Construction

Construction:
Gradual uptick in
fortunes
© 2016 CRISIL Ltd. All rights reserved.

January 2018
Flow of the presentation
 Methodology
 Construction investments: Budgetary allocation fueling infra growth
 Construction investments: Government versus private spending
 Investments in Infrastructure

‾ Roads
‾ Railways
‾ Irrigation
‾ Urban Infrastructure
• Analysis of key policies
 Expectations on revenue and margins
 Credit profile of construction players
 Key conclusions
2
2
Methodology

(per cent) (per cent)
Telecom 10 Oil and gas - Exploration… 15

Power-Solar 8 Two-wheelers 18
Textiles 18
Power-Wind 8
Aluminium 20
Power - Coal based 20 Auto ancillaries 20
Power - Gas based 20 Cement 20
Power - Hydel 70 Paper 20
Railways 45 Petrochemicals 20
Tyres 20
Ports 50
Tractors 23
MRTS 55 Fertilisers 25
Water Supply and… 60 Steel 26
Airports 60 Cars 28
Irrigation 80 Commercial vehicles 28
Oil & gas - Natural gas
Roads 100 33
Oil and gas - Refining &…
33
3
3
Strong increase in government allocation towards
infrastructure sectors
Increase in allocation towards infra sectors in Union Budget 2017-18
Rs 5.1 tn
Rs 4.8 tn
29%
28%
Rs 3.5 tn

7%
8%
28%
25%
6% 25%
26%
16% 15%
18%
23% 24%
21%
2015-16 Actual 2016-17 RE 2017-18 BE
Roads Power Railways Urban Development Others

16%
Source: Budget documents, CRISIL Research
 Budgetary allocation to infrastructure sector on continuous rise

 In 2016-17, revised estimates for urban and rural developments significantly higher than
budget estimates
4
4
Construction spends to grow by 1.26 times over
the next two years
Roads, Irrigation and urban infra to lead the way for increased spends
Rs. billion
Rs 26.6 tn
9,202
7% 6%
4%
7,200 7%
7% 14%
5%

Rs 15.8 tn 12% 15%
12% 10%
93% 11% 15%
16%
1.7 x 39%
88% 38%
2015-16E to 2016-17E 2017-18P to 2018-19P

2012-13E to 2016-17E 2017-18P to 2021-22P
Roads Irrigation Urban Infra Railways Power Oil & Gas Others
Infrastructure Industrial
Source: CRISIL Research

Note: To arrive at construction spends, investment across sectors is considered and respective construction intensity is applied to each sector
 In past 2 years, share of public spending close to 65-70%, set to rise over 70% in the next 2
years, driven by infra
 Private spending declines as many asset heavy sectors face low capacity utilization levels
5
5
Within infrastructure, roads to lead the way
Key segment Past 2 yrs Next 2 yrs Increase/decrease Sector wise outlook on investment
(Rs billion) (Rs billion) (x times)
Investments in national highways to pick up, while those on

Roads 2760 3547 1.3 state highways to grow moderately. Sustained funding to
PMGSY will drive investments in rural roads.

Capacity additions in non-renewable power generation to
Power 852 661 0.7
decline : transmission and distribution to drive investments.
Increased government support to drive investments. Focus on

establishing a line of command, and merging various policies
Irrigation 1119 1416 1.3
under one roof can provide the much-needed push for the
sector.
Seen as a key focus area for the new government. Budget

Urban Infrastructure 824 1355 1.6 provides funding for smart cities and water supply & sanitation
projects.
Investments growth at higher pace, compared to past. Network

Railways 748 1295 1.7 decongestion -Dedicated Freight Corridor will be key area.
Investments likely to be moderate in sectors like ports and

Others 134 133 0.99
telecom.
6
6
Suboptimal capacity utilization to delay industrial
capex revival
Optimal utilisation levels for each sector
90
79 79 80 80 79
80 77 77 77 77 78
73 73
71 70 71 70 71 71
70 68
65
62 62
60 60 61

60 57.4 57
50
40
30
20
10
0
Tractors Cars & UVs Commercial Two- Wheelers Cement Paper Fertilisers Steel Aluiminium
Vehicles
2016-17 2017-18P 2018-19P
7
Investments in roads to rise 2 times over next 5 years
Policy reforms will boost NH investments, rural roads to receive boost from PMGSY scheme
Rs 10.7 tn
18%
45%
Rs 5.5 tn
17%

56% 2x
38%
27%
2012-13E to 2016-17E 2017-18P to 2021-22P
National Highways State Roads Rural Roads
 Investments in NH to increase 2.7 times over the next 5 years

- Increased budgetary support, traction in HAM will drive investments
 Investments in state roads to grow at a steady pace; major states like UP, Maharashtra, Rajasthan and
MP lead investments. A few projects are expected to be bid out on HAM in these states.
 Rural road execution has seen significant uptick in last 3 years

‾ Bihar, MP, Orissa, WB, Jharkhand, UP to have max investment in PMGSY
‾ Budget allocation by Centre to PMGSY increased by Rs 50 bn in 2015-16 mid year, another 26% in 2016-17 and is
maintained for 2017-18
8
Investments in Railways rolling in…
Construction spends expected to rise by 2.4 times over the next years
Rs bn

3,637
2.4 x
1,513
2012-13E to 2016-17E 2017-18P to 2021-22P

 Railways consistently spending almost entire budgeted amount in the last few years
 Budgetary support increased ~9% to Rs 1310 bn over the FY17 revised estimate
 LIC to provide Rs 1.5 tn over next 5 years. Rs 70 bn has been released in 2 tranches.
 Tax free bonds to play a big role in funding the sector; Rs 95 bn raised through these
bonds in FY16
9
9
Irrigation investments to increase 1.7 times in the
next 5 years
Investments estimated to rise by 1.7 x in next five years (Rs. Bn)

3,664
2,311
1.6 x
2012-13E to 2016-17E 2017-18P to 2021-22P
 Top six states (AP & Telangana, Maharashtra, Karnataka, Gujarat, MP,UP) to account for ~75% of total investments
 Most of the investments will be towards major and medium irrigation projects.
 Centre to play a more active role in monitoring progress of projects.
 A bottom up approach rather than a top down approach followed before.
 99 major and medium projects prioritized under AIBP, to be completed by 2019-20
10
10
Major states to stick to their budgeted targets
Top six states account for ~75% of overall irrigation investment
120%
Maharashtra Madhya Pradesh
110%
Andhra Pradesh &

100% Telangana
Gujarat
Uttar Pradesh
Achievement ratio
90%

80%
Karnataka
70%
60%
50%
0% 10% 20% 30% 40% 50% 60%
Irrigation capital expenditure as proportion of total capital expenditure
Note: Achievement Ratio is average of 2015-16 (Actual over BE) and 2016-17 (RE over BE). Size of the bubble indicates total irrigation spends in each state over next 2
years
 GFD/GDP for these six states below 3% except AP, Telangana and MP
11
11
Metro, WSS to drive urban infra investments
Construction spends in urban infra to grow by 2 times over next 5 years
Rs bn  WSS spends will dominate urban infra spending

3,610 mostly through schemes like Swacch Bharat
12%
 Delhi Metro Phase III & IV, Colaba Bandra SEEPZ,

Bangalore Phase II, Dahisar-Andheri, Ahmedabad

29% and Nagpur to drive investments over next 5 years
1,798  Smart city programme to also increase

construction activities in selected cities
31%
2.0 x 58%  Infrastructure development is the main agenda of

smart cities.
66%
 About 44% of smart city investment is expected to

2012-13E to 2016-17E 2017-18P to 2021-22P
result in construction opportunity.
WSS MRTS Smart Cities Others
12
12
Key policies under urban infra segment
Policy Date of launch Key focus area and status
Swachh Bharat Oct-14 To achieve universal sanitation coverage.

Mission (Gramin and Allocated Rs 162.5 bn in Union Budget 2017-18
Urban) RE of 2016-17 13% higher the BE
~86% of the allocated funds in 2017-18 towards SWM-G
~97% of funds towards IHHLs.

AMRUT June-15 To provide basic services – water supply, sewerage, public transport.
Allocation- Rs 500 bn for 5 years (2015-16 to 2019-20)
500 cities to be covered.
Only 9% of Rs 500 bn released till March 2017.
National Mission for Aug-11 For pollution abatement through construction of STPs, Common Effluent Treatment
Clean Ganga Plants, Ghat Development,.
97 projects on sewerage and sanitation have been sanctioned till now of which 32
are complete.
Smart city Jun-15 To develop 100 smart cities in next 5 years.

Infrastructure development core area- roads, housing and water supply
33 smart cities identified to be funded from 2016-17 and 27 to be funded from
2017-18
Housing for All
(Gramin and Urban)
13
13
PMAY, Swachh Bharat schemes show good progress
(Rs billion)
1000
PMAY
Investments over next 2 years
800
600 Smart City

400
Swachh Bharat
AMRUT
200
NMCG
0
0 100 200 300 400 500 600 700 800
Construction investments over next 2 years
Note: The color of the bubble indicates pace of execution

Source : CRISIL Research
 Progress of AMRUT is slow- only 20% expended in 2 years

 90 smart cities selected – tendering in full swing
 Swachh Bharat and PMAY- investments have surpassed targets
14
Revival in revenues to begin slowly
Revenue growth to improve, pick up in execution
20%
17%
15%
10%
6-7%
5-6%
4%
5% 2%
0%

0% -3%
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17E 2017-18P 2018-19P
-5%
-10%
-15%
-21%
-20%
-25%
Note: Revenues based on data of 65 companies on a standalone basis.

P-Projected
 Revenue growth to improve in 2017-18, driven by policy initiatives and govt. funding push
 Order inflows and execution to continue to pick up for companies with comfortable liquidity
15
15
Profitability pressures at net level to persist
Recovery in margins in 2017-18
17-17.5%
16.5-17%
16.3% 15.9% 16.2%
15.7% 15.4%

5.0% 4.60%
4.5% 4.1%
3.9%
3.0%
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18P 2018-19P
Operating margins Net margins
Note: Standalone financials for 65 companies

E: Estimated, P: Projected
 Operating margins improved marginally in 2016-17; gradual improvement in 2017-18 and

2018-19
 Net margins improved in 2016-17, to improve further in 2017-18 with efforts from companies
to reduce debt
16
16
Stark difference in performance of highly leveraged
companies
Revenue, margins differ significantly for leveraged companies
17%
4%

Avg revenue growth Avg operating margin
-15%
Cos with gearing > 2.5 Cos with gearing < 2.5
-33%
Note: 24 companies included in set of companies with gearing>2.5 times and 75 companies included in set of companies with gearing<2.5 times. All
financials on standalone basis
 High gearing and elongated working capital cycle hampering execution capability
 Large scale debt restructuring underway (HCC, Gammon, Ramky, IVRCL, Unity Infra)
- Stressed financial position making it difficult to bag new projects
 Profitability under pressure

- Lower fixed cost absorption owing to sluggish execution, aggressive bidding for legacy BOT projects severely
impacting EBITDA margins
17
17
Operating cash flows unable to support interest
cost
Operating cash flows consistently below interest cost, however the gap reduced in 2015-16
Rs Billion
144
111 115
100
93

86
78
67 68
46 46 42
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Cash Flow Interest cost
Note: Data based on financials of 68 listed companies on a consolidated basis.
Source: Company Reports, CRISIL Research
 Cash flow from operation (CFO) have consistently fallen short of interest costs
 In the last few years, gap between CFO and interest costs has increased to an alarming
level
 However, cash flows have shown improvement, a replication of project closures.
 Going forward, the gap is expected to decline with rising revenues and SDR
18
18
Gap between CFO and Interest costs higher for
leveraged firms
Companies with gearing > 2.5 unable to generate cash flows to
Companies with gearing < 2.5 have better CFO support interest payments
Rs bn
60
68
53 54
49
46 46 45
40 46
36 36 41 40 41
33 34 36
29 30 29 29
27

23 20
14 16
7
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Cash Flow Interest cost
Cash Flow Interest cost
Source: Company Reports, CRISIL Research Source: Company reports, CRISIL Research
Note: Data of 18 listed companies on a consolidated basis. Note: Data of 13 listed companies on a consolidated basis.
 CFO has come down due to increase in receivable days and unbilled WIP
 Gap between CFO and interest costs significantly higher for companies with higher gearing.
 Players looking at monetization of operational assets and equity infusion to lower debt
 For high gearing companies, interest expenses expected to stabilise as most of these companies are into
SDR.
19
19
Working capital remains stretched
Gross working capital days continue to rise on account of growing receivables
455 476 500 511 505

400
224 272 293 298
350 207
300
250
200 110 105

78 64

58
150
22 25 29 29
22
100
115 124 125 126 120

50
0
2012-13 2013-14 2014-15 2015-16 2016-17
Loans & Advances (days) Cash and Bank Balances (days) Inventories (days) Receivables (days)
Source: Company Reports, CRISIL Research

Note: Data of 31 companies on a standalone basis is used
 Working capital stretched as delays in payments continue

 Sectors like irrigation and WSS have stretched WC because of high retention money
 Inability to bring down debt burden might hamper ability of some companies to carry out
operations on a continuing basis
20
20
Financial flexibility is constrained
Gearing to improve in 2016-17 and 2017-18 Interest coverage ratio estimated to improve in 2016-17
4.7
4.4
3.9 2.5
3.7 2.4
3.1 2.1
2.8 1.9 1.9
1.8

1.2 1.3
1.0 1.1
0.9 0.9
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Consolidated gearing Standalone gearing 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Note: Consolidated data for 50 companies and standalone data for 65 Note: Consolidated data for 52 companies, FY17 data of 11 companies excl
companies. In consolidated L&T has been excluded. L&T. is used
Source: CRISIL Research Source: CRISIL Research
 Consolidated gearing has been rising in the past few years

 Improvement expected in 2016-17 and 2017-18 as a result of SDRs of major players and closure of
asset deals
 Interest coverage remained low, improve in 2016-17and 2017-18
– Estimate a marginal improvement in 2016-17 owing to 4-6% increase in revenue and reduced
debt and further improvement expected in 2017-18.
21
21
Investment growth to continue, credit profile key to
execution
 Construction investments pegged at ~Rs 9 tn over next 2 years (FY18 to FY19), 13% higher
p.a than past 2 years
– Albeit ~70% of the investments in the low margin segments
– Most investments to be driven by government spending in the medium term

 Revenues remained stable in 2016-1, higher government spending, pick up in execution set
to improve in 2017-18
– Revenue growth would continue to be more pronounced for companies with better debt management
 Credit profile for most companies remains stretched through 2016-17, improvement
expected in 2017-18
– Profitability to improve with better fixed cost absorption.
– Marginal improvement expected in net margins with lower interest cost, conversion of debt to equity
– Closure of asset sales key monitorable
– Gearing expected to improve in 2017-18 due to SDRs and asset sales
– Working capital estimated to improve in 2016-17 and 2017-18 with government focus on infrastructure
2
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© 2016 CRISIL Ltd. All rights reserved.

 Construction investments: Budgetary allocation fueling infra growth

 Construction investments: Government versus private spending

© 2016 CRISIL Ltd. All rights reserved.

 Expectations on revenue and margins

 Credit profile of construction players

© 2016 CRISIL Ltd. All rights reserved.

Telecom 10 Oil and gas - Exploration… 15

© 2016 CRISIL Ltd. All rights reserved.

2015-16 Actual 2016-17 RE 2017-18 BE

Roads Power Railways Urban Development Others

 Budgetary allocation to infrastructure sector on continuous rise

© 2016 CRISIL Ltd. All rights reserved.

2015-16E to 2016-17E 2017-18P to 2018-19P

Source: CRISIL Research

(Rs billion) (Rs billion) (x times)

Investments in national highways to pick up, while those on

© 2016 CRISIL Ltd. All rights reserved.

Increased government support to drive investments. Focus on

Seen as a key focus area for the new government. Budget

Investments growth at higher pace, compared to past. Network

Investments likely to be moderate in sectors like ports and

© 2016 CRISIL Ltd. All rights reserved.

2016-17 2017-18P 2018-19P

Source: CRISIL Research

© 2016 CRISIL Ltd. All rights reserved.

2012-13E to 2016-17E 2017-18P to 2021-22P

National Highways State Roads Rural Roads

 Investments in NH to increase 2.7 times over the next 5 years

 Rural road execution has seen significant uptick in last 3 years

© 2016 CRISIL Ltd. All rights reserved.

2012-13E to 2016-17E 2017-18P to 2021-22P

© 2016 CRISIL Ltd. All rights reserved.

2012-13E to 2016-17E 2017-18P to 2021-22P

Source: CRISIL Research

Andhra Pradesh &

© 2016 CRISIL Ltd. All rights reserved.

Irrigation capital expenditure as proportion of total capital expenditure

Rs bn  WSS spends will dominate urban infra spending

 Delhi Metro Phase III & IV, Colaba Bandra SEEPZ,

© 2016 CRISIL Ltd. All rights reserved.

1,798  Smart city programme to also increase

2.0 x 58%  Infrastructure development is the main agenda of

 About 44% of smart city investment is expected to

WSS MRTS Smart Cities Others

Source: CRISIL Research

Swachh Bharat Oct-14 To achieve universal sanitation coverage.

© 2016 CRISIL Ltd. All rights reserved.

Smart city Jun-15 To develop 100 smart cities in next 5 years.

600 Smart City

© 2016 CRISIL Ltd. All rights reserved.

Construction investments over next 2 years

Note: The color of the bubble indicates pace of execution

 Progress of AMRUT is slow- only 20% expended in 2 years

© 2016 CRISIL Ltd. All rights reserved.

Note: Revenues based on data of 65 companies on a standalone basis.

© 2016 CRISIL Ltd. All rights reserved.

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18P 2018-19P

Operating margins Net margins

Note: Standalone financials for 65 companies

 Operating margins improved marginally in 2016-17; gradual improvement in 2017-18 and

© 2016 CRISIL Ltd. All rights reserved.

 Profitability under pressure