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Capital goods: Investments to drive growth

Aug 26, 2008

In the previous article, we had discussed on how the order backlog of engineering and construction companies has been growing over the quarters and the kind of visibility these provide with respect to future growth. In this article, we will discuss on how the broader trend in investments has been since the beginning of the XIth five-year plan (2007-2012).

  • Also read – Capital goods: Orders keep coming in

    Capital goods and construction companies are highly dependant on the investments in infrastructure. The ambitious targets set by the Planning Commission of India have helped in pushing the investments since the beginning of the XIth five-year plan. The investments in infrastructure are expected to be in excess of US$ 450 bn during this period, nearly 2.3 times higher as compared to the Xth five-year plan (2002-2007). As per CMIE’s capex survey, at the end of June 2008, the outstanding investments across all the infrastructure segments stood nearly US$ 1.6 trillion (including the backlog as also investments planned for a period more than 5 years) compared to US$ 1.1 trillion a year back, an increase of 49% YoY. Here are the details of these outstanding investments.

    Investment trend over the last year
      June 2007 June 2008 Change %
    (Rs bn) Projects Amount ATS Projects Amount ATS Projects Amount ATS
    Manufacturing 3,485 12,862 3.7 3,963 17,899 4.5 14% 39% 22.4%
    Electricity 1,613 13,373 8.3 1,849 20,999 11.4 15% 57% 37.0%
    Road transport 2,091 1,618 0.8 2,179 2,407 1.1 4% 49% 42.7%
    Air transport 96 448 4.7 136 527 3.9 42% 17% -17.1%
    Shipping 190 1,282 6.7 230 2,012 8.7 21% 57% 29.6%
    Irrigation 339 1,436 4.2 356 1,603 4.5 5% 12% 6.3%
    Railway transport 395 1,910 4.8 428 3,126 7.3 8% 64% 51.1%
    Others 4,274 11,701 2.7 5,361 18,093 3.4 25% 55% 23.3%
    Overall total 12,483 44,630 3.6 14,502 66,665 4.6 16% 49% 28.6%
    Source: CMIE; ATS - Average ticket size

    Investments in the power sector still command the highest share. In fact by June 2008, these investments have increased by nearly 57% YoY while the number of projects have increased by 15% YoY. As compared to the increase in numbers of power projects, the amount invested in absolute terms has increased substantially mainly due to large investments in mega power projects. Next in line comes the investment in the manufacturing space. This segment has witnessed an increase of 39% YoY while the number of projects have increased by 14% YoY. The road transport segment, over the last year, has been given strong priority. We can notice from the above table that although the actually number of projects have grown by just 4% YoY, the project value is up almost 50%. This can be mainly attributable to large projects being awarded under the National Highways Development Programme. Further, as majority of the ports across the country are operating at almost 100% capacities, the government has given a strong priority to enhance the port infrastructure across the coastline. The investment in this segment has gone up by nearly 57% YoY as compared to June 2007.

    If we look at the average ticket size (average size of each order), it has witnessed a significant increase across all major sectors. The average ticket size of orders in the railways transport segment has increased by nearly 51% YoY. Next in line comes the ticket size of orders in the road transport segment, which have grown by nearly 43% YoY. On the other hand, the average project sizes in the air transport and irrigation have come down. While the average size of an order in the irrigation segment has grown by a relatively slower 6% YoY, project sizes in the air transport segment have actually declined by 17% YoY.

    Almost nearing the second year of the XIth five-year plan, the investment scenario continues to be strong by both the public and the private players. While rising inflation and interest rates are likely to pressurise some investments and subsequently the order inflows of companies, we expect the situation to stabilise in the long run, thereby perking up the momentum for companies from the engineering and construction space. A quote from the economic research agency, CMIE describes this aptly –"Construction companies stand to gain immensely from the rising investments in civil and industrial infrastructure. Increasing role of private sector in infrastructure development in segments like roads, airports, ports and power will give a boost to the order inflows of these companies."

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