1/11/2018 Construction sector: FDI cannot be a game changer unless execution hurdles ease - Livemint
Home » Money
Construction sector: FDI cannot be a game changer unless execution
hurdles ease
Unless pro t growth improves by leaps and bounds by better tolling rates and traf c or improved margins in the construction sector, news of
allowing 100% FDI in the sector, will not be a game changer
Last Published: Thu, Jan 11 2018. 08 15 AM IST
Vatsala Kamat
Enter email for newsletter Sign Up
A lot depends on the government’s ability to access funds, given its higher degree of involvement in the initial stages of road construction. Graphic: Subrata Jana/Mint
On Wednesday, the government decision to allow 100% foreign direct investment (FDI) in the construction sector fired up a few
stocks with higher exposure to the roads business. Coming close on the heels of the ambitious target to lay out 83,000km of roads
(including Bharatmala and other plans) by the ministry of road transport and highways, the hope is that the FDI nod would help lure
global funds and bidders into the grand plan.
Although the intent is commendable, there is much to be sorted out beneath the surface in the sector. Demonetisation and the goods
and services tax may have slowed the pace of execution in 2017, but the average length of roads constructed over the last five years is
far below targets.
An analysis by Icra Ltd says that cumulative awards and execution for the last eight years, by the ministry of road transport and
highways, was 61,977km and 43,307km, respectively. Going by this measure, 83,000km in the next four years is a tall task.
And this is not without reason. The funding needs are huge. The ministry has started monetizing existing toll roads by awarding them
to private firms. Called the TOT (toll-operate-transfer) model, this is expected to bring in part of the funds needed for road
Get Notifications
development. But critics say that tough bidding norms could slow the pace of monetizing as it would restrict bidders.
According to Prabhudas Lilladher Pvt. Ltd, “While cess was the main source of funds for National Highways Authority of India
(NHAI), the funding model is undergoing a change, with the institution supporting project execution through external borrowings.”
http://www.livemint.com/Money/ACUvrWqJojiiVaVzYTW4NL/Construction-sector-FDI-cannot-be-a-game-changer-unless-exe.html 1/3
1/11/2018 Construction sector: FDI cannot be a game changer unless execution hurdles ease - Livemint
Hotel Royal Cliff
Kanpur
From Rs 6,688 Book now
But balance sheets of firms with good track record are flush with orders up to twice their annual revenue. Hence, they may have little
appetite for more. The opportunity for FDI in the sector too is nothing great to write home about as it has already been allowed on a
case-to-case basis with approvals.
Meanwhile, land acquisition in huge parcels may slow down the process of awarding itself, given that the new contracting model is to
ensure that most of the land is acquired by the government before contracts are awarded.
“Land acquisition cost as a percentage of total project cost for the NHAI projects was at 9% in 2009, increased to 16% in 2012 and; for
some of the recent expressway projects, the land acquisition cost is estimated to be in the range of 37-55% of total project cost,” says
the Icra report.
Besides, a lot depends on the government’s ability to access funds, given its higher degree of involvement in the initial stages of road
construction.
That said, road construction companies such as Ashoka Buildcon Ltd, Dilip Buildcon Ltd, Simplex Infrastructures Ltd, IRB
Infrastructures Ltd and Sadbhav Engineering Ltd are the front runners that have done well in terms of revenue and profit ramp-up on
the back of a robust order book and efficient execution. Yet, shares of these companies have already run up, returning between 35%
and 60% in the last six months, thanks to the strong push by the government to the sector.
Hotel Royal Cliff
Kanpur
From Rs 6,688 Book now
Valuations are rich at nearly 18-20 times the estimated earnings for fiscal year 2020. Unless profit growth improves by leaps and
bounds by better tolling rates and traffic or improved margins in the construction segment, mere news of allowing 100% FDI in the
sector will not be a game changer.
First Published: Thu, Jan 11 2018. 08 15 AM IST
TOPICS: CONSTRUCTION 100% FDI IN CONSTRUCTION FDI IN CONSTRUCTION ROADS BUSINESS ROADS PROJECTS
You May Like Sponsored Links by Taboola
Photo Gallery: the World's 20 Richest People
Work + Money
Get Notifications
These Dating Sites Have The Hottest Girls - See Now!
Online Dating Services | Search Links
Financial Risk Management course from IIM Kashipur
http://www.livemint.com/Money/ACUvrWqJojiiVaVzYTW4NL/Construction-sector-FDI-cannot-be-a-game-changer-unless-exe.html 2/3
1/11/2018 Construction sector: FDI cannot be a game changer unless execution hurdles ease - Livemint
IIM Kashipur
Stock Clearance Sale. Upto 80% Off on Branded Luxury Watches
Royal Watches Club
Rahul Gandhi slams 'Arun Jaitley'
Mirror Now
4000 Magazines At ₹999 Only - Annual Subscription
Magzter
EDITOR'S PICKS »
Satyam case: Sebi bans PwC entities from auditing listed rms for two
years
Union Budget to tackle rural distress, job creation, investments
Govt liberalizes FDI regime, nod for 49% foreign investment in Air India
Home Lounge Specials
Companies Multimedia Technology
Opinion Money Mint on Sunday
Industry Science Contact Us
Politics Education About Us
Consumer Sports Advertising
Sitemap Brand Stories
DesiMartini Livehindustan
Mint Apps Subscribe
Shine
Hindustantimes
Get Notifications
Syndication
Subscribe to our Newsletter
Enter your email Subscribe
http://www.livemint.com/Money/ACUvrWqJojiiVaVzYTW4NL/Construction-sector-FDI-cannot-be-a-game-changer-unless-exe.html 3/3
