Infra sector returning to normalisation post temporary blips: CMIE


Latest reports indicate that order inflow trend for capital goods and infrastructure companies has shown significant improvement and order value has more than doubled year-on-year. In an interview to CNBC-TV18, Mahesh Vyas, MD & CEO of CMIE, the Centre for Monitoring the Indian Economy shared his views and readings on the economy.

Vyas said that order inflows have seen substantial improvement in infrastructure space. Therefore, see pick up in orderbooks of infrastructure companies.

According to him, infrastructure sector is returning to normalisation post temporary blips. However, capex database does not show pick-up in new investments.

He sees practical problems with regards to National Highways Authority of India (NHAI)
Slowdown in new investments a concern; hoping for a turnaround: CMIE
He further said that he is seeing pick-up in road execution but not as fast as needed.

We are not seeing pick-up in orders from power space, Vyas added.

Below is the verbatim transcript of the interview:

Q: Do numbers corroborate this trend and is it nationwide or is it restricted to few states?

A: Number one, orderbooks have increased is true; in December 2017 we have seen a substantial increase in the orderbooks of infrastructure companies and whether it is in terms of construction orders or machinery orders there is a pickup in orderbooks of companies in this quarter but a caveat to that will be that the increase is seen year-over-year and December ’16 was a particularly bad quarter. So immediately after demonetisation we saw a drop over there and that drop continued for three more quarters. So we are seeing a recovery. So a recovery from a fall is a right way of putting this and not a big jump. It is just a recovery from the fall that we saw over a year ago.

Q: If you just move back and then look at the trend over five years or thereabouts then where would you place our recovery? Is it looking good enough to be called a green shoot that can grow?

A: That would be too early but if you look at the series over sometime, say from 2012 or so; there is a very gradual increase in orderbook position of companies. So it not like there was a fall-fall-fall. It was a little up and down but if you draw a straight line curve, it looks up. So what happened is in the last three quarters this kind of fell and that trend was a bit disturbed. So the disturbance we would have seen in the last few quarters has been corrected. So we are coming back possibly to normal things.

Q: You have been watching these things for decades now. So does it look like we are in some kind of inflection point like we were in 2003-04?

A: I would say so. That would be really too early. Number one, these order books are a reflection of just a couple of projects. Bharat Heavy Electricals (BHEL) and Larsen & Toubro (L&T) are the only two who have seen these big orders. The other companies have not seen it. It is also just a couple of projects that have given out these orders. More importantly the capex database still does not show a pickup in new investments. So it is too early to say but at least we can be happy on one count that the decline that we saw in the recent past seems to be arrested.

Q: If you look at NHAI’s ordering activity, till date it has been quite muted with just total awarding of 1,170 km. do you expect any major pickup as far as NHAI’s ordering activity is concerned in the second half of the fiscal?

A: The government, the ministry are pretty gung-ho on giving out orders faster but there are practical problems. If new construction of roads has accelerated it is because the orders given in the past, much earlier in the United Progressive Alliance (UPA) II, were very high. It takes about five years for road projects to get completed and in the last two years we haven’t seen a pickup. It will have an impact upon new roads being laid down in the coming couple of years. So the intention is right but the arithmetic doesn’t show that as yet.

Q: Let’s not talking about ordering activity. If you all measure execution – is there an uptick in roads?

A: Not as much as is required. We require the pace of orders being placed, orders being given out etc, deals being completed to increase much more than what we see right now. What we have seen is a completion which is work of five years ago.

Q: What about power because I heard you mention about BHEL as well. While one hears a lot of positive ordering in the road sector. One didn’t hear of too much in the power sector. Is that also recovering?

A: Except in one project not much. There is a problem of excess capacity and a shift towards renewable which is also getting into trouble because of the pricing problems. So there isn’t any reason to believe and the data doesn’t show it that there is a pickup in power projects as well.

There is one order which has given out by Telangana, I think for power but that is just one-off.

Q: Can you give us an update on – 1) the stalled projects where the stalled projects have reduced and 2) have we seen an increase as far as revival of projects is concerned?

A: There has been an increase in the revival of project and that certainly is happening but projects still do keep getting stalled. I do not have the numbers for this quarter. We will wait for a couple of weeks more before we get that but there is a one-off case of a project getting stalled. The good news is that projects do get revived as well.

Q: So speaking of revival, you just alluded to excess capacity in power. Are things moving out of stress, are they reaching breakeven and profitable levels at all in the power sector?

A: In so far as the impact of profitability on investments is concerned, it is still a long distance. I do not think we are going to see a revival in power investments for a fairly long time because capacity utilisation or plant loads factor or thermal plant is still pretty low. It will be a long time before we see that pickup.

Q: Railways – when the National Democratic Party (NDA) government came in our big hope was that it will move on both these areas – roads and rail. Do you all collect any figures on rail projects and is that looking substantially better?

A: We do collect information on railways as well but the biggest source of that information is Railway Budget. So the Budget documents are just around the corner. We should wait for that to come and then we can comment on railways a lot better.

Q: But so far is there any improvement in the last three years?

A: Not any significant improvement. It is not big.

Q: Irrigation is largely a state subject. Have you seen an uptick in that sector?

A: I do not recall the irrigation numbers unfortunately.

Q: Just directionally if it is recovery?

A: Since I haven’t noticed it, it implies that nothing has moved big time enough to catch my attention – that’s the only way I can put it.

Q: If you had to summarise for us, how long do you think it could take for nascent signs of recovery in the capex cycle. Can we expect to see anything by the end of this year, the fiscal year?

A: Very unlikely. What will cause a revival in the capex cycle? One, capacity utilisation is to improve which means that consumption demand has to grow up substantially to catch-up nearly 10 percent on capacity. So we have 70 percent capacity utilisation or even less than that and this requires reaching close to 80 percent before investments pickup. So that could be one angle and catching up 10 percent capacity is really very difficult. It will not happen in a quarter, not even in two quarters. It will take a lot more. The second way of getting the capex cycle back into action is government pump-priming the economy. If the government say you are going to build a lot more, do a lot more and spend money on that not merely announce things then that is the second way of doing it but the government is committed towards fiscal conservative stance and if that is the case then I do not think that can also be used. So I do not see any lever.

Q: Optically for those of us, who cover the economy, we see a lot of construction activity, in Mumbai for instance, because of metros and we are told that a lot of other cities are also moving in that direction. Is not all that adding up to capex somewhere, infra expansion somewhere?

A: It does. All those metros that make us suffered traffic snarls are all captured. The only problem is that all these do not add-up to make it better than what we saw two-three years ago.