India’s road execution growth to slow in FY25. Analysis of investor and industry impact provided.
Source and citation: “Road Execution to Grow 5-8% in FY25 to 12,500-13,000 Km: Icra.” The Economic Times, 17 Apr. 2024, PTI.
TLDR:
- Road execution in India expected to grow 5-8% to 12,500-13,000 km in FY25
- Growth slows from 20% expansion in FY24
- Ministry of Road Transport and Highways (MoRTH) has a healthy project pipeline of over 45,000 km as of March 2024
- Project awards declined by 31% to 8,551 km in FY24 due to delay in Cabinet approval for revised cost estimates
- Engineering, Procurement, and Construction (EPC) mode accounts for 70-75% of awards, followed by Build, Operate, Transfer (BOT)- Hybrid Annuity Mode (HAM) at 25-30%
Analysis for a layman:
India’s road construction growth is set to slow down to 5-8% in the fiscal year 2024-25 (FY25), reaching 12,500-13,000 kilometers, according to rating agency Icra. This comes after a strong 20% expansion in the previous fiscal year (FY24). The slowdown is attributed to factors such as a prolonged monsoon in certain regions, which affected productive days in the first half of FY24.
Despite the slowdown, the Ministry of Road Transport and Highways (MoRTH) has a healthy project pipeline of over 45,000 km as of March 2024. However, project awards were significantly impacted in FY24, declining by 31% to 8,551 km, due to a delay in Cabinet approval for the revised cost estimates of the Bharatmala Pariyojana Phase 1 (BMP) project.
Impact on Retail Investors:
- Slower growth in road construction may impact the stock prices of companies in the infrastructure and construction sectors in the short term
- Investors should monitor the progress of key road projects and the financial health of companies in their portfolio
- Long-term investors may still find value in well-managed companies with strong order books and execution capabilities
- Diversification across sectors and asset classes can help mitigate the impact of slowdowns in specific industries
Impact on Industries:
- Construction and engineering companies may face challenges due to the slower pace of road project awards and execution
- Cement, steel, and other raw material suppliers could experience reduced demand from the road construction sector
- Logistics and transportation companies may benefit from the gradual expansion of the road network, improving connectivity and efficiency
- Real estate and tourism sectors in regions with improved road connectivity may witness long-term growth
Long Term Benefits & Negatives:
Benefits:
- Continued expansion of India’s road network, albeit at a slower pace, will improve connectivity and boost economic growth
- Enhanced infrastructure will attract investments and create job opportunities across various sectors
- Improved road safety and reduced travel times will benefit businesses and individuals
Negatives:
- Prolonged slowdown in road construction may impact the government’s infrastructure development targets
- Delayed project completions and cost overruns could strain the finances of construction companies and investors
- Reduced public spending on infrastructure may have a cascading effect on allied industries
Short Term Benefits & Negatives:
Benefits:
- Companies with strong order books and execution capabilities may weather the slowdown better than their peers
- The government’s focus on completing ongoing projects could provide stability to the sector
- Amendments to the BOT-Toll model concession agreement may improve its attractiveness for future projects
Negatives:
- Slower growth in road construction may lead to subdued earnings growth for infrastructure and construction companies
- Delays in project awards and approvals could impact the financial planning and cash flows of businesses
- Increased competition for a limited number of projects may put pressure on profit margins
Companies Potentially Affected by Icra’s Road Execution Forecast
Indian Companies Likely to Gain:
- Indian Infrastructure Companies (Focused on Road Construction): A projected 5-8% growth in road execution translates to potential contract opportunities for construction companies. Companies with strong execution capabilities and experience in government projects could benefit. Examples include:
- Larsen & Toubro (L&T)
- Dilip Buildcon
- IRB Infrastructure Developers
- Afcons Infrastructure
- NCC Infrastructure
- Engineering Procurement and Construction (EPC) Companies: The article highlights EPC as the dominant mode for road project awards (70-75% in FY24). This bodes well for EPC companies with expertise in road construction projects.
Positive Impact on Market Sentiment:
The forecast for continued growth in road execution could be positive for the Indian infrastructure sector, particularly companies involved in road construction (mentioned above) and EPC contracting. An increase in order flows and project awards could improve their financial performance and attract investor interest.
Uncertain Impact:
- Companies Reliant on BOT-Toll Model: The article mentions no awards under BOT-Toll in FY24 and highlights recent amendments to improve the model’s attractiveness. The impact on companies dependent on this model is uncertain and depends on the effectiveness of the amendments in attracting future investment.
Global Companies That May Gain (Long Term):
- Global Construction Equipment Manufacturers: Increased road construction activity could lead to a rise in demand for construction equipment over the long term, potentially benefiting global manufacturers.
Overall Market Sentiment:
The news is positive for Indian companies involved in road construction and EPC contracting. However, the outlook for BOT-Toll dependent companies is uncertain.