, while these states will continue to lead overall investments,
their share is likely to decline in the next five years.
• Thus, the balance is expected to tilt in the next five years, to eastern
states such as Bihar, Orissa and Jharkhand during the next five
years.
• Madhya Pradesh and Gujarat will also see significant investments.

83
Major states to take a backseat
• A CAG probe into the irrigation scam and land acquisition issues
have impacted investments in Maharashtra and Karnataka.
• Ongoing projects in North Karnataka are facing delays due to
dispute over Krishna & Godavari water allocation, delays in land
acquisition and delayed payments .
• While the state does not have plans for many new major & medium
irrigation projects over the next 5 years; minor irrigation projects are
expected to awarded in the state.
• Irrigation activities in the state of Maharashtra has been marred by
poor management of funds and execution delays.
• More than 60% of the projects are delayed due to paucity of funds
with state government and land acquisition issues.
84
Major states to take a backseat
• Major irrigation projects being carried out on the Krishna River,
Gosikhurd River, Tapi River and Godavari River have seen delays.
• Inter-state water disputes mainly with Karnataka have led to delays
in irrigation projects along the Krishna River basin.
• Similarly, projects on the Gosikhurd stretch have been delayed
owing to land acquisition issues, which has also driven up project
cost.
• Owing to a rise in the cost of contracts, the state government is
facing a funding crunch, which has resulted in inordinate payment
delays to contractors.
• In the coming years, these states are likely to focus on completing
existing projects and announcements of new investments will be
limited. 85
Major states to take a backseat
• Andhra Pradesh, who leads the country in terms of irrigation
investments also had to face the effects of the turmoil surrounding
the formation of Telangana.
• The government is expected to speed up execution of ongoing
irrigation projects that were stalled due to land acquisition issues in
a phased manner.
• The state government is also making payments towards cost
escalations on such projects.
• However, there are no ambitious new irrigation projects planned.
• While irrigation investments will pick up from 2016-17 with the
formation of Telangana and settlement of political issues, it will
remain low in absolute terms as compared to the previous years.
86
Urban infrastructure: WSS projects to provide opportunities
• Urban infrastructure includes water supply and sanitation (WSS)
projects, Mass Rapid Transit System (MRTS), Bus Rapid Transit
System (BRTS) and development of related infrastructure such as
bus stops, etc.
• The rising population has intensified focus towards development of
urban infrastructure.
• The average construction intensity in urban infrastructure is about 60
per cent, as WSS and MRTS projects involve a significant amount of
civil work.
• Over 2015-16 to 2019-20, expected construction spends in urban
infrastructure to amount to almost Rs 2.4 trillion, higher by 1.8 times
as compared to past five years.
87
Urban infrastructure: WSS projects to provide opportunities

• WSS projects will account for almost 69 per cent of the total amount
of investments in urban infrastructure.
• Investments in such projects will be mainly driven by state
governments and partially through centrally-sponsored
programmes.
• Gujarat, Rajasthan, Karnataka, Andhra Pradesh, Uttar Pradesh,
Telangana will lead the country in state investments in WSS
projects.

88
Construction spends in urban infrastructure (Rs billion)

E: Estimated; P: Projected
89
Ganga mission, Swacch Bharat schemes to power WSS projects...
• Investments in the Water Supply and Sanitation scheme will also
receive a significant boost in the coming years with schemes such as
Swachh Bharat and the National Mission for Clean Ganga (NMCG).
• In the Union Budget 2015-16, the central government has allocated
Rs 62.4 billion for Swachh Bharat and Rs 2.1 billion for NMCG.
• States such as Maharashtra, Gujarat, Rajasthan, Telanaga and Tamil
Nadu have also allocated Rs 24.4 billion for Swachh Bharat Mission
in their budgets.

90
Status of Swacch Bharat Mission (Gramin)
• In 2013-14, only about 40-45 per cent of the funds allocated to the
centre and state were utilized under this scheme and in 2014-15,
this number had improved to 55-60 per cent.
• However, this year till December 2015, the states together have
already expensed 96 per cent while the centre has expensed 85 per
cent of the allocated funds.

91
AMRUT to drive WSS spends over the next 5 years
• In May 2015, the government also approved the Atal Mission for
Rejuvenation and Urban Transformation (AMRUT) to replace the
Jawaharlal Nehru National Urban Renewal Mission (JNNURM).
• Under this mission, the government will focus on ensuring basic
infrastructure services such as water supply, sewerage, storm water
drains, transport and development of green spaces and parks.
• The government has allocated Rs 500 billion over the next 5 years
under this scheme, which is higher than the Rs 360 billion spent
under the JNNURM scheme over the last 5 years.
• Central government assistance to states will be to the extent of 50 per
cent of project cost for cities and towns with population of up to 10
lakh and one-third of the project cost for those with a population of
above 10 lakh. 92
AMRUT to drive WSS spends over the next 5 years
• Central assistance will be released in three instalments in the ratio of
20:40:40 based on achievement of milestones indicated in state
annual action plans.
• The scheme will also cover JNNURM projects sanctioned during
2005 to 2012 and those which have achieved physical progress of 50
per cent (102 projects) or have availed 50 per cent of central
government funding until now (296 projects).
• As on today, the government has released funds amounting to Rs
1000 crores to the states of Andhra Pradesh, Gujarat, Jharkhand,
Madhya Pradesh, Mizoram, Odisha, Rajasthan, Tamilnadu, West
Bengal, Kerala, Chhatisgarh, Haryana and Telangana under this
scheme.
93
Metro contruction to increase over the next five years

• MRTS projects will be the second-largest contributor to urban

infrastructure investments.
• The Delhi Metro Rail Project - Phase III, Hyderabad Metro Rail
Project, the Colaba-Bandra-Seepz project in Mumbai, Ahmedabad
Metro, Lucknow Metro , Kolkata Metro Project (East West), Nagpur
Metro and Bangalore Metro (phase II) are among the key projects.
• Construction spends on Metros in India will increase 1.7 times to
Rs 597 billion over the next 5 years.
• Almost 400 kms of metro is expected to be constructed during this
period.

94
 Smart cities - Clarity awaited; investments to commence only
towards terminal years
• The government also approved a budget of Rs 480 billion in May 2015,
for the development of 100 smart cities over the next 5 years.
• This scheme will focus on adequate and clean water supply, sanitation,
solid waste management, efficient transportation, affordable housing
for the poor, power supply, robust IT connectivity, e-governance,
safety and security of citizens, health and education.
• It will be implemented through an 'area based' approach consisting of
retrofitting, redevelopment, pan-city initiatives and development of
new cities itself.
• Each city will be selected through a "city challenge" competition and
those selected would get central assistance of Rs 2 billion in the first
year and Rs 1 billion per year for the next four years. 95
Smart cities - Clarity awaited; investments to commence only
towards terminal years
• To begin, about 20 cities would be selected after the state
governments come forward with names of cities they want
nominated.
• The below chart indicates the process of selection of smart cities.
• However, in the current status, the framework for smart cities is still
under works.
• The process of identification of smart cities and tying up the
necessary funds is expected take at least 2 years.
• Thus, work on smart cities might commence only from FY18
onwards.

96
Smart cities - Clarity awaited; investments to commence only
towards terminal years

97
Securing funds to be a challenge
• As per the High Power Expert Committee (HPEC), investments of at
least Rs 7 trillion will be required over the next 20 years for
developing of100 smart cities.
• This translates into an annual requirement of Rs 350 billion, which is
much lower than the government's annual budgetary allocation of
Rs 96 billion per year.
• While contributions from the central government and states/urban
local bodies will be largely by way of Viability Gap Support (VGF),
as per the government's plan, private developers are expected to
make majority of the investments.
• The government also proposes usage of alternate funding structures
like Pooled Municipal Debt Obligations, REITs, infrastructure debt
funds and tax-free municipal bonds to increase availability of funds
98
for implementation of smart cities.
Securing funds to be a challenge
• However, with the past BOT experience in urban infrastructure
projects (in terms of fixing of user charges) being negative, private
developers are likely to be very cautious in committing capital to
urban infrastructure projects.
• Hence, securing funds for the smart city project is expected to be a
challenging exercise.

99
Status so far..
• Of the 98 smart cities, 85 cities submitted their proposals as on Dec
15 2015.
• Tamil Nadu will be submitting their proposals shortly and so will
Telangana as it wants to change the city nominated.
• Out of these 98 cities, the top 20 cities will be selected in the first
year, another 40 in the second year and the remaining in the third
year.

100
Railways: Investments in DFCs to fuel construction spends, HSR
remains far fetched
• Construction expenditure in railway projects is expected to grow by
1.9 times over 2015-16 to 2019-20 as compared to past five years.

101
Construction spends in Railways (Rs bn)

E: Estimated; P: Projected
102
Construction spends in Railways (Rs bn)
• The government has proposed investments worth Rs 8.5 trillion in
Railways for the next 5 years.
• Of the total investments, about 23 per cent will go towards network
decongestion (including dedicated freight corridors (DFCs),
electrification, doubling - including electrification and traffic
facilities), about 23 per cent will go towards network expansion and
about 20 per cent will be allocated towards High speed Rail &
Elevated corridor, station redevelopment and logistic parks.
• Analysts believe that about 70-80 per cent of the proposed
investments towards network expansion and decongestion can
come on stream in the next five years.
• However, only 50 per cent of the spends towards High speed rail
and station redevelopment can materialize over next five years. 103
Investment plans for next 5 years

104
 DFCs to be a major avenue for construction players
Background

• The Dedicated Freight Corridor (DFC) project is estimated to cost

about Rs 814 billion which includes land acquisition cost of Rs 81
billion and construction cost of Rs 734 billion.
• The full cost of this project is higher as it excludes the 538 km stretch of
the eastern DFC which is proposed to be implemented through PPP.
• The length of the entire project is 3375 kms.
• The DFC will offer significant scope for construction activities as about
86 per cent of the 10548 hectares land required (except for the stretch to
be awarded on PPP) has been acquired across both the corridors.
• Land covering 245 km of EDFC (excluding PPP stretch) and 113 km in
WDFC is held up due to resistance from locals.

105
DFC awarding status
• As on August 2015, 20 per cent of the civil work of the DFC is
completed.
• 65 per cent of the civil contract and 48 per cent of the system
contract has been awarded

106
Investments in railways rolling in
• In the Union Budget 2015-16, the government announced a plan
outlay of Rs 1 trillion which was 52 per cent higher than its plan
outlay in the preceding year.
• About 40 per cent of the planned outlay is expected to be financed
through budgetary support whereas the remaining is to be funded
through internal sources (17 per cent) and market
borrowings/institutional finance (35 per cent).
• While the government will look to fund one half of its its long term
investment plan of Rs 8.56 trillion over the next five years through
budgetary support (2.5 trillion) and internal resources, the balance
will be met by market borrowings, institutional finance and
increased private participation.
107
Investments in railways rolling in
• Indian Railway Finance Corporation (IRFC) has been authorized to
issue tax free bonds for a total amount of Rs 6000 crores during
2015-16.
• The bonds worth Rs 4532 crores which were open for public
subscription on Dec 8th 2015, were oversubscribed by 2.38 times on
Day 1 itself.
• As of Dec 10 2015, IRFC has raised Rs 5671 crores through tax free
bonds.
• The government has also signed an MoU with LIC in March 2015 to
raise Rs 1.5 trillion over next 5 years.
• Of this, the first tranche of Rs 2000 crores has already been released
by LIC in October 2015 through the purchase of bonds issued by
IRFC. 108
Investments in railways rolling in
• The DFC is also well funded.The Eastern DFC (estimated project cost
of Rs 26674 crores, excluding the stretch on PPP) is being funded by
the World Bank through a loan of US$2.725 billion (approx Rs 16350
crores).
• The Western DFC (estimated project cost of Rs 46718 crores) is being
funded by the Japan International Cooperation Agency (JICA)
through a loan of Rs 38722 crores.

109
PPP in railways not in the near future
• Participative models in railways was introduced in December 2012.
• The policy provides for 5 different models.
• - Non-Government Private Line Model
• - Joint Venture(JV) model
• - Capacity Augmentation with funding provided by customers
• - Build, Operate and Transfer (BOT) model
• - Capacity augmentation through annuity model

110
PPP in railways not in the near future

• Of the above three models, the first three involve strategic investors
or customers while the BOT and Annuity models are pure PPP in
nature.
• Whileprojects are currently being implemented through the first
three models, private participation through BOT and the annuity
models is yet to take off.
• Projects worth Rs 3016 crore have been identified to be awarded
through the annuity route.
• However, unless the government develops robust revenue models
and also removes bottlenecks related to land acquisition and
clearances which have been hampering the progress of current
railway projects significant pick up in private participation in the
sector remains unlikely. 111
High Speed Rail Projects
• The high speed rail (HSR) project which was started in 2009 has
failed to gather pace.
• The only project to have made any significant headway is the
Mumbai Ahmedabad bullet train whose final feasibility report was
submitted by the Japan International Cooperation Agency (JICA) in
July 2015.
• As per the report, the project cost is about Rs 98000 crore and is
declared as feasible with an assumption of 40,000 passengers using
the service everyday post 2024 and a fare of about 1.5 times the first
Ac Rajdhani Express.
• The Government of Japan will be funding this project to an extent of
$12 billion dollars at favorable terms of only 0.1 % interest, a 15 year
moratorium period and a 50 year repayment period. 112
High Speed Rail Projects

113
High Speed Rail Projects
• The Mumbai Ahmedabad project is expected to contribute only
from FY18 onwards considering that the project was awarded very
recently and land acquisition is yet to happen.
• All other projects are in a nascent stage and are not expected to
make any significant contribution to construction spends over the
next five years.

114
Power sector share in construction spends reduces to 10 per cent
• Construction spends on power projects are likely to be flat over the
next 5 years, as a result of decline in addition of non-renewable
generation capacity.
• Stretched financials of developers, delays in clearances and a lack of
adequate long-term power purchase agreements (PPAs) owing to
lower deficit levels, will impact investments in non-renewable power
generation projects.
• New projects announcements will also decline as large players are
increasingly seeking the inorganic route for exansion through
acquisitions.
• Moreover, several projects are facing delays in civil works due to
issues such as shortage in manpower and agitation by locals at
project site. 115
Power sector share in construction spends reduces to 10 per cent
• In contrast, sharper government focus will result in significant
investments in renewable power projects during the period.
• As non-renewable power generation capacity additions decline over
next five years, the share of transmission and distribution (T&D)
capacities shall increase in overall investments.
• T&D spends have failed to keep pace with the increase in capacity
over the past five years.
• Going forward, investments in T&D are expected to grow by 1.3
times, driven by the transmission segment due to healthy line
additions.
• However, T&D projects have a lower construction intensity of about
10 per cent.
116
Coal-based capacities to dominate investments

• Notwithstanding the above issues, private sector players are

expected to add more capacity in the next five years.
• Despite a construction intensity of 20 per cent, bulk of construction
spends will cater to coal-based projects as these are estimated to
constitute around 88 per cent of non-renewable capacity additions.
• By contrast, hydel power capacities (with a 70 per cent construction
intensity) will have a smaller share in investments as fewer new
projects are announced given the long gestation period and
geological risks involved in these projects.

117
 ...yet renewable capacity additions will grow faster
• Although non-renewable capacity additions decline, those in the
renewable space are likely to grow at a healthy pace, as various
favourable central government schemes are reintroduced.
• These are:
• Accelerated depreciation and generation based incentive investments
in the wind energy segment
• Commissioning of projects allotted under different state policies like
the Jawaharlal Nehru National Solar Mission (JNNSM) phase II.
• Aggressive expansion plans by central PSUs in the solar power
segment.
• Hence, despite of having a construction intensity of only 7-8 per cent,
the share of renewables segment is overall power investments is
expected to almost triple to about 14 per cent during the next 5 years.
118
...yet renewable capacity additions will grow faster

• However, the contribution of renewable capacity additions will

remain negligible to total construction spends.

119
More than half of industrial construction expenditure to cater to
oil & gas projects
• The oil & gas sector is estimated to provide construction
opportunities worth Rs 963 bn (in both upstream and downstream
segments) between 2015-16 and 2019-20, slightly higher than the
expenditure over last five years.
• The sector will account for close to 55 per cent of total construction
expenditure in the industrial segment.

120
 Construction spends in the oil and gas sector (Rs billion)

E: Estimated; P: Projected
121
Construction spends in the oil and gas sector (Rs billion)
• In the exploration & production (E&P) segment, blocks awarded in
the past under the National Exploration Licensing Policy (NELP)
will garner maximum investments.
• Some of the major projects in the refining segment include BPCL's
expansion at Mumbai and Kochi refinery, Cuddalore refinery by
NOCL, HMEL's expansion at Bhatinda and BORL's expansion at
Bina.
• Over the next 5 years, industry expect investments in the
downstream gas infrastructure to pick up since most of the
constraints faced by players over the last few years are expected to
be resolved gradually.
• Consequently, investments are expected to rise by over 50 per cent
to Rs.446 billion. 122