Despite high interest rates and land acquisition woes, construction activities in the quarter ended June grew at a 19-quarter high of 10.9 per cent, against 3.5 per cent in the year-ago period.
Players and analysts attributed the rise in construction to execution of road projects awarded by the National Highways Authority of India (NHAI) last year. Analysts said real estate developers focused on completing existing projects; they did not line up for new ones.
A low base effect was also cited as one of the reasons for the growth in construction.
Analysts said any positive effect of the delayed monsoon this year on construction activities would not be seen before the next quarter.
Growth in construction, along with that in financial services, helped raise growth in gross domestic product (GDP) to 5.5 per cent for the quarter ended June, against market expectations of sub-5.3 per cent growth (growth in the quarter ended March was 5.3 per cent). With the services sector slowing below estimates, and low activity in the manufacturing segment, it was construction that raised GDP growth to levels more than expected.
In 2011-12, NHAI awarded a record number of contracts, construction for which began this year, analysts said. In 2011-12, NHAI awarded 7,957 km of road projects, the highest ever. Of the 51 projects awarded by NHAI, 31 were at a premium. “Since we saw a huge number of project sanctions last year, those would have gone into construction this year, boosting overall construction activity in the country, as there is a lag effect between the sanctioning and actual construction,” said Vishwas Udgirkar, senior director, Deloitte.
The nine per cent increase in government expenditure in the quarter ended June, against about four per cent in the year-ago period, also aided the rise, said Madan Sabnavis, chief economist, CARE Ratings. “The majority of the government’s expenditure goes into infrastructure projects,” he added.
In the first four months of 2012-13, NHAI could only award contracts for constructing 4.25 km of roads a day, lower than the government’s target of 20 km a day.
In recent months, NHAI failed to receive any bid for six projects. In the last financial year, it saw huge demand for its projects. Analysts said unlike this year, NHAI had lucrative projects on offer last year, and these promised good returns.
The real estate sector may have seen some improvement in construction, as developers were now concentrating primarily on execution, rather than new project launches, analysts said.
However, it was a mixed bag for construction companies. “The 14 construction companies covered by us recorded an average of 18 per cent revenue growth in the first quarter, against 14 per cent last year,” said Nitin Arora, infrastructure analyst, Angel Broking. However, he added the growth rally was primarily led by only a few companies—-IL&FS, IRB and L&T—-which performed better than expected.d.
The high interest rates have had a bearing on construction activity. “Raising funds for projects is another hurdle, especially for road projects at the moment,” he said, adding construction companies had piled huge debts.
The housing, retail, healthcare, roads, power and transportation segments were expected to record 10-15 per cent growth in the first half of the financial year, said V Suresh, chief executive, Hirco.
Cement output in the quarter ended June rose 9.9 per cent, against just 0.1 per cent in the corresponding quarter last year.
DLF, India’s largest real estate firm by market capitalisation, delivered 2.05 million sq ft during the quarter, against 1.9 million sq ft in the corresponding period last year. “Yes, overall construction activity has surely picked up in the realty sector compared to last year,” said Mudassir Zaidi, regional director, Knight Frank.
Unitech Managing Director Ajay Chandra said the company’s focus continued to be on ramping up construction. For this, Unitech was taking several measures, he added.
The Noida Extension region (where projects were stuck for the past one year) secured the clearance to continue construction activity and developers are expected to begin work on stalled projects in about a week. “This year will be great for construction, as the Noida Extension area will see a lot of activity,” said R K Arora, whose four projects in the region were stalled due to the Supreme Court’s order that the masterplan for the area be cleared by the National Capital Region Planning Board.
Sanjay Sharma, managing director, Qubrex, however, said the pick-up in construction wasn’t dramatic enough to account for the 10.9 per cent growth. “I would say it is more of a low base effect,” he said.