Author: Manish Kulkarni, Director – Strategy & Business Development, BDB India
Intro: Welding industry expected to witness a growth of around 8-9 per cent for FY 2017-FY2020 with the development of infrastructure in India.
Welding industry witnessed a growth of around 5 per cent for FY 2017. Automotive, Construction Equipment, Heavy Engineering sector have been the major contributors. Semi automatic and automatic systems are witnessing a platform of increased growth.. Automation is predominantly present in the heavy engineering segment, railways, auto industry. Welding automation market is expected to be in the range of Rs 250 crore, wherein the CNC Laser Cutting Machine market is expected to be in the range of approx Rs 220 crore for FY 2017 driven by railways, earthmoving equipment, automotive, dies, defence and aerospace. There would be significant contribution from the SME sector (40-50%) however; the trend is towards more organized structure of the industry. Investment in welding segment will be driven in FY18 mainly by the central government which is expected to concentrate on spending on roads (up 11.9% YoY), railways (up 22.2% YoY) and urban development. States may not be in a position to spend too much as they have already taken on the additional debt of the DISCOMs though the UDAY bonds. Private sector investment in infra would come with a lag while that in manufacturing would be contingent on links between higher consumption and capacity utilization across sectors. Although, overall investments are likely to see an improvement, it could be marginal in nature and a percent of GDP would continue to be below the levels seen during FY12-FY16 (34.3% to 29.2%). The Gross Fixed Capital Formation (GFCF) is expected to increase at around 27.5 per cent of GDP in FY18. Some of the private sector companies specially in consumer durable, building material and metal segment that are witnessing strong demand has started working on their capacity expansion plans. However, full fledge recovery may take time as balance sheets are still highly leveraged leading to rise in Non-Performing Assets levels. The industry credit growth remained weak, and the capacity utilization levels are still at lower levels. Going ahead, we think that strong government and public investment demand would eventually turn the corner for private sector investment demand as capacity utilization rates rise across the economy.
Key highlights of FY 2017
Growth driven by agriculture economy: up 4.9% YoY v/s 0.7% YoY in FY16
Public administration, defence expenditure saw an uptick: up 11.3% YoY v/s 9% YoY in FY16
In the fiscal year FY17, the Gross Fixed Capital Formation (GFCF) recorded a decline to 26.9% of GDP as against 29.2% of GDP recorded in FY16.
Lower private sector spending led to low capacity utilization which in turn hampered the overall investment in the economy.
GFCF has fallen from a high of 35% in FY 2012 leading to significant stagnation in private investment.
Also private sector investment in infra has not yet picked up.
On the expenditure side, the government consumption rose sharply along with moderately high growth in private consumption as compared to FY16.
Competitive federalism: Driving reforms at state level
States have aggressively been working on attracting investments and implementing policies of central government. Andhra Pradesh launched Industrial Development Policy (IDP) 2015 to 2020 in April 2015 to support the development of various industries and provide financial assistance. Around 15 companies from the U.S. have assured collective investments of approximately USD750 million in Andhra Pradesh; majorly being pumped in the renewable energy sector. Soft Bank (a Japanese telecom and Internet company) will set up a 20 GW solar plant in Andhra Pradesh. The new Aerospace and Defence (A&D) Policy of Andhra Pradesh is expected to attract investments worth USD 3 billion by 2020. The investments are expected from various companies such as Airbus, Essel Infra, SREI Infra, etc., which have shown interest in setting-up defence and aerospace parks. Setting up Bangalore Aerospace Park (BAP) and Bangalore Aerospace SEZ (BASEZ) at Devanahalli and Aerospace Parks at potential locations like Mysore, Hubli, Mangalore, Belgaum through PPP model has made Karnataka an A&D cluster. Faoxconn, Lava, Micromax, Karbonn and Celkon (mobile handset manufacturers) have also signed up with Andhra Pradesh to set up their manufacturing facilities near Tirupati with a total investment of USD 300 million. Chhattisgarh government would be investing USD1.6 billion in the coming 2 to 3 years (2015-18) to build the upcoming new capital city of Naya Raipur into a smart city. Rajasthan Solar Policy with its four companies have signed MoUs to develop solar power projects under the state’s solar policy. These four projects combined would contribute about one-fourth (26 GW) of India’s solar power generation target by 2022 with an investment of around USD24.3 billion.
Priority areas in the infrastructure sector
Power sector investments:
The budgetary outlay on the power sector does not truly reflect the extent of importance being given here as the bulk of the funding is from outside the Union Budget. The massive resetting of discom finances under Ujwal Discom Assurance Yojna (UDAY) is largely being managed by bond placements. The 100 per cent electrification of villages and revamping of urban distribution networks is being done through funding from the Power Grid Corporation of India, REC Power Distribution Company, Power Finance Corporation, et al. The emphasis has shifted from adding coal-based thermal generating plants to revamping the nation’s transmission and distribution networks and 2021 target of 100,000 MW of solar power has been widely published and is getting much traction.
Other key takeaways
While the roads sector retains its prime focus, significant emphasis is on railways, rural infrastructure, urban rejuvenation, solar power and electricity transmission and distribution. The government is serious about its mantra of ‘public expenditure-led investment in infra to kick-start the economy’. Even in a fiscal-deficit challenged situation, the Finance Minister has proposed a 23 per cent increase in outlay this year, over and above the 27 per cent increase last year. Budgetary allocation is being leveraged many times over by off-budgetary funding. The National Investment and Infra Fund epitomizes this new line of thinking. Even individual ministries are being encouraged to increasingly see budgetary support as seed funding. So, the railways sector is set to raise capital from the Life Insurance Corporation of India and the World Bank. The roads ministry wants to securitize tolls and garner substantive funding under the toll-operate-transfer (TOT) scheme. Japanese loans are funding the bullet train project. Rural infrastructure is clearly a much needed political-economic thrust. Not only does Bharat account for the bulk of vote banks, but also the current state of despair in rural India necessitates a major thrust in this area.
Railways -Key focus area
Initiatives taken to boost railway infrastructure
The railway sector allows for 100 per cent FDI under the automatic route. FDI worth USD12 billion have already been received (major projects include Mumbai–Ahmedabad high-speed corridor project and CSTM–Panvel suburban corridor development project). China, Japan and Spain have shown interest in technology transfer and technical cooperation in High Speed Rail, modernisation of infrastructure and maintenance. Japan is expected to sign a MoU to develop 400 stations and assist in zero-accident mission of the Indian Government. Locomotive and wagon manufacturing: Indian railways awarded a 10years contract to GE and Alstom for diesel and electric locomotive factories in Bihar at a cost of about USD 6.2 billion respectively. Various metro rail projects are currently being developed across the cities of Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Kolkata, Kochi and Jaipur. Other cities where metro projects have been approved include Ahmedabad, Nagpur, Pune and Lucknow. Dedicated freight corridor (DFC) is being implemented in phases with an investment of around USD12.5 billion. This project is expected to be completed in 2019.
Higher FDI limits would encourage more investment. Countries such as China, France and Japan have shown interest in the sector to assist in the development of modern infrastructure and high-speed rail network. The government expects the share of private investments toward MRTS development to grow from 13 per cent during 2007-12 to 42 per cent during 2012-17. Zero-accident mission of the Indian Government will drive in safety systems like Train Protection Warning System (TPWS) and Train Collision Avoidance System (TCAS).Upgrade of identified stations to international standards with modern facilities and passenger amenities will drive investments like centrally managed railway display network in over 2,000 stations. Power generation and energy saving investments are focused to support modernisation and expansion (2000 stations and railways signaling).
Industrial corridors: Potential growth drivers
New corridors developed
Amritsar Kolkata Industrial Corridor (AKIC): Delhi Mumbai Industrial Corridor Development Corporation (DMICDC) would prepare a feasibility report, for which consultants have been appointed .
Bengaluru Mumbai Economic Corridor (BMEC): The draft perspective plan has been prepared. Nodes are being identified alongside preparation of a master plan and finalisation of the perspective plan.
Chennai Bangalore Industrial Corridor (CBIC): The perspective plan has been finalised. The Phase II Study is in progress and the draft final report of master planning for industrial nodes is under consideration in consultation with stakeholders.
Delhi Mumbai Industrial Corridor (DMIC): The first node/city level Special Purpose Vehicle (SPV) under DMIC Project has been incorporated. Work on 5 smart industrial townships in Delhi Mumbai Industrial Corridor has been initiated (Dholera in Gujarat, Shendra-Bidkin in Maharashtra, Greater Noida in UP, Ujjain in MP and Gurgaon in Haryana).
Vizag Chennai Industrial Corridor (VCIC): Four nodes have been finalised; Asian Development Bank has agreed to prepare the master plans for 2 identified nodes.
Development of green field infrastructure to support the industry and satellite citieshavebeen planned effectively. Thus, investments in the power transmission and distribution network with the latest technologies are in place.
Other areas of growth
The government has announced the installation of 100,000 MW (or 100 GW) of solar power generating capacity by 2019, of which 20,000 MW would be contributed by solar parks and 40,000 MW each from roof-top and distributed generation projects. Also, the target of 10,000 MW of wind power installations per year has been efficiently set.GST shall drive the demand for warehousing and PEB segments. Defence, ports (coastal economic zones) and airports shall be the ultimate areas of growth in terms of Private Investment, Construction Equipments and Automobile Sector shall see consistent growth due to infra spending and rural growth in the next 3-4 years. Enhancement in water and gas pipeline network, power transmission and distribution capacity is also expected and at the same time significant focus would be given to the electric vehicle technology.
Welding industry in India: Expected to grow by CAGR of 8-9 per cent
Welding industry expected to witness a growth of around 8-9 per cent for FY 2017-FY2020.
Welding automation market is expected to see growth in the range of 11-12 per cent for FY 2017-FY2020.
CNC Laser Cutting Machine market is expected to witness a growth 9-10 per cent for FY 2017-FY2020.