Budget 2018: Rural Infrastructure A Sweet Spot In India’s Capex Cycle

Budget 2018: Rural Infrastructure A Sweet Spot In India’s Capex Cycle

While markets are still debating the revival of India’s capex cycle, particularly in the light of an absence of private capex, the measures announced in the Budget for 2018-19, particularly for the infrastructure sector, could lend some support.

As per the CMIE data, during the first 9 months of FY18, new investment proposals of the government and the private sector dipped by 53 percent and 56 percent, respectively, on a year on year basis.

Nevertheless the government seems to want to kill two birds with one stone by deciding to spend on rural infrastructure.

The government intends to spend close to Rs 5.97 lakh crore on infrastructure in FY19 – up 21 percent over the estimated spending of around Rs 4.94 lakh crore in FY18. Secondly, the budget has created an environment for demand recovery, particularly from rural India, leading to better capacity utilisation and facilitating private sector capex.

To put it in perspective, apart from the social schemes, the Budget increased its rural infrastructure spending by whopping 30 percent to Rs 1.43 lakh crore. This will help in generating higher rural incomes, provide employment and could lead to higher demand in rural markets.

Rural Infrastructure

Rural India was the centre of attraction this year, considering close to 65 percent of India’s 125 crore people residing there. An increase in spend of almost 30 percent on rural infrastructure like roads under the Pradhan Mantri Gram Sadak Yojana (PMGSY) connecting agriculture markets, sanitation, food parks, ground water development, electricity for all and rural housing was announced.

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Companies in the ceramics space like Kajaria and HSIL in sanitation, and a slew of cement players who have exposure to these markets would benefit.

The Budget talked about constructing 51 lakh rural houses in FY18 and another 51 lakh rural houses in FY19. This will benefit companies like Everest Industries and HIL. The momentum should rub off positively on construction equipment manufacturers like Action Construction Equipment, Elgi Equipment, Shakti Pumps, Ingersoll Rand India and Ador Welding.

Road and railways

After rural reforms, what is worth talking about is transport, particularly roads and railways. Under the Pradhan Mantri Gram Sadak Yojana, close to 57,000 km roads will be built with a total cost of Rs 19,000 crore. That apart, NHAI would target to award projects for around 23,892 km with a total outlay of around Rs 62,000 crore in FY19, which will augur well for companies like IRB Infra, Dilip Buildcon, Ashoka Buildcon and few others in this segment.

The government has pegged Railways capex at Rs 1,48,528 crore, largely spending on capacity expansion including 18,000 km of railway track doubling and 5,000 km of guage conversion. This brings in good news for companies like KEC international and Skipper India. That apart, work for Eastern and Western Freight Corridor is going on full swing with the government estimating a purchase of rolling stock of 1,20,000 wagons, 5,160 coaches and about 700 locomotives during 2018-19.

Increasing demand for the rolling stocks like wagons is good for companies like Texmaco and Titagarh Wagons. Companies like BEML and BHEL benefit as a result of additional demand for the locomotives.

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The Budget also mentioned the redevelopment of 600 major stations, which will benefit companies like NBCC and others in the engineering space. The scope of work includes other facilities like installation of escalators in a large number of railway stations.


Airports could be yet another big area, particularly with the present government able to identify infrastructure bottlenecks. Budget document mentions that passenger traffic grew at 18 percent over the past three years and airlines have placed orders for about 900 aircraft. Interestingly, it proposes to increase the airport capacity fivefold to handle close to 1 billion trips per year. This is not only good for airline companies who are struggling for better infrastructure support to drive efficiencies but also good for the companies in the construction space, particularly GMR Infra, GVK Power and others like L&T that are catering to these segments.

Will capex cycle revive?

The other big issue that the industry is facing is delays and execution-related challenges. A lot of it seems to be on the mend. L&T, India’s largest private sector engineering company, in its recent earnings call, said that it has seen improvement in execution and some of the large projects have started moving with delays reducing.

The focus is clearly on implementation where government and the Prime Minister himself reviews progress of the projects through online monitoring system known as PRAGATI. Nevertheless, whether these measures can revive capex cycle needs to be seen. While government appears to be doing its bit, private capex, does not seem to be coming soon, particularly in the light of low capacity utilisations, balance sheet stress, pending asset sale (capacity supply) under NCLT and elections in 2019. Read More

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