Slowdown seen in infra sector orders

Reduced spending by govts, high interest costs for firms blamed.

Trouble in the infrastructure sector has started showing, with order inflows taking a hit this quarter. The construction industry is seeing a slowdown in not only power and roads but also irrigation and water supply, forcing them to look for more building contracts.

“Orders from state governments have reduced in the last few quarters, as there has been a deficit in spending. Many EPC (engineering, procurement, construction) orders from the hydro sectors also got delayed because of projects being stuck due to environmental clearances,” said Abhinav Bhandari, research analyst at Elara Capital.

Balarami Reddy, finance director of IVRCL, said orders in the irrigation sector from Andhra Pradesh government, currently embroiled in a state division controversy, had delayed many projects. “But there have been steady orders from other states. However, in roads and power sectors, the number of orders have gone down drastically,” he said.

While private sector orders have reduced due to financing issues in line with higher interest rates, the public sector is facing a different problem. “With the number of scams breaking out, nothing is moving in the government. That has reduced the number of orders placed,” said an infrastructure consultant.

S N Subrahmanyan, senior executive vice-president of construction at Larsen & Toubro had also said decision making had been slow on the government side, at the company's results’ press conference. L&T, an infrastructure major, had reported near-flat order inflow growth, of around four per cent, over the first quarter last year. The company, analysts say, did better than many others as they have a good mix of orders across sectors.

In addition to looking for more international orders, L&T looking at construction orders from the buildings sector, which many claim is a sector unaffected by the slowdown. “We are optimistic on the infrastructure side in the information technology sector, as the orders we have received will keep us going for the next few years. There is increased thrust on the health sector and, hence, buildings in ESI hospitals, etc,” said Subrahmanyan.

Virendra Mhaiskar, chairman of IRB Infra, said 2,000 km of projects had already been awarded by the National Highways Authority of India (NHAI). “This should result in Rs 20,000 crore worth of contracts in EPC,” he said. But that would happen only after the companies manage to raise debt for projects. “There are questions on whether some of these projects will be financed, because they have been bid aggressively,” Bhandari said.

On the other hand, as the overall EPC order pie has reduced, competition has increased. “There have been some international companies which have huge staff resources and have seen a reduction in orders abroad, who have now come into the market. There are always contractors who are more enthusiastic and a little more aggressive,” said Subrahmanyan.

Bhandari said the aggressive bidding can result in reduced margins in the coming quarters, because of the under-cutting. “This may get mitigated if commodity prices go down in the coming months. But by and large, margins will go down,” he said.