The revival of irrigation sector backed by adequate funding support may add to the order inflow of construction companies, a report said. The construction sector's gross value added (GVA) witnessed a YoY growth of 2.7% during Q3 FY2017.
A major push from the Government for roads and urban infrastructure segments has helped construction companies improve their order book positions, ICRA said in its report here.
The revival of irrigation sector backed by adequate funding support is a credit positive for construction companies, ICRA said.
The irrigation sector has witnessed good traction over the last one year and is likely to see improved execution with increased funding support from the State and the Central Governments budgetary allocation and the Long Term Irrigation Fund (LTIF) of NABARD, the corpus of which was increased to Rs 40,000 crore in Union Budget 2017-18.
The focus is currently on the 99 projects selected under Accelerated Irrigation Benefit Programme (AIBP) which are targeted for completion in stages by Dec-2019, the rating agency report said.
Further, states like Telangana have significantly increased allocation towards the irrigation sector to fast track the development of irrigation projects, it said.
Some very large irrigation projects such as Polavaram, Pranahitha and Kaleshwaram are under execution in Telangana and Andhra Pradesh which have added to the order inflow for construction companies operating in this space, it said.
"While funding issues for these projects are largely addressed with fund availability from LTIF, other execution impediments could still delay completion of many projects.
"Nevertheless, the strong focus of both the State and the Central Governments towards irrigation projects is a positive step towards their resolution, which has been pending for a long time," ICRA Vice-President and Sector-Head, Corporate Ratings Shubham Jain said.
"This will help in the resolution of stuck orders in the order book of many construction companies and help them reduce their working capital requirement," he said.
ICRA said that the pace of recovery in the overall construction sector is likely to be modest and will be linked to the on the ground impact of the policy measures including the release of 75 per cent arbitral award as well as the availability of funds for project development.
In the short term, demonetisation would have a negative impact on construction activities, as indicated by the contraction in cement production by 8.7 per cent in December-2016 and 13.3 per cent in January 2017; however, the impact is expected to subside and the situation is expected to normalise from Q1-FY2018 onwards. However, on the positive side, with the Government's emphasis on infrastructure projects, public sector investments are expected to increase in the medium to long term - though this will be constrained by fiscal deficit targets and other increased expenditures on account of pay revisions, among others. Hence, the revival of public private partnership is crucial for improving the pace of infrastructure development, it said.