Jitendra Kumar Gupta Moneycontrol Research
Over the last couple of years, the government has been stepping up its efforts to build roads, bridges and other allied sectors in the infrastructure space to ensure that somewhere down the line the private capex cycle would revive.
Unfortunately, nothing major has been achieved and now fiscal compulsion limits the government’s ability to support incremental big bang capex. Fiscal deficit estimated at 3.4 percent in FY19, that too after massive efforts to raise funds through divestment and other means.
Data from the Centre for Monitoring Indian Economy Pvt (CMIE) suggest that during the quarter-ended December 2018, private sector projects announcements declined 64 percent on a year-on-year (YoY) to Rs 497,000 crore
Shifting focus Now, with the final countdown for elections beginning this year, no wonder Finance Minister Piyush Goyal in his latest Budget was silent about capital expenditure and flagship infrastructure schemes. The focus for his speech and allocation was on agriculture, real estate, unorganised sector, health, water and few other social schemes.
Allocation figures too depict the similar picture with the government’s capital expenditure pegged at Rs 9.54 lakh crore in FY20 as against 9.61 lakh crore as per the revised figure of FY19.
The National Highways Authority of India's (NHAI) revised target for FY19 was Rs 37,300 crore, which has now been scaled down to Rs 36,700 crore for FY20. In last Budget, close to Rs 2,000 crore was targeted for the National Investment and Infrastructure Funds, which is now pegged at Rs 1,000 crore in FY20. Nevertheless, the good news is that the Ministry of Road Transport and Highways received a 20 percent higher allocation for capital expenditure to about Rs 72,000 crore.
What does it mean for the sector? With the government going a tad slow on capital expenditure, it might hit sentiment in the near term. One might see stocks from the construction space commanding relatively lower valuations.
One should also understand that most of these companies are currently sitting on order book of close to three times their annual sales, which is one of the highest in the recent history, thereby providing strong revenue visibility. Many of the companies are now focusing on execution rather than piling more orders, which will only block capital and risk the balance sheet. Against this backdrop, a short-term pause in the public sector capex cycle should not be a cause for excessive worry.
The silver lining here is that the railways, metro projects and defence still continues to be on the top of the government’s list. Metro projects have received an allocation of close to Rs 17,700 crore as against Rs 14,265 crore in the previous Budget. Similarly, railways has received budgetary support of close to Rs 64,600 crore as against Rs 53,000 crore in the previous Budget. Hence, within infrastructure and construction, investors got to be selective.
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