>CONSTRUCTION SECTOR: Implementation of the Lokpal mechanism across states could make things even worse for the sector

Of all the current challenges faced by the construction sector, the  policy paralysis at the Centre seems to us to be the biggest concern.  We met the managements of some companies to seek any signs of  change, but come away largely disappointed. Implementation of the  Lokpal mechanism across states could make things even worse for the  sector as the fear psychosis may extend to state department officials.  The role of interest rate reversal as a catalyst may be muted in the  context of a sharper slowdown – any significant improvement in  fortunes may be at least 2 quarters away.



■ Government approvals slow; turnaround at least 2 quarters away
Our interactions with the managements of some construction companies in  Hyderabad indicate that there is no discernable pick up in the pace of  government approvals. Delays in documentation have impacted last‐mile  approval of several projects. Collections from irrigation projects executed in the  state of Andhra Pradesh have normalized, though companies continue to be  cautious and are going slow on execution. Receivables from central authorities  in some projects have been delayed due to setting in of extreme fear psychosis 

amongst government officials. We see a large risk that implementation of the  Lokpal mechanism across states may extend the paralysis to state machinery as  well and adversely impact the construction industry, which has large exposure  to orders from state government departments.

■ Bidding for NHAI projects is less intense, but IRRs still uneconomic
Managements have echoed the common view that bidding for NHAI projects have become less intense than the situation six months ago. However,  companies that have won projects recently have lowered their threshold IRR  expectations to 16% and below. We believe actual IRR may end up being lower,  if traffic disappoints. Companies that win projects are, thus, accruing negative  NPV projects; the poor relative stock performance of such companies reflects  the market’s concerns. Although bids aggregating to c950km were opened in  Nov11, it does not necessarily indicate a pick‐up in award activity since bid  awards are being bunched up by the NHAI – the next bunch of bids being  invited in Jan12. Large companies have shown interest in bidding for small ticket  OMT projects to get a sense of traffic patterns. The discord between the  NHAI and the Planning Commission seems to have increased, resulting in  resignation of several top officials of the NHAI. This is likely to further hamper  the organization’s working.



■ Interest rate reversal may not be enough of a catalyst
Interest rate reversal is a much‐anticipated catalyst for the sector. However, its  impact may not be significant in the context of overall slowdown in the sector.  The sector is not facing an acute funding crunch—as in 2008—hence, we  believe the competitive intensity continues to be high at the current stage. NCC  (NJCC IN, Buy) is our preferred sector pick as a potential stake sale in  development assets may drive a large re‐rating from current levels.


To read the full report: CONSTRUCTION SECTOR
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