 Budget 2007-08: Construction
India is on the verge of witnessing a sustained investment phase in infrastructure buildup. With a slew of announcements in housing, road, port and airport development, we are seemingly on a path of sustained higher economic growth on the back of improvement in infrastructure construction in the country. The government, in its mid-term appraisal of the tenth five-year plan (2002-07), has revised upwards its infrastructure investment target from Rs 10,890 bn to around 11,100 bn (US$ 250 bn) over the next five years. From a policy perspective, there has been a growing consensus that a private-public partnership is required to remove difficulties concerning the development of infrastructure in the country. A substantial chunk of the abovementioned investment target is likely to come from the private sector. Read more
|
Allocation towards Bharat Nirman increased by 32% to Rs 246 bn |
|
Increase in provision for National Highway Development Programme (NHDP) by 7.2% to Rs 107 bn |
|
Enhanced allocation for Jawaharlal Nehru National Urban Renewal Mission (JNNURM) to Rs 499 bn, an increase of 9% |
|
Corpus of Rural Infrastructure Development Fund-XIII (RIDF) for FY08 raised to Rs 120 bn |
|
Separate window for rural roads under RIDF-XIII to be continued in FY08 with a corpus of Rs 40 bn |
|
Utilisation of foreign reserves towards infrastructure development |
|
Tax on dividend distributed by companies to be hiked from 12.5% to 15% |
|
Additional education cess of 1% to fund secondary and higher education |
|
Since government spending on infrastructure is the most important growth driver for construction companies, the proposed increase in allocation will translate into awarding of more projects |
|
Leveraging of foreign exchange reserves for infrastructure development to result in increased availability of funds with the government and thereby result in faster infrastructure growth for the country |
|
Higher education cess and dividend distribution tax to impact net profits and retained earnings respectively |
|
Since government spending on infrastructure is the most important growth driver for construction companies, the proposed increase in allocation will translate into awarding of more projects. Further, leveraging of foreign exchange reserves for infrastructure development will result in increased availability of funds with the government and thereby result in faster infrastructure growth for the country. Despite huge order backlogs, timely execution of orders by construction companies remains our major concern. Rising raw material prices are also likely to be a tough nut to crack for these companies. |
|
Positive for construction companies like IVRCL, HCC and Gammon who are engaged in the development of roads, irrigation and water supply projects |
|
Higher allocation to sanitation schemes likely to benefit companies like Hindustan Sanitaryware, Parryware and Kajaria Ceramics |
|
|
CII |
|
Strengthening of National Highways Authority of India (NHAI), Airports Authority of India (AAI) and Railways |
|
Meaningful engagement with organisations like World Bank and Asian Development Bank |
|
Putting up more airports for privatisation with some amount of viability gap funding from the government |
|
Leveraging foreign exchange reserves for infrastructure financing. |
| Budget 2004-05 |
|
Budget 2005-06 |
|
Budget 2006-07 |
|
|
|
|
|
The Finance Minister has proposed to extend such a measure to other infrastructure sectors. The IIG includes the like of IDBI, IDFC, ICICI Bank, SBI, LIC, Bank of Baroda and Punjab National Bank. The consortium will pool their resources to an extent of Rs 400 bn. Initially, airports, seaports and tourism will be the target sectors of the IIG.
Excise duty on clinker increased to Rs 350 per tonne from Rs 250 per tonne.
Customs duty on cement reduced from 20% to 15% in line with the reduction in peak customs duty rate.
Deduction of upto Rs 1 lakh on the repayment of principal amount of housing loan.
|
|
Customs duty on cement reduced from 15% to 12.5% in line with the reduction in peak customs duty.
| |
Increase in allocations for National Highway Development Programme (NHDP) from Rs 93.2 bn in FY06 to Rs 99.5 bn in FY07.
54% hike in the budgetary support to the Bharat Nirman Programme, amounting to Rs 187 bn.
Increase in corpus of the Rural Infrastructure Development Fund to Rs 100 bn.
Grant of Rs 46 bn for the National Urban Renewal Mission.
Exemption under Section 10 (23G) of the Income Tax Act removed. The section exempted income by way of dividend, interest and long-term capital gains arising out of investments made in an enterprise engaged in the business of developing, maintaining and operating an infrastructure facility.
Plan allocation for Department of Shipping increased by 37% to Rs 7.4 bn to facilitate investment in National Maritime Development Programme (NMDP).
|
|
| Key Positives |
|
| Government spending on infrastructure: - Government spending on infrastructure is the most important demand driver for the construction industry. Since adequate infrastructure is essential for sustained economic growth, construction activities have gained significant importance over the past few years. Though infrastructure development will be across sectors, the key drivers would be roads, water supply & sanitation and irrigation. Infrastructure construction investments, with a share of 25% in total construction investments are expected to grow at a CAGR of 9% over the next three years (Source: CRIS INFAC). |
| Growth in real estate construction: - Real estate investments account for about 60% of the total construction investments. Demand-supply gap for residential housing, favourable demographics, rising affordability levels, availability of financing options as well as fiscal benefits available on availing of home loan are the key drivers supporting the demand for residential construction. In addition to this, demand for office space from IT/BPO segment is expected to continue due to emergence of India as a preferred outsourcing destination. Also, boom in organized retail is expected to result in huge demand for real estate construction. |
| Industrial construction to witness strong growth: - With India Inc. on major expansion drive, the demand for industrial construction is expected to remain strong over the next few years. According to CRIS INFAC, industrial construction (accounts for 10% of the total construction investments) is expected to grow at a CAGR of 33%, mainly propelled by the investments in oil & gas and metals. |
| |
| Key Negatives |
|
| Increasing property prices and rising home-loan rates: - Demand for residential properties tend to be highly price-sensitive. Though the underlying demand for housing is huge, increasing property prices will result in postponement of purchasing decisions. We believe that the growth in housing demand has been stymied by high property prices. Declining home loan rates has been one of the key demand drivers for the residential property in the last 4-5 years. However, home loan rates, akin to the general interest rates have been steadily climbing in the past 12-15 months. Increase in loan rates will further dampen the demand for real estate construction. |
| Execution risks: - Increased investments in infrastructure and huge capacity addition plans by manufacturing companies have resulted in huge order books for construction companies. We believe that the people problem faced by the construction industry will make it difficult for them to execute large projects on a timely basis.
| Payment issues: - Construction companies involved in infrastructure development activities have to rely on government agencies for payments in case of cash contracts and annuity based projects. Delay in payments for projects can have adverse impact on profitability of companies.
| |
|
|
|
|
|
|
|
| Visit our Sponsors |
ICICIDirect.com
Get "Clear Value Deals" for buying and selling stocks online. |
Quantum Mutual Fund
Low cost fund with no distribution fees for better returns. |
|
|