Foreign Investment in Construction Shoots Up by 422 Percent

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Sept. 17- Foreign institutional investors  (FII) are betting large on India’s construction sector with the market capitalization of FII investment soaring by 422 percent in the past six months.

According to The Financial Express, the market cap of FII investment in infrastructure and heavy engineering has also increased largely due to higher government spending and leveraged investment by companies in these sectors.

“In the next decade, the story of India has to be the story of infrastructure,” Mr. Kamal Nath, Union Minister of Road Transport and Highways was quoted by The Economic Times as saying. Nath cautions that this story cannot be one of just connectivity but one that leads to significant economic stimulus across the country. The infrastructure sector accounts for 26.7 percent of India’s industrial output, highlighting its important role in the economy.

As noted recently in India Briefing, since the Congress party’s victory in May, infrastructure development is the government’s top priority. A steady supply of power along with a solid transport infrastructure will help revive the Indian economy and boost productivity.

The government has set up plans to increase gross capital in infrastructure in the next several years that translates into over US$500 billion worth of investments. A June 2009 study from First Global indicates the government plans to fund these projects through public private partnership investments, respectively at a 70:30 ratio.

Transport Minister Nath indicates that India is likely to attract US$10 billion for roads in the next two years alone. Mr. Nath has recently discussed several mega infrastructure projects where each project for building 300 kilomters of road will be worth US$1 billion.

The Finance Minister also increased the budgetary allocation for roads by 23 percent under the National Highways Development Project, demonstrating the significant domestic capital investment in roads as well.

The Economic Times recently analyzed the 2009 performance of India’s top infrastructure companies. Despite the global economic crisis, the overall revenues of these 22 companies grew by 32.3 percent in 2009, primarily boosted by government spending projects. The top ranking company, Reliance Infrastructure, recorded revenue growth of nearly 39 percent followed by Punj Lloyd that posted 53 percent growth in revenue.

Further, according to a survey by Ernst & Young and The Associated Chamber of Commerce and Industry of India  of the leading private equity (PE) firms, 84 percent of PE firms indicate they find the present environment conducive to raise infrastructure-focused funds.

PE funds have already invested US$2.6 billion in the country’s infrastructure sector in the last three and half years; out of this, 36 percent has gone to the power sector and 19.7 percent to roads and highways.

Despite the immense growth, there are two consistent problems in the infrastructure sector: execution capability and cost overruns. Companies often offer competitive bids to win contracts, but overall rising costs lead to low margins for profitability. Last year, raw material costs along with commodity prices, labor costs, and interest rates all reached record levels leading to profit compression.