Special Feature on Infrastructure Sector

Key Sector For Economic Development

From housing provision to water and sanitation services and to digital and transportation needs, there is an increasing demand for superior delivery across the spectrum of entire infrastructure. Shreya Chaware explains how infrastructure sector is poised for growth bearing a bunch of opportunities in coming future.  

One of the major drivers of the Indian economy, without a shade of doubt, is the infrastructure sector. It’s a sector that is highly responsible for boosting India’s overall development, matching the mission and vision of the government to create world-class facilities across the country. This includes power generation and distribution, bridges, dams, roads and urban infrastructure development. In fact, infrastructure development is the need of the hour for India to achieve its GDP target of USD 5 trillion by 2025.

While the government has spent heavily through budgetary allocations over the past few years, challenges on the fiscal front have been a constraint on all-out infrastructure capital expansion-driven stimulus. The centre has launched an ambitious plan to spend ₹ 111 trillion through the National Infrastructure Pipeline (NIP). It has drafted other initiatives such as ‘Make in India’ and the production-linked incentives (PLI) scheme to enhance India’s competitiveness globally, which also calls for an upgrade in infrastructure.

Market Size

According to the Department for Promotion of Industry and Internal Trade (DPIIT), foreign direct investments (FDIs) in the construction development sector that includes townships, housing, built-up infrastructure, construction development projects and construction activities stood at USD 26.14 billion and USD 25.38 billion, respectively, between April 2000 and June 2021.

In FY21, infrastructure activities accounted for 13 per cent share of the total FDI inflows of USD 81.72 billion. In the Union Budget 2021, the government has given a massive push to the infrastructure sector through an allocation of ₹ 2,33,083 crore (USD 32.02 billion) to enhance transport infrastructure. The government has expanded the National Infrastructure Pipeline (NIP) to 7,400 projects. Around 217 projects valued at ₹ 1.10 lakh crore (USD 15.09 billion) will be completed as of 2020. Through the NIP, the government has invested USD 1.4 trillion in infrastructure development as of July 2021.

Sector Performance

The infrastructure sector reported 14.9 per cent year-on-year growth in revenue – up 4.7 per cent on a quarter-on-quarter basis – on account of pick up in execution although order inflows remained muted during the first nine months in FY22. Even with healthy revenue growth, OPM contracted 281 bps on a YoY basis and there was an 11 per cent decline in YoY net earnings. On a YoY basis, the logistics sector registered 6.5 per cent growth in revenue along with 28 bps improvement in OPM and 29 per cent rise in net profit. Q3FY22 witnessed better execution for the infrastructure sector, leading to higher revenue, better operating profit and PAT.

Q4FY22 is expected to be better owing to faster execution of projects, lockdown relaxations, better availability of workforce and an emphasis on achieving the year-end target. The production of eight infrastructure sectors improved 5.8 per cent in the previous four months on improved output of coal, natural gas, refinery products and cement industries. The production of core sectors had declined by 3.3 per cent in February 2021 whereas in January 2022 it grew by 4 per cent. The growth rate of the eight infrastructure sectors – coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity – stood at 11 per cent during the April – February period of FY22 versus a negative growth of 8.1 per cent during the same period in FY21. Core sectors take up 40.27 per cent weightage in the Index of Industrial Production (IIP).

Booster Factors

With the aim to provide a blueprint to advance the Indian economy for the next 25 years under the aegis of PM Gati Shakti i.e. a transformative approach for economic growth and sustainable development and to make possible GDP of USD 5 trillion, Union Budget 2022 recognises infrastructure as a key sector. The budget has focused on high impact areas and paced up the capital expenditure cycle by providing for sharp rise in capital expansion outlay by 35.4 per cent from ₹ 5.54 lakh crore to ₹ 7.50 lakh crore in FY 2022-23, predicting a strong drive for infrastructure spends.

Meanwhile, the public-private partnership (PPP) model continues to remain at the core of the infrastructure policy for successful implementation of NIP and the National Monetisation Pipeline (NMP). The proposed issuance of sovereign green bonds for the purpose of deploying resources for green infrastructure also seeks to extract the hidden and unexplored potential of the green bond market in India. The budget has also proposed the use of surety bonds from insurance companies as substitute for bank guarantees in government procurements. Thus, it would be interesting to observe how the major announcements play out.

Infrastructure and Equity Markets

On an YTD basis, eight out of 10 top infrastructure stocks according to market capitalisation have so far dipped in 2022. KEC International declined the most by 19.61 per cent followed by GMR Infrastructure and Sterling and Wilson Renewable Energy contracting 14.97 per cent and 13.12 per cent, respectively.

However, zooming up by 15.47 per cent was IRB Infrastructure Developers. In its revenue update, IRB Infrastructure Developers reported total toll collection through its subsidiaries at ₹ 277.47 crore compared to ₹ 236.47 crore for February 2022, registering growth of 17.34 per cent on a YoY basis. IRB MP Expressway, the company’s wholly-owned subsidiary, recorded the highest toll collection of ₹ 107.76 crore followed by IRB Ahmedabad Vadodara Super Express Tollway Private Limited’s collection of ₹ 46.56 crore and joint venture CG Tollway Limited’s collection of ₹ 23.86 crore.

On a one-year basis, eight out of 10 stocks have yielded positive returns, rallying up to 300 per cent. The stock taking top position in the list was Man Infra Construction, soaring 302.22 per cent followed by IRB Infrastructure Developers and GMR Infrastructure gaining 130.39 per cent and 55.6 per cent, respectively. Man Infra Construction shares are known to be one of the multibagger stocks. It is one of those stocks that delivered a strong return to its shareholders despite the global economy experiencing the brunt of the pandemic. However, in 2022, the stock has gained only 6.53 per cent on an YTD basis.

Outlook

The country’s manufacturing competitiveness also depends on infrastructure development as it boosts the short and long-term potential rate of GDP growth, while at the same time it helps absorb labour, thereby giving a thrust to employment and income generation in the economy, leading to an improvement in domestic demand. Reforms on the supply side along with investment in infrastructure are crucial in achieving this target and enhancing India’s competitiveness in global economy scenario. Better infrastructure capacities also create efficiency gains through advanced logistics and networks, which can enhance the economy’s competitiveness.

This will aid the virtuous cycle of higher investments, growth and employment generation, which is much needed after the pandemic-induced hiccup. According to previous data, spending on transport, energy and water and irrigation has contributed to more than 80 per cent of the infrastructure spending in the country. While these remain the key drivers, future spending must consider the changing demographics and environment of the country. From housing provision to water and sanitation services and to digital and transportation needs, there is an increasing demand for superior delivery across the spectrum of entire infrastructure.

This will ensure economic growth and improve ease of living as well as competitiveness across various sectors. The infrastructure sector has become the biggest focus area for the Government of India. India plans to spend USD 1.4 trillion on infrastructure during 2019-23 in order to have sustainable development of the country. India and Japan have collaborated for infrastructure development in India’s northeast states and are also setting up an India-Japan Coordination Forum for Development of Northeast to undertake strategic infrastructure projects for the region. Put together, such initiatives certainly bode well for the growth of the infrastructure sector and in turn the economic growth of the nation.