Sunil Hitech Engineers Ltd Management Discussions.


The acceleration in global activity that started in 2016 gathered steam in 2017, reflecting firmer domestic demand growth in advanced economies and improved performances in other large emerging market economies. Global growth is set to be just over 3.5% in this calendar year 2018, the fastest in seven years, with improved outcomes in both advanced economies and the EMEs. Confidence measures and levels of new orders for businesses remain strong. This long awaited lift to global growth, supported by policy stimulus, is being accompanied by solid employment gains, a moderate upturn in investment and a pick-up in trade growth.

Trade in goods will grow 4.4% this year after a decade averaging 3.0% a year following the financial crisis. The continued expansion depends on robust global growth and governments support for right trade policies. However, there are signs that escalating trade tensions may already be affecting business confidence and investment decisions, which could compromise the current outlook.

(Source: IMF and OECD)


Indian economic growth is giving a positive signal for the current and future scenario. It is projected to strengthen to above 7%, gradually recovering from the transitory adverse impact of rolling out the Goods and Services Tax (GST) and measures to choke off the black economy, including demonetisation. Indias GDP grew 7.2% in the third quarter of 2018, surpassing expectations and wresting back the mantle of the fastest growing economy from China on the back of a rebound in industrial activity, especially manufacturing and construction, and an expansion in agriculture. The Reserve Bank of India has estimated GDP growth in a range from 7.4% to 7.9% for the Financial Year 2019-2020.

(Source: OECD and Economic Times)

Fiscal deficit for 2017-18 is revised to Rs. 5.95 lakh Cr at 3.5% of the GDP, which is approximately the same as 2016-17 in spite of transformation in the economy. In addition to initiatives like; ‘Make in India, ‘Housing for All and ‘Digital India, the government has also introduced ‘Sagar Mala and ‘Bharat Mala initiatives, which will help to boost the domestic growth of the country.

(Source: IBEF and Trading Economics)

Indias Infrastructure

"The link between infrastructure and economic development is not a once and for all affair.

It is a continuous process; and progress in development has to be preceded, accompanied, and followed by progress in infrastructure, if we are to fulfil our declared objectives of generating a self-accelerating process of economic development." - Dr. V. K. R. V. Rao

The Government of India has taken major initiatives to strengthen the economic credentials of the country and make it into one of the healthiest economies in the world. India is fast becoming home to start-ups focused on high growth areas such as mobility, e-commerce and other vertical specific solutions - creating new markets and driving innovation. Owing to higher infrastructure spending, increased fiscal to states, and continued reforms in fiscal and monetary policy, the Indian economic outlook has strengthened. The Government of India is striving to move steadily to minimise structural and political bottlenecks, attract higher investment and improve economic performance.

Infrastructure is the spine of our economy and society, from the roads, rails to electricity that lights or heats our homes to the water we drink by investing in core infrastructure businesses that deliver essential services throughout the economic cycle. The Government of India is extremely keen on developing the infrastructure sector in the country. This is clearly evident through the several initiatives announced for this sector as part of the Budget 2018-19. Infrastructure has been made the priority segment in the Union Budget.

Indias Roads & Transportation Sector

India has the second largest road network in the world, constituting over a total of 5.6 million km in length. Over 65% of all goods in the country are transported through roads, while 90% of the total passenger traffic uses road network to commute

in their day to day lives. (Source: IBEF Research/ Newsroom)

The governments ambitious infrastructure development plan aims to provide significant opportunities for investors and market players to help change the sector and partner Indias socioeconomic progress.

India has surpassed its own capacities by extending its capabilities beyond the national boundaries via road connectivity. The transportation sector has been highly responsible for propelling Indias overall development. The Government of India has intensified this sector by initiating policies that would ensure time-bound creation of world class infrastructure in the country at a breakneck pace.

Indias total road length includes National Highways (NHs), Expressways, State Highways (SHs), district roads, PWD roads, and project roads.

The network can be sub-divided into three categories for a total length of 56,00,000 km:

State Highways

They form 3% of the total roads in India totalling a length of 1,76,166 kms.

National Highways

They form merely 2% of the total roads in India envisaging a total length of 1,15,530 kms.

District and Rural Roads

They form 95% of the total roads in India envisaging a total length 53,26,166 kms.

(Source: IBEF Research)

Roadways have been the key focus area for budget allocations over the years. As per Union Budget 2018-19, the government provided an outlay of Rs. 1.21 lakh Cr (US$ 18.69 billion) for the road sector. The graph below, provides a clear idea of the trend of outlay for roads under the respective Union Budgets.

(Source: IBEF Research)

There were also several policy proposals made in the Budget Speech by the Finance Minister which can be seen as follows:

Road and Infrastructure cess

The existing Road Cess (cess on motor spirit and high speed diesel) has been converted to the Road and Infrastructure Cess. This cess on petrol and high-speed diesel has been increased by Rs. 2 per litre, while the excise and customs duty have been cut by the same amount.

Under the Bharatmala Pariyojana, about 35,000 km of roads will be developed in Phase-I at an estimated cost of Rs. 5,35,000 Cr.

To raise equity from the market for its mature road assets, NHAI will consider organizing its road assets into Special Purpose Vehicles and use other innovative monetizing structures like Toll, Operate and Transfer (TOT) and Infrastructure Investment Funds (InvITs).

The government will come out with a policy to introduce toll system on ‘pay as you use basis.

The two key authorities in the road development segment of the country are NHAI and MORTH. Just in the year 2017, NHAI and MORTH have been awarded 16,000 km of road projects – the highest in the sectors history. While the target was set at a highly ambitious scale of 25,000 km – of which the department achieved 15,000 km, despite land acquisition and management change troubles, is really creditable. The pace of construction of highways also reached 28km/day from 14km/day in 2014.

(Source: Phillip Capital Research)

For the last three years, the government has been ironing out issues hampering growth of the Roads sector. In FY17, early signs of revival in the sector became evident, with project awards at 16,270 km (up 56%) and construction at 8,230 km (up 37%). The government has set steep targets for FY18 to award 25,000 km and construct 15,000 km. Moving ahead, the trend looks promising, with industry reports indicating that NHAI would award over 31,000 km of road projects executable over FY17-21E, entailing an estimated investment of Rs. 3.6 Tn (civil construction works). Expect awarding activity to stabilize at 15,000 km per year, and execution activity to pick up – 9,300 km in FY19 and 10,000 km in FY20.

(Source: MOSL Research)

Investment programs worth Rs. 7 Tn have been identified, ensuring a strong pipeline of projects Bharatmala is to constitute 56% of the ordering. Total projects of 9,304 km could come up for award under the NHDP scheme. Given that 50% of the highways in India are two-laned, four-laning itself promises to be a big opportunity. The outlook for the Roads sector has improved considerably over the last two years, with roads being a key focus area for the new government to revive capex activity in India. In its previous tenure as well, the NDA government had chosen the Roads sector to accelerate the capex cycle and had awarded 23,000 km over its five-year tenure. In its current tenure, it has set an ambitious target to ramp up road construction activity from 23 km per day to 40 km per day and has prepared a strong pipeline of road projects, which entails an investment of Rs. 7 Tn (centre and state put together). Multiple states like Maharashtra, UP, Telangana, and Karnataka have a strong pipeline of projects. Between the centre and the states put together, there exists an opportunity of over Rs. 7 Tn (Centre: Rs. 4.0 Tn; states: Rs. 3.4 Tn).

(Source: MOSL Research)

The HAM model is being preferred for new . tenders, as it requires lower government funding as compared to the traditional EPC model. There has been an ease in the pressure from the government side for the model, as 40% of the funding will be coming from the government and the remaining 60% is coming from the private player vis--vis an EPC model where 100% of the funding requirement comes from the government authority.

Since introduction in FY16, HAM has steadily emerged as the preferred mode of project award from the government. These projects formed 62% of the cost of projects awarded in FY17; in FY18, this share has inched up marginally to 63%. EPC mode contributed 35% of the cost of projects awarded in FY18. The share of toll projects continued to dip with mere 2% of the cost of projects belonging to this mode.

Impetus towards HAM & EPC Model

With build, operate and transfer (BOT) projects losing flavour among developers in the last two years, given (a) their weak financial position, and (b) weak economic activity impacting traffic growth, EPC and HAM would be the preferred routes for NHAI to award road projects. EPC and HAM projects would attract higher interest, as they require limited upfront capital and involve less risk than BOT projects. Maximum ordering will be for NHDP phase-4, which is a two-lane program, with low traffic density. It is expected that about 45% of projects will be awarded on an HAM/annuity basis in the near term, constituting Rs. 269 Bn of market potential for HAM players in the national highways segment.

(Source: NHAI/ MOSL Research)

HAM project financing may become incrementally challenging for companies with leveraged balance sheets. With many few PSU/ Private banks facing asset quality headwinds, HAM lending may be selective and limited to Tier 1 road developers.

Government Boost: Bharatmala Pariyojana

Bharatmala Paryojna is the mother scheme of highway development over the next 10 years – just like the current NHDP has been for the last 15. MoRTH has taken two years to prepare the detailed plan of this mammoth scheme, intended to decongest and expand the existing highway network of the country.

At the same time, it seeks to decongest the existing corridor network – for which 185 choke points were identifiedacross the country and are planned to be removed by:

28 Ring Roads


The Roads sector has been identified as one of the top-3 capex themes by the current NDA government. The Ministry of Road Transport and Highways (MORTH) has taken multiple steps to revive the ailing sector over the last three years. The framework required for the speedy award and execution of projects is in place. Activity will pick up with the government addressing issues like:

• Execution hurdles – awarding projects after 80% land acquisition under BoT and 90% land acquisition under EPC.

• Funding arrangement – cess trebled from Rs. 2 per litre to Rs. 6 per litre; market borrowing plans in place. The road cess on petrol and diesel has been one of the major sources of funding for NHAI projects over the years (from Rs. 60 Bn in FY13 to Rs. 96 Bn in FY15).

• Faster forest and environmental clearances.

• Change in project model to ease funding burden of cash-strapped developers.

• Exit policy for developers to help unlock equity from completed projects, making it potentially available for investment in new projects.

Premium deferment scheme to ease cash flow issues faced by developers.

(Source: MOSL Research)

To meet the capex requirement of constructing 83,677 km of roads, the government has laid out a clear cut plan of funding the same. Of the total anticipated cost of Rs. 6.9 Tn, the major source of the funding (65%) would be met from raising money from market borrowing (Rs. 2.1 Tn) and central road fund (Rs. 2.4 Tn).

However, NHAIs share of the road cess was reduced in 2016-17. While it was given Rs. 150 Bn in 2015-16 from the Central Road Fund, the budgeted amount for 2016-17 is only Rs. 121 Bn. Government allocation of Rs. 2.4 Tn fund to CRF will bring in stability and certainty of funds available for road development in the long run.

(Source: Industry/ NHAI/ MOSL Research)


• Most players are now opting for inorganic growth routes and are diversifying into other businesses (IIML, a subsidiary of IL&FS is into private equity business with over USD 3.2 Bn under management).

• Many players are entering into technical partnerships with foreign players to match their R&D levels with MNCs.

Promotion of R&D

• Companies are ramping up investment for better and cost effective ways of road construction.

• As of November 2016, three memorandum of understanding (MOUs) were signed between National Green Highways Mission (NGHM) and ITC Ltd, Yes Bank Ltd and Teri for setting up a Centre for Innovations in Green Pathways in order to enhance research and innovations in the field

Training of labour

• Companies are hiring and training staffto reduce the shortage of skilled manpower and focusing on policies to retain labour.

• Firms plan to increase minimum wages in the construction sector as well as women participation.

• Companies are partnering with technical institutes and colleges such as CSTI (L&T and Govt. of Odisha).

• The Roads Ministry will give grant of USD 1,52,765 to private companies and state road transport corporations willing to set up or upgrade driver training schools.

Geographical expansion

• Indian companies are increasing their footprints abroad, thus tapping outside the market.

• IL&FS won a road contract worth USD 216.7 Mn in Botswana, through its subsidiary Elsamex SA.


Infrastructure – a key government priority

• Infrastructure investment is a major focus area for the government.

• The government has given a massive push to infrastructure by allocating USD 61.8 Bn for this segment in the Union Budget 2017-18.

Support from the Union Budget

• The planned outlay under the Union Budget 2017 -18 for development of road transport and highways is USD14.67 Bn.

• Moreover, as per Union Budget 2017-18, the government has set targets to develop almost 2,000 kilometres of coastal connectivity roads.

Rural Development

• The Prime Ministers Gram Sadak Yojana (PMGSY) is a scheme for development of rural roads in India. The Government of India has succeeded in providing road connectivity to 85 per cent of the 1,78,184 eligible rural habitations in the country under the scheme.

• Under the Union Budget 2017-18, the Government of India allocated an investment of USD 4.21 Bn for the Pradhan Mantri Gram Sadak Yojana (PMGSY).

• The Government of India will spend around Rs. 1 lakh Cr (USD 15.26 Bn) during FY18-20 to build roads in the country under the Pradhan Mantri Gram Sadak Yojana (PMGSY).

Taxes and other sops

• Companies enjoy 100 per cent tax exemption in road projects for 5 years and 30 per cent relief over the next 5 years.

• Companies have been granted a capital of up to 40 per cent of the total project cost to enhance viability.

Value Engineering Programme

• The Ministry of Road Transport and Highways, Government of India, plans to implement ‘Value Engineering Programme in order to promote the use of new technologies and materials in the execution of highway projects in the country.

Transport Sector Growing in Proportion to Roads Sector

• In India, roads remain the most important means of transport, accounting for around 80% of the passenger traffic and 65% of the freight

• The number of total vehicles in India increased at a CAGR of 9% during the period of FY06-17, from 9.7 Mn to 25.3 Mn.

• As of FY17, 2 wheelers accounted for 78.73% of the total number of vehicles in India.


Under the ‘Housing-For-All by 2022 programme, the government envisages pucca houses with water connections, toilet facilities, and 24x7 electricity.

Pradhan Mantri Awaas Yojana (PMAY): The government intends to construct 22 Mn affordable houses by spending Rs. 3 Tn by 2022 under this ambitious plan:

• 12 Mn units in urban entailing a cost of Rs. 1.86 Tn.

• 10 Mn units in rural entailing a cost of Rs. 1.27 Tn.

Rural housing

The government plans to spend Rs. 3.5 Tn to build 30 Mn houses under the National Gramin Awaas Mission (NGAM) for the homeless by 2022 in rural areas.

Urban housing

The central government has a plan to roll out the following schemes for the development:

• This involves redevelopment of slums with the participation of private investment helped by a central grant of Rs. 1,00,000 per beneficiary. State governments can use this grant as viability gap funding for any slum redevelopment scheme.

• An interest subsidy of 6.5% on housing loans up to tenure of 15 years to EWS and

LIG beneficiaries will be provided for loan amounts up to Rs. 6,00,000.

• Central assistance of Rs. 1,50,000 per beneficiary, to promote housing stock for urban poor with the involvement of private/ public sectors – 35% of proposed units to be earmarked for the EWS category.

• Subsidy for beneficiary-led individual construction or enhancement: Central assistance of Rs. 1,50,000 each to eligible urban poor beneficiaries to help them build own houses or undertake improvements to an existing one.

(Source: Phillip Capital Research)

Smart Cities Project

Smart Cities Mission referred to as Smart City

Mission is an urban renewal and retrofitting program by the Government of India with the mission to develop 100 cities across the country making them citizen friendly and sustainable.

Smart Cities Mission envisions developing an area within 100 cities in the country as model areas based on an area development plan, which is expected to have a spill-overeffect on other parts of the city and the nearby cities and towns. Cities will be selected based on the Smart Cities challenge, where the eligible cities will compete in a countrywide competition to obtain the benefits from this mission. As of January 2018, 99 cities have been selected to be upgraded as part of the Smart Cities Mission. (Source: Wikipedia) Cities selected have started project preparations and implementation:

• The projects launched by Ahmedabad are ‘sewage treatment plant, housing project and smart learning in municipal schools.

• Bhubaneswar launched ‘railway multi-modal hub, traffic signalisation project and urban knowledge centre.

• New Delhi Municipal Council launched ‘mini-sewerage treatment plants, 444 smart class rooms, WiFi, smart LED streetlights, city surveillance command and control centre.

(Source: Phillip Capital Research)

It is a five-year program, where all the Indian states and Union territories are participating apart from West Bengal through nomination of at least one city for the Smart Cities challenge. Financial aid will be given by the central and state governments between 2017-2022 to the cities, and the mission will start showing results from 2022 onwards.

The central government will provide Rs. 500 Bn for the scheme, translating into each city getting Rs. 1 Bn per annum for five years.

(Source: Wikipedia)

AMRUT (Atal Mission For Rejuvenation and Urban Transformation)

The AMRUT project is a reuse of the Jawaharlal Nehru National Urban Renewal Mission. Under

AMRUT, state governments will get the flexibility of designing schemes based on the needs of identified cities (unlike JNNURM). State governments will submit annual action plans to the Centre for the funds to be released.

AMRUT seeks to ensure basic infrastructure for 500 cities. Under this, the central government will provide each city with Rs. 1 Bn for improving its amenities. The state government/ULB will also invest an equal amount, implying total investment of Rs. 1 Tn. The central assistance will be provided as follows:

• 50% of the project cost for cities and towns with a population below 1 Mn

• 33% of the project cost for those with population above 1 Mn.

AMRUT aims to spend Rs. 500 Bn over the next five years, ensuring basic infrastructure for 500 cities. (Source: Kotak Research/ Wikipedia/ Phillip Capiltal Research)


Indias power sector is one of the most diversified in the world. Sources of power generation is notably distinguished between conventional sources such as coal, lignite, natural gas, oil, hydro and nuclear power to viable non-conventional sources such as wind, solar, and agricultural and domestic waste. In order to meet the increasing demand for electricity in the country, massive addition has to be made to the existing installed generating capacity. In order to address the lack of adequate electricity supply to the people in the country by March 2019, the Government of India has launched a scheme called ‘Power for All. This scheme will ensure continuous and uninterrupted electricity supply to all households, industries and commercial establishments by creating and improving necessary infrastructure. Its a joint collaboration of the Government of India with states to share funding and create overall economic growth. The countrys total installed capacity of power plants as on 31st March, 2018 stood at 3,40,527 Mega

Watts (MW). (Source: Wikipedia)

Sector MW % of total
State Sector 84,517 24.8%
Central Sector 1,03,968 30.5%
Private Sector 1,52,402 44.6%
Total 3,40,527

(Source: Government of India, Ministry of power)


The utility electricity sector in India has one National Grid with an installed capacity of 340.53 GW as on 31 March 2018 with renewable power plants constituting 32.2% of total installed capacity. India is the worlds third largest producer and third largest consumer of electricity. The per capita electricity consumption is low compared to many countries despite cheaper electricity tariffs in India. Installed capacity increased steadily over the years, posting a CAGR of 5.73% in FY10–FY18. Energy generation from conventional sources stood at 1,206 Bn units (BU) between April-March 2018. Coal-based power generation capacity in India, which currently stands at 197 GW, is expected to reach 330-441 GW by

2040. Initiatives taken by the Energy Efficiency

Services (EESL) have resulted in energy savings of 37 Bn kWh.

(Source: Government of India, Ministry of power)