Higher infrastructure spends may spur private capex by FY18

In a first of its kind, Union Finance Minister Arun Jaitley bunched up all avenues of transportation under one roof in Budget 2017. Consequently, the allocation towards the transportation sector rose by 10 -11 per cent to Rs 2,41,387 crore for FY17-18. The noteworthy areas of spending were roadways, railways and rural electrification. With these allocations meeting the expectations of India Inc and consequently the stock market, investors witnessed noteworthy spike in stocks of L&T, BHEL, KEC International, Kalpataru Power Transmission, IRB Infrastructure, Sadbhav Engineering (up 2–6 per cent on Wednesday), even stocks of Siemens and ABB are likely to benefit from the rural electrification and higher railways spending saw 1–2 per cent surge in their prices. Metro rail emphasis and allocation holds promises for coach manufacturers such as BEML, while L&T and JKumar Infrastructure too will stand to gain.

However, two questions which assume high importance is how soon would these increased allocations help revive the languishing private sector capital expenditure (capex) and whether these spends will reflect in the financials of listed infrastructure players. R Shankar Raman, Group CFO, L&T, says that the government has realised that it is running out of time and hence the higher allocation towards infrastructure sector. “Higher allocation to infrastructure sector would help steel and cement companies utilise their unused capacities and we could see the private sector–public sector capex lag shrink. If we do the spending in the right direction, the private capex should kick in by FY18-19. By September 2017 infrastructure companies with relatively strong balance sheets should start reporting decent revenue growth," he explains.

Nilesh Shah, MD & CEO, Envision Capital agrees with Shankar Raman. “FY18 is likely to be the first big year of earnings for the infrastructure players as they now have more work on hand, operating leverage is kicking in for them, the cost of finance is reducing and lastly learning from the past will prevent them from being overaggressive on order bids. What the stock market is looking for is the delta in earnings and infrastructure companies are beginning to gain momentum on this front”, he affirms.

Most experts also echo similar views. But, they also point out that project execution where the government is currently missing its targets will assume higher importance from now onwards. Experts unanimously agree that any delay in rolling out with these allocations could push private capex pick up indefinitely.

“While the intent of the finance minister is strong, implementation is going to be the challenge,” Shankar Raman points out. Satish Parakh, MD, Ashoka Buildcon adds that with the lack of order inflows–the key issue for the roadways sector now being addressed, the focus now needs to be on execution. “Execution hasn’t picked up in the recent times. I feel more allocation into the sector should improve execution,” he says. Rohan Suryavanshi, Director - Strategy and Planning, Dilip Buildcon adds that dispute resolution mechanism holds more positives. "It will increase confidence and revenue visibility for companies as well as investors and holds positive for lenders too," he opines.  

Nitin Bhasin, head of research, Ambit Capital who closely tracks infrastructure companies suggests that there are more issues which require attention to improve project execution. “Although the base has moved very high with more allocation towards infrastructure sector, I think it would be business as usual for the companies as certain critical process issues remain to be solved for the sector. Project size is shrinking, clearances are still taking time to come through, bank funding towards road projects remain challenging and competition is only increasing,” he asserts.

On the whole, the street is confident that higher budgetary allocation towards infrastructure sector is a step in the right direction towards reviving private capex and improving the financial performance of the companies, market participants will closely watch how well the government walks the talk on infrastructure development.