Polls may slow down new infra projects

The upcoming general election is likely to put a speed breaker on new large infrastructure projects in the country, as both the government and the funding agencies would rather go slow on the fresh ones and focus more on the ongoing roads, irrigation, airports, seaports or completion of under construction projects.

Capex cycle over the last few years has been supported by the government spending on infrastructure projects like roads, railways and power T&D sector, while private sector participation has remained subdued given the under-utilisation of assets created by the companies historically.

However, with the impending general election, even the government capex could slow for new projects.

"Approaching general elections to slow fresh government orders. Ordering activity seen in the first nine months is a testimony to the weak new-business scenario," research house Motilal Oswal said in its investment strategy paper.

The sentiment is shared by Srei Infrastructure Finance which has exposure to infrastructure assets.

"Investors into the infrastructure space are staying away till at least the new government comes in and its policies towards the economy and the infrastructure space are made clear," said Hemant Kanoria, chairman and managing director, Srei Infrastructure Finance.

The company, in fact, would be staying away from project financing and would concentrate more on financing equipment used in infrastructure projects like roads and mining.

The likely slowdown would be coming on the back of some discouraging data points.

A recent data released by the Centre for Monitoring Indian Economy showed new project announcements during the nine months were down by 7% on-year.

Capital expenditures in completed projects have come down from Rs 1.66 trillion to Rs 0.83 trillion while implementation of stalled projects has also slipped from Rs 2.07 trillion to Rs 0.29 trillion during the period, as per data released by CMIE.

"Investments are generally low prior to general elections because of policy uncertainties. The industry is also bogged down by global volatility, especially the US-China trade war, European political climate and commodity price volatility. Domestically, raising money has been increasingly difficult and activity in the capital market has remained subdued. Also, capacity utilisation levels still suggest that there remains some residual capacity in the industry," Karan Mehrishi, chief economist, Acuité Ratings & Research, said.

"Rising policy uncertainties ahead of the general election and current liquidity squeeze prevailing in the economy have also added to the turmoil," Motilal Oswal said.

Key new projects during the quarter have mainly been announced by the state governments, which includes the Taloja affordable housing project by Maharashtra state government, Rayapudi government office complex and the Mahipalpur bypass by Delhi state government.

Private sector project announcements, accounting for 50% of the new projects announced during the third quarter, declined 64% YoY.

"We believe investment revival would be triggered by a sustained recovery in consumption demand. Thus, capacity utilisation and investment push by the public sector is leading to a virtuous cycle of cash flow generation. By initiating GST, labour and energy sector reforms, the government has partly addressed concerns about the pace and extent of reforms. Implementation of substantive reforms is essential for structured investment growth," Motilal Oswal said.

Some policy tweaking is also needed to ease roadblocks on new infrastructure projects amid stringent land acquisition and green approvals.

''Environmental concerns have often stalled large infrastructure projects in India. While the government maintains that it is committed to encouraging sustainable developments, policy decisions often reveal the gap between the stated intent and ground realities. There have been several environmental issues raised in projects like proposed Pune Metro Rail project, Delhi-Mumbai Freight Corridor, 100 meters of eco-zone around Noida's Okhla bird sanctuary, and Thane Municipal Corporation's proposed road at the south of Sanjay Gandhi National Park," said Vijay Agrawal, executive director, Equirus Capital.

In the third quarter, orders in the road sector were driven by states, while orders by National Highway Authority of India remained muted.

Even for marquee projects like Mumbai Nagpur Expressway and the Coastal road project, the orders had come from the state governments on an EPC basis with execution expected to begin soon.

While the general election could result in some short-term disruptions in fresh awards, the trend is expected to remain positive over the medium term, says rating agency Icra in a note.

"Last three to four years have witnessed a quantum increase in the infrastructure capital outlay, particularly in the roads, railways and the urban infrastructure segments, and this is likely to continue over the medium term. This has boosted the order book of the construction companies significantly, with most having an order book of over three times last year's operating income. With the expected strong focus on infrastructure development by both the Central and the state governments, the construction companies should continue to see a healthy influx of new orders," Icra said in the research

FEELING THE PINCH

• Rs 0.83 trillion – capital expenditure in completed projects
   
• Rs 0.29 trillion – expenditure on stalled projects implementation
   
• 7% – drop in new project announcements during nine months period