Execution, capital issues persist in infra sector: BofA-ML

Noting that infrastructure is witnessing a gradual revival, a BofA-ML report said the sector is still faced with challenges in terms of working capital requirements and execution issues.
A Bank of America Merrill Lynch (BofA-ML) report today said growth in orders for companies in the infrastructure sector is expected to revive in the next fiscal.
Lower order inflow growth during 2011-12 to 2013-14 as well as the ongoing execution challenges on-the-ground were key issues impacting growth for infra projects, the report said.
"But we note that sales growth of infra companies and government capex are witnessing gradual signs of a revival as can be seen from growth for construction companies in power transmission and distribution, construction and mining equipment and road segments.

"We note that execution challenges as well as working capital cycle issues continue to persist," it added.
BofA-ML said in its report that the order flow growth for the infra sector is likely to revive in 2016-17.

"Based on our bottom-up analysis, we expect order flow growth for the sector at 17-20 per cent yoy. As per our analysis, roads, railways (civil construction), metro rail, power T&D, the Dedicated Freight Corridor and renewable energy are the key business segments which are likely to drive order flow growth in 2016-17," it added.
However the report said macro trends suggest a weak business momentum.

"We note that most macro indicators such as growth in freight traffic through rail, road and ports as well as energy consumption through power supply, coal, LNG and gasoline are still witnessing weak business momentum after a spurt in 2014-15 post-elections," it said.
The report, to corroborate its hypothesis, analysed the quarterly revenue trends for the past 12 quarters for 51 industrial and infra companies having a presence across 20 business verticals.
"Our analysis suggests that growth for most short-cycle based industrial products (ex-rail wagons & industrial cables) has been decelerating, which corroborates our view that a recovery in industrial capex is likely to be back-ended versus infra capex," it added.

It, however, noted that the growth for product exports is robust, mainly led by the rupee depreciation.
The BofA-ML analysis suggests that demand for consumption products such as home cables, lights and fans and scooters are showing signs of fatigue after an acceleration, post elections.
"While growth for air-conditioners has been robust for the past few quarters, it was impacted in Q1 of 2015-16 led by unseasonal rains. Growth in passenger vehicles and paints has been moderate, but is registering a sustained recovery," it added.