MANAGEMENT DISCUSSION AND ANALYSIS GIOBAI ECONOMIC OVERVIEW The global economy continued to expand in 2014 at a moderately uneven pace, as countries remained saddled with post-crisis adjustments. Global recovery was hampered by some new challenges, including a number of unexpected shocks, such as heightened geopolitical conflicts in various areas. WGP (World Gross Product) growth was estimated at 2.6% in 2014, marginally better than 2.5% in 2013, but lower than the projected 2.9%. (Source: United Nations) High-income countries are likely to see a growth of 2.2% in 2015-17, up from 1.8% in 2014, on the back of gradually recovering labour markets, ebbing fiscal consolidation, and receding financing costs. As domestic headwinds that held back growth in the developing countries ease and recovery in high income countries strengthens, growth is projected to accelerate, rising from 4.4% in 2014 to 4.8% in 2015 and 5.4% by 2017. (Source: World Bank) Indian economic overview India reported a stable rupee, decline in inflation, increased domestic demand, growing investments and a declining oil bill. This reality was in contrast to the situation of the earlier years, marked by erstwhile inflation, high fiscal deficit, dwindling domestic demand, external account imbalance and an oscillating rupee The decline in inflation during the initial months of the year under review was faster than anticipated. A decline in the price of crude and tradeable commodities helped moderate headline inflation. A tight monetary policy helped contain demand brssures, creating a buffer against external shocks and moderating rupee volatility vis-a-vis other currencies. The latest estimates of national income indicate that growth revival, which had commenced in 201314, gained vigour in 201415. From a macroeconomic perspective, it is then increasingly evident that the worst is over. (Source: Central Statistics Office) India is estimated to grow 7.4% in 2014-15 (6.9% in 2013-14). India grew 7.5% during the October-December quarter, exceeding China's 7.3% during the same period, making India the fastest growing major economy in the world. The brvailing economic optimism could catapult India towards double-digit growth across the medium-term. (Source: Economic Survey 2015) Construction industry Following the election of the new Central Government with a strong mandate, the outlook for India's construction sector appears positive and its forecast to grow at a rate of 8% per annum over the next decade. The country will see an increased economic growth and the removal of barriers to foreign investment will spur demand for construction over the coming 12-18 months. The construction market in India for FY2014 was valued at US$157 billion, an increase of US$4 billion over FY2013. The construction sector is primarily divided into three categories namely, infrastructure (49%), housing and real estate (42%) and industrial (9%). But it is the private housing sector that is expected to emerge as a key growth area. The demand for real estate has been one of the key drivers of the construction sector over the past ten years. Improvement in economic conditions can potentially drive demand for real estate, as housing continues to be a favoured asset to invest in, among Indians. From a policy perspective, there has been a growing consensus that private-public partnerships are required to remove the difficulties that are thwarting the development of infrastructure in the country. Growth drivers The Indian construction industry is valued at over $126 billion and on the back of sustained demand from the industrial and real estate sectors is expected to grow to approximately $140 billion by 2017. As the economy picks up from 8 to 8.5% in FY16 these reformatory initiatives will spur the much needed growth in the sector: • The Planning Commission of India has already pledged around $1 trillion to the infrastructure sector during the 12th Five Year Plan period (2012-17). • The construction sector accounts for ~10% of India's GDP and employs more than 30 million people. • Indian Ministry of Roads and Transport outlined plans for $120 billion worth of road-widening projects. There are also plans for $60 billion to be invested in India's ports by 2020. • Unit sale of construction equipment in India is expected to grow to 82,000 by 2016. The construction equipment industry's revenues are estimated to reach $22.7 billion by 2020 from $5.1 billion in 2012. • The Smart Cities initiative involves the development of satellite towns for larger cities by modernising existing mid-sized cities in the country. The Indian Government has allocated $1.2 billion in the current fiscal year for the project. • Housing for seniors has seen increased interest levels from corporates, and the hospitality and healthcare industries over the last few years. Investment opportunities • Construction in residential, retail, commercial and hospitality sectors • Technologies and solutions for smart sustainable cities and integrated townships • Technologies for the promotion of low-cost and affordable housing • Green building solutions • Sustainable and environmental-friendly building materials • Training and skill development of construction sector workers • Smart Cities initiative • Urban water supply, urban sewerage and sewage treatment Interesting statistics • The construction sector is the second largest employer and contributor to economic activity after the agriculture sector and accounts for the second highest inflow of FDI after the services sector. • 49% of the demand for construction activity in India comes from the infrastructure sector; the rest comes from industrial activities, residential and commercial development among others. • Indian cities contribute significantly to India's GDP. As per a mid-term appraisal in 2012, the urban share of the GDP was 62% in 2009-10 and this was further projected to increase to 75% in 2030. • In 2001, about 286 million were living in urban areas across India. It had the second largest urban population cluster in the world. As per the 2011 Census, the urban population had increased to 377 million, thereby registering a growth of around 32%. As per recent estimates, nearly 590 million people will live in Indian cities by 2030. • According to FICCI-EY Real Estate Report 2013, India's real estate segment requires about $42 billion (excluding housing for economically weaker sections) in investments by end-2015. Residential real estate alone will require an investment of $29 billion. Need for urban development Present levels of urban infrastructure are inadequate to meet the demands of the existing urban population. There is need for re-generation of urban areas in existing cities and the creation of new, inclusive smart cities to meet the demands of increasing population and migration from rural to urban areas. The Government of India is in the process of launching a new urban development mission. This will help develop 500 cities, which include cities with a population of more than 100,000 and some cities of religious and tourist importance. These cities will be supported and encouraged to harness private capital and expertise through PPPs, to holster their infrastructure and services in the next 10 years. To provide quality urban services on a sustainable basis in Indian cities, the need of the hour is that urban local bodies enter partnership agreements with foreign players, either through joint ventures, private sector partners or through other models. FDI policy 100% FDI through the automatic route is permitted in townships, housing, built-up infrastructure and construction-development projects (including, but not restricted to housing, commercial brmises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional-level infrastructure). However, there are certain conditions that must be fulfilled; these include: • 10 hectares is the minimum land area for the development of serviced housing plots. 50,000 square metres is the minimum built-up area for construction-development projects. For combination projects, any one of the two prior conditions would suffice. There are specific exemptions for smart cities, housing projects and old age homes. • A minimum capitalisation of $10 million is envisaged for wholly-owned subsidiaries and $5 million for joint ventures with Indian partners. The funds will have to be brought in within six months of date commencement of business. • The original investment cannot be repatriated before a period of three years from completion of minimum capitalisation. The term 'original investment' means the entire amount is brought in as FDI. The lock-in period of three years will be applied from the date of receipt of each installment/tranche of FDI or from the date of completion of minimum capitalisation, whichever is later. However, the investor may be permitted to exit earlier, with prior approval of the government through the Foreign Investment Promotion Board. • The conditions of minimum capitalisation, minimum area requirement, lock-in period and minimum development above do not apply to hotels and tourism sectors, hospitals, SEZs, the education sector, old-age homes and investment by NRIs. • FDI is not allowed in the real estate business or construction of a farmhouse. • 100%-FDI is allowed under the automatic route for urban infrastructure areas like urban transport, water supply, sewerage and sewage treatment subject to relevant rules and regulations. Overview India has the second largest road network in the world (4.7 million kilometres) and transports around 60% the country's freight traffic and 85% of the country's passenger traffic. Road transport has increased over the years, majorly lead by improvement in connectivity between cities, towns and villages. The rapid increase in automobile and freight movement rates has necessitated the development of a seamless road network. Subsequently, the Government of India has allocated 20% of the total investment of US$ 1 trillion towards road development during the 12th Five Year Plan (2012-17) period. India's roads and bridges infrastructure, which was valued at US$ 6.9 billion in 2009, is expected to touch US$ 19.2 billion by 2017. The roads and bridges sector is poised to grow at a CAGR of ~17% over FY2012-17. The financial outlay for the roads and bridges sector grew at a CAGR of ~19% over FY2009- 14. The India's Planning Commission has granted an outlay of US$ 6.9 billion towards roads development. Road construction projects awarded to build-operate-transfer (BOT) companies achieved a CAGR of ~17% over FY 2006-13. The Ministry of Roads and Highways is planning to award approximately 1,100 kilometres worth Rs.14,000 crore under the proposed hybrid annuity project model. The hybrid annuity project model is one in which 40% of the cost is borne by the government as construction-linked support and the balance is borne by the private player. The government collects toll under this model and pays the developer a biannual annuity for recovering investment and interest costs and carry out operations and maintenance activities. This will shield road developers from the risk of revenue uncertainty caused by shortfall in traffic estimates. The Ministry of Roads and Highways has indicated the revival of 34 projects, cumulatively worth more than Rs. 26,000 crore ($4.11 billion). The projects consist of more than 4,084 km being restructured or converted from public-private partnership to EPC (engineering, procurement and construction) to accelerate progress. Of these, five projects were handed to the respective State Governments while 18 will be awarded via the EPC mode. Governmental initiatives The Indian Government plans to set up a finance corporation with a corpus of H1 trillion (US$ 15.83 billion) in collaboration with Japanese investors to fund road projects. As part of the Indo-Japan Strategic and Global Partnership, the two sides launched a Special Economic Partnership Initiative, including the Delhi-Mumbai Industrial Corridor project. The Central Government is attempting to implement a number of policies to attract investor interest. The government is already facilitating investments through policy initiatives that include use of long-term fund sources (pension and insurance funds) in consultation with Ministry of Finance and RBI, besides encouraging long-term debt re-structuring. The Central Government announced highway projects worth $93 billion, including the flagship National Highways Building Project with a total investment of $45 billion over three years. The Central Government plans to develop 66,117 km of roads under different programmes like NHDP and SARDP-NE (Special Accelerated Road Development Programme in the North East) and in areas marked by LWE (Left Wing Extremism).The Central Government targeted the building of 30 km roads a day 2016 onwards. About two-thirds of NHDP road projects (ex-phase IV) have not yet been awarded, offering a massive opportunity to private players. Opportunities for prospective investors: • The Bharat Mala project (worth $12 billion) for the construction of 6,000 kilometres of roads • Scheme for providing connectivity to 123 district headquarters for US$ 15 billion • Construction of 350 bridges/road over bridges over the next two years for (worth $8 billion) • Char Dham project for the construction of 2,500 kilometres in mountainous terrains (worth $8 billion) • Strong network of roads in the North-East and border areas (worth $5 billion) The Central Government plans to provide incentives like right of way to ensure that project land is readily available to concessionaires without encumbrances. Earlier, road maintenance initiatives were implemented separately through short-term O&M contracts and funded via budgetary resources. Annual user fees were collected through different agencies on a contractual basis. With the growth in highway lengths and a slowdown in the new development of highways and bidding activities, the need for O&M initiatives gained paramount importance. Operational highlights, 2014-15 The highways, flyovers and bridges business vertical, commissioned in 1999, is the flagship business of PNC Infratech. The business accounted for 90.20% of the Company's revenues in 201415. The Company is engaged in designing, engineering, financing, constructing and operating and maintaining highways, flyovers and bridges. PNC Infratech successfully completed 24 major projects leading to 2014-15 and had 20 under execution as on 31 March, 2015. Overview Airport development is a basic infrastructural brrequisite for ensuring widesbrad air-connectivity. India's aviation industry has taken off over the years with a passenger base having grown at a CAGR of 12% over FY05-15. India is the ninth-largest civil aviation market in the world, with a market size of about US$ 16 billion and aiming to become the largest by 2030. The advent of low-cost carriers, construction of modern airports, implementation of Foreign Direct Investment in domestic airlines, advanced IT interventions and a growing emphasis on regional connectivity helped the industry expand. There are many small airports and landing strips with the potential to extend connectivity. The Central Government plans to develop around 100 low-cost airports. The Indian aviation sector is likely to report investments aggregating approximately $12.1 billion during the Twelfth Five Year Plan, of which $9.3 billion is expected to come from the private sector. To enhance FDI, the Central Government has allowed certain policy changes, including: • 100% FDI approval under the automatic route for greenfield projects • 100% FDI approval for existing airports (with an approval from the FIPB) • 49% FDI approval for foreign carriers India has total of 449 airports and airstrips of which 125 are managed by the AAI (Airport Authority of India). Currently, 40% of the entire airport traffic is managed by the AAI, while 60% is handled under the PPP model. The AAI aims to operationalise around 250 airports pan-India by 2020. The AAI developed and upgraded 23 metro airports over five years and plans to develop more than 20 airports in Tier-II and Tier-III centres over the next five years. The AAI is planning to spend USD 1.3 billion on non-metro projects over the five years leading to 2017 with an emphasis on modernisation and upgradation of existing airports. Operational highlights, 2014-15 The airports segment is the second largest revenue earner for PNC Infratech and is engaged in the construction and resurfacing of airport runways. The Company completed 17 major projects leading to 2014-15 with two projects under execution as of 31 March, 2015. Priorities, 2015-16 Going ahead, the Company expects to secure more airport runway projects. Overview Power supply and transmission is one of the most critical determinants of economic growth. The Indian power sector is one of the most diversified in the world. Sources for power generation range from the conventional like coal, lignite, natural gas, oil, hydroelectric and nuclear to viable non-conventional sources like wind, solar, and biomass. The demand for electricity in the country is expected to grow in the years to come. In order to meet the increasing requirement of electricity, a massive addition to the installed generating capacity is required. The manufacturing base of a nation is dependent on the sector's ability to provide reliable power at competitive rates. India, being a developing nation, needs to have a commensurate transmission and distribution infrastructure to generate power and support growth over the years to come. The Central Government has allocated $250 billion towards the augmentation of the entire power industry chain comprising generation, transmission and distribution. The Central Government expects to remove all roadblocks affecting the sector and has set for itself the goal of providing 'Power for All' by 2019 across the domestic, industrial and agricultural sectors. During the 12th Five Year Plan, the Central Government has targeted 88 gigawatts of capacity addition. This comprises 72.3 gigawatts in thermal power, 10.8 gigawatts in hydroelectric power and 5.3 gigawatts in nuclear power. The 12th Five Year Plan has also laid down a renewable energy capacity addition of 30 gigawatts by 2017. The current annual per capita consumption of 940 kilowatt-hours in India is among the lowest in the world. Over the next five years, the per capita consumption is expected to rise rapidly to about 2,500 kilowatt-hours, which is the international average, following increased urbanisation and last-mile connectivity. Consequently, it is expected that total energy consumption could double by 2019. India needs to create a National Power Grid as many areas face chronic power shortages, whereas certain parts enjoy excess power. A National Power Grid can channelise surplus power to areas with no or low power access. There are close to 400 million Indians currently unconnected to the National Power Grid. Priorities, 2015-16 The Company intends to secure larger power transmission projects over the next few years |
