The domestic construction sector is expected to get a major boost from the Indian Railways’ (IR) capex plans, estimated at over Rs 650 billion per year, over the next three to five years. The IR is in the midst of a transformational journey to upgrade its infrastructure and gain the lost market share from the roads sector. The IR capex plans for the five-year period 2015-2019 involves a capital outlay of Rs 8.56 trillion. To meet this target, the annual capital outlays for FY2016-2018 were increased significantly from Rs 0.6 trillion in FY2015 to Rs 1.31 trillion in FY2018BE. The majority of the planned capex is towards decongestion of the existing network, laying of new lines, electrification of network, station modernisation and development, etc. The IR is also working on a high speed rail corridor (HSR) project.
Railway electrification is likely to be a focus area for the Indian Railways, which has recently shifted towards the EPC mode of contract execution, from the hitherto conventional methodology or turnkey contracts, which is expected to improve the execution pace and provide sizeable opportunities for the private players. About 38,000 route km of railway lines are proposed for electric traction in the next five years, entailing a capex of Rs 400 billion. This is sharply higher when compared with the average execution pace of 2,580 rkm involving expenditure of Rs 30 billion per year during the last three years. IR has already awarded the first two contracts on an EPC basis, which were won by L&T. Similarly, station modernisation or redevelopment is another focus area for the Railways with plans of upgrading 100 railway stations across the metro and major cities over the next five years. These are planned to be developed under the PPP model with the private sector getting revenues from real estate. Few stations have been chosen to start with and execution has started on the Habibganj (Bhopal, Madhya Pradesh) and Gandhinagar (Gujarat) railway stations.
The other big ticket project being undertaken by IR is the HSR corridor or bullet train project between Mumbai to Ahmedabad. The project, which is expected to cost Rs 1.08 trillion, will be primarily funded by low cost debt from Japan and is expected to start execution in 2018. The project completion is targeted by 2023-24. Apart from the capex plan, IR has also taken steps to improve the pace of project execution and funding. Some of the key initiatives include securing the line of credit from LIC, merger of the Rail Budget with the Union Budget, delegating powers to the zonal level, reducing the project approval process time lines, awarding projects on an EPC basis, etc. These initiatives are expected to increase private sector participation and improve the pace of execution. The construction companies which have stronger balance sheet are well placed to benefit from the large government spending on infrastructure and are likely to see faster growth and improved credit metrics.