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IDFC Infra Pulse - Momentum in order awards continues

Our monthly report on the infrastructure sector comprises of order inflow analysis, new project announcements, perspective on road sector, major port volume, air traffic movement, power generation trend and events/ news in the sector. The objective is to provide timely updates and a detailed perspective on these issues and other sector dynamics.

Construction contact awards remained strong and consistently crossed Rs300bn mark over last 8 months (Nov 2017-June 2018). Contract awards grew 288% yoy to Rs361bn in June 2018. Tender announcements were weak and fell 22.2% yoy to Rs552bn. As on 20 July 2018, National Highway Authority of India’s (NHAI) bid pipeline remained strong at 2,959km with projects worth Rs529bn. Government’s recent move to increase permissible axle load for existing fleet of commercial vehicles could be a negative for toll operators, in our view. However, Government intends to lower freight rate through this measure, which would improve the share of road freight in the medium term and thereby enhance volumes. Traffic at major ports saw a yoy recovery and grew 7.1% to 57.8mt, largely due to 31.9%/25.6% yoy growth in iron ore/coal cargo volumes, respectively. Growth trajectory in coal cargo volumes continued for the tenth consecutive month in June 2018 (13.1mt, +25.6%yoy) on higher demand. Continued buoyancy in EXIM trade led to 7.3% yoy growth in container traffic in June 2018 to 807K TEUs. We believe construction companies focused on roads and urban infrastructure will benefit the most from improvement in contract awards and a strong bid pipeline. Adani Ports will be a key beneficiary of the strong rebound in container volumes and improved coal cargo volumes, given the company’s diversified presence in cargo.

• Award of construction contracts remains strong: Construction contract awards at Rs361bn were up 288% yoy in June 2018 (Rs3.8trn, +59.3% yoy on trailing 12 months (TTM) basis). On trailing six month basis, awards saw robust 124% yoy growth to Rs2.5trn. The strong order award momentum from the building segment sustained in June 2018, which registered 5.3x yoy growth to Rs160bn. Tender announcements fell 22.2% yoy to Rs552bn on a high base of last year (LY) in June 2018; the same grew 8.7% yoy to Rs4.6trn on a trailing six-month basis. Uttar Pradesh and Madhya Pradesh accounted for 24.5% and 15.1% of the total tenders announced in June 2018, respectively.
• Highway sector posted strong performance in FY18; bid pipeline strong: A total of 9,829km (+19.4% yoy; 27km/day) and 17,055km (+4.8% yoy) of highway projects were constructed and awarded in FY18, respectively. Of this, NHAI awarded 7,396km (+70.6% yoy) and constructed 4,000km (+52.2% yoy; 11km/day) of the projects. While NHAI’s bid pipeline remains strong at 2,959km (Rs529bn), MORTH (including NHAI’s share) targets to award 20,000 km of projects in FY19. UPEIDA has declared the lowest bidder for 8 packages of Purvanchal Expressway of which, Gayatri Projects, GR Infra and PNC Infra emerged the winners with the highest number of wins (2 packages each). We believe government’s recent move to increase the permissible axle load for existing fleet could be a negative for toll operators. However, if this measure leads to lower road freight rates, which is the intention of the government, then it could improve the share of road freight in the medium term and also enhance volumes.
• Major ports witnessed recovery in cargo volumes: In June 2018, cargo volumes at major ports grew 7.1% yoy to 57.8mt (174mt, +3.9% yoy YTDFY19). Higher demand led to 25.6% yoy growth in coal cargo volumes to 13.1mt. Container volumes grew 7.3% yoy to 807K TEUs (2,404K TEUs YTDFY19, +6.4% yoy), led by a pick-up in EXIM trade. JNPT reported 3.6% yoy growth in container volumes to 402K TEUs and Chennai reported 5.1% yoy growth to 144K TEUs. In Q1FY19E, we expect container volumes (including minor ports) to post 9.1% yoy growth (+12.7% yoy in FY18) on the west coast.  
• Other sectors: Domestic air passenger traffic improved 18.4% yoy to 11.3m pax in June 2018 (+20.4% yoy YTDFY19). While conventional power generation grew 4.7% yoy in June 2018, overall power generation (including renewables) is expected to register 6.6% yoy growth during the month.

Key sector news

o  Cabinet clears Rs 136.5bn package for irrigation projects in Maharashtra.

o  MORTH has identified 5 greenfield road connectivity projects for efficient freight movement.

o  Karnataka budget proposed 6 interconnected elevated corridors worth Rs158.3bn for Bengaluru.