Why Is the Infrastructure Sector Performing Poorly?

Reasons Behind This Movement:

1. Major Business with Handful Players

Top 7 companies got 40% of Rs. 50,000 Crore worth of the fresh contract, awarded by the National Highway Authority of India (NHAI) in  March, according to Bloomberg. This will pose increasing equity funding risk.

Brokerages like Nomura are optimistic though, as they’re expecting the momentum of road infrastructure in India to continue after the usual pause in the first half.

2. Risk of Project Financing

Working capital and project financing needs of large companies are largely met by state-run banks that are reeling under mounting bad loans.

This has reduced the appetite of banks towards giving out loans to the infra sector and rising interest rates are also impacting the outlook of these companies, thus increasing the risk involved in investing with them.

3.  Rate of Awarding Projects

According to IIFL Private Wealth, a total of 892 Kilometres were awarded during April to June. Though the Ministry of Road Transport and Highways missed the target earlier, 20,000 kilometers in FY ’19 seems to be realistic.

With the success of toll-operate-transfer model and higher budgetary allocations, the ministry is in a much better position to acquire the required land and award large projects.

4. Faster Construction Pace

The pace of road construction has improved over the past three years. The expected pace of road construction is expected to reach 32 km a day in March 2020 from 27 km a day.

5. The Boost

Government’s first highway monetization programme through the toll-operate-and-transfer (ToT) model fetched the highest bid of Rs 9,700 crore against the estimated Rs 6,300 crore, according to IIFL.

While the government initially expected to raise an estimated Rs 34,000 crore in four years through March 2022, the actual mop-up could be higher, as said by IIFL.

This would ease pressure on the NHAI’s balance sheet and allow smooth execution.