FREE

IDFC Infra Pulse: Robust recovery in construction contract awards

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 contract awards, which remained weak over last six months, have seen a strong rebound in Nov and Dec 2017, registering 175% yoy growth to Rs307bn. Tender announcements too were strong at 25%yoy growth to Rs893bn. While highway project awards fell 48.7% yoy to 2,917km in 8mFY18, completion of projects remained strong posting 23% yoy growth to 4,944km (20km/day, 8mFY18). While project awards from NHAI were weak at ~2,000km (-27.8% yoy, 9mFY18), bid pipeline currently is the strongest we have seen in last 30 months at 3,688km (Rs758bn). Container volumes at major ports grew 18% yoy to 812K TEUs, highest monthly volumes in last seven years, led by a pick-up in EXIM trade. Total traffic at major ports grew 6.2% yoy to 59.7mt, as the ban on pet coke (now lifted) led to higher volumes in coal cargo imports at 14.1mt, up 27.2% yoy. We expect construction companies focussed on the roads and urban infrastructure to benefit the most from the improved contract awards and strong bid pipeline. Further, we see Adani Ports as a key beneficiary of a strong rebound in EXIM trade and container volumes and superior coal cargo volumes, given its diversified cargo presence.

• Construction contract awards improve; tender announcements strong: Awards of construction contracts surged in Nov and Dec 2017 at 175% yoy to Rs307bn (Rs2.4trn, -5% yoy TTM). On a trailing-six-month basis, awards improved by 2.6% yoy to Rs1.3trn. Tender announcements too were strong, having registered 25% yoy growth to Rs893bn in Dec 2017, dominated by tenders from roads (57% share), followed by the water (12% share) sector. On a trailing-six-month basis, tenders announced grew 17% yoy to Rs4.5trn. Maharashtra and Andhra Pradesh accounted for 26.6% and 12.7% of the total tender announcements in Dec 2017, respectively.
• Highway project award remains weak but bid pipeline robust: Awards of highway projects remained weak (fell 48.7% yoy to 2,917km in 8mFY18), but completion of projects remained strong and grew 23% yoy to 4,944km (20km/day, 8mFY18). Although project awards from NHAI were weak at ~2,000km (-27.8% yoy, 9mFY18), NHAI's award target for FY18 remains ambitious at ~10,000km. NHAI bid pipeline was the strongest in last 30 months at 3,688km (Rs758bn). NHAI has spent ~Rs560bn upto Dec 2017 and its FY18 expenditure target stands at ~Rs900bn. We expect traffic on key stretches to have grown by 7% yoy in Q3FY18, led by recovery in traffic growth post the slowdown in Q2FY17 due to GST implementation.
• Major ports witness strongest container volume growth: Container volumes grew the strongest at 17.7% yoy to 812K TEUs (highest monthly volumes in seven years at major ports), led by a pick up in EXIM trade. YTDFY18, container traffic volumes grew 7.6% yoy to 6,798K TEUs with volumes at JNPT rising 6.2% yoy to 3,592K TEUs and at Chennai by 4.1% yoy to 1,169K TEUs. Total traffic at major ports grew 6.2% yoy to 59.7mt (+5.3%yoy to 499.4mt YTDFY18). The ban on pet coke in three states (now lifted) led to a rise in coal cargo imports registering volume growth of 27.2% yoy to 14.1mt. Thermal coal cargo volumes grew 24.4% yoy to 9.2mt in Oct 2017 (66.7mt, -5.5% yoy YTDFY18) led by higher demand.
• Other sectors: Domestic air passenger traffic grew 17.8% yoy to 11.2mn pax in Dec 2017 (+17.2%yoy YTDFY18). Conventional power generation grew 1.4%/3.8%yoy in and overall power generation (including renewables) grew 3%/5% yoy in Dec17/YTDFY18, respectively.
• Key sector news

o   Central government plans to build ring roads worth Rs363bn

o   World Bank to provide loan worth USD318mn for Tamil Nadu irrigation scheme

o   EIB and AIIB to fund EUR800m for Bangalore Metro rail Phase II