The construction sector gross value added (GVA) witnessed a YoY growth of 2.7% during Q3 FY2017 which is similar to the modest growth witnessed in the past quarters. The growth in the construction GVA despite the disruption in the execution caused by the demonetisation reflects the resilience of the organised construction sector. Further, Budget 2017-18 has continued its thrust on infrastructure with an increase in allocation towards the infrastructure sector, and focus on major schemes towards infrastructure development. The Budget has also set higher execution targets for the major infrastructure segments.
A major push from the Government on roads and urban infrastructure segments has helped construction companies improve their order book positions.
According to K. Ravichandran, Senior Vice-President and Group-Head, Corporate Ratings, ICRA, ''ICRA's sample of construction companies witnessed an improvement in order inflows with a major push coming from segments like roads, metro rail, and urban infrastructure. Their current order book stood at over three times their last reported annual revenues which will support growth in the near term. However, any significant improvement in the credit metrics of construction companies will take time and will be contingent on an improvement in the working capital cycle and in the pace of execution, besides their ability to deleverage by raising long-term funds through stake sale or equity placements.''
The irrigation sector has witnessed good traction over the last one year and is likely to see improved execution with increased funding support from the State and the Central Governments budgetary allocation and the Long Term Irrigation Fund (LTIF) of NABARD, the corpus of which was increased to Rs. 40,000 crore in Union Budget 2017-18. The focus is currently on the 99 projects selected under Accelerated Irrigation Benefit Programme (AIBP) which are targeted for completion in stages by Dec-2019. Further, states like Telangana have significantly increased allocation towards the irrigation sector to fast track the development of irrigation projects. Some very large irrigation projects such as Polavaram, Pranahitha and Kaleshwaram are under execution in Telangana and Andhra Pradesh which have added to the order inflow for construction companies operating in this space.
According to Shubham Jain, Vice-President and Sector-Head, Corporate Ratings, ICRA, ''While funding issues for these projects are largely addressed with fund availability from LTIF, other execution impediments could still delay completion of many projects. Nevertheless, the strong focus of both the State and the Central Governments towards irrigation projects is a positive step towards their resolution, which has been pending for a long time. This will help in the resolution of stuck orders in the order book of many construction companies and help them reduce their working capital requirement.''
The pace of recovery in the overall construction sector is likely to be modest and will be linked to the on the ground impact of the policy measures including the release of 75% arbitral award as well as the availability of funds for project development. In the short term, demonetisation would have a negative impact on construction activities (as indicated by the contraction in cement production by 8.7% in Dec-2016 and 13.3% in Jan-2017); however, the impact is expected to subside and the situation is expected to normalise from Q1-FY2018 onwards. However, on the positive side, with the Government's emphasis on infrastructure projects, public sector investments are expected to increase in the medium to long term-though this will be constrained by fiscal deficit targets and other increased expenditures on account of pay revisions, etc. Hence, the revival of public private partnership is crucial for improving the pace of infrastructure development.
