ICRA: Railway Station Redevelopment Programme Picks Up Speed - Opens Up Opportunities For Building Construction Players
Building construction players are eyeing significant opportunities from the railway station redevelopment projects over the medium term for the construction players engaged in the building construction segment. As per ICRA note, the overall size of the station redevelopment programme is quite large, involving over 500 stations with an estimated cost of Rs. 1.1 lakh crore and the same is likely to be spread over a longer time horizon (more than five years). Over the medium term (1-3 years), about 50 stations are likely to be taken up for redevelopment with estimated cost between Rs. 10,000 to Rs. 20,000 crore, depending on the extent of commercial development around these stations.
According to Mr. Shubham Jain, Vice-President and Group-Head, Corporate Ratings, ICRA, “So far, contracts for five station redevelopment projects have been awarded by the Indian Railway Stations Development Corporation Limited (IRSDC), and NBCC India Ltd. These include Habibganj (Bhopal), Gandhinagar (Gujarat), Gomti Nagar (Lucknow), Charbagh (Lucknow), and Puducherry. While Habibganj has been awarded under the public private partnership mode, the other four stations have been awarded on the engineering procurement construction (EPC) mode. The first two stations awarded - Habibganj and Gandhinagar - are in advanced stages of implementation. The remaining three stations (two in Lucknow and one in Puducherry) have been awarded in FY2019. The awarded contract values have varied between Rs. 100 crore to Rs. 540 crore and have been taken up by construction players focussed on the building segment. The total value of the four contracts (excluding the PPP project) is Rs. 1,149 crore. However, the competitive intensity in bidding for these projects have been low with average awards at 5% premium to the base cost.”
Besides, ICRA notes that IRSDC, the nodal agency for the railway station development programme, has recently allocated planning and feasibility work for 39 stations to five CPSEs (NPCC, Engineering Projects, MECON, RITES, Bridges & Roof Co.). This is likely to pave the way for fast-tracking their development. This apart, NBCC was earlier entrusted with 10 railway stations of which it has already awarded EPC work for three stations and is likely to take up the remaining stations depending on their financial viability.
After a slow start, the station development programme has gained traction in the last one year and is expected to gather momentum with multiple station redevelopment projects in the pipeline. Nevertheless, challenges still remain which can impact the programme.
The private sector investment in these projects has been weak and is likely to remain muted due to significant market risk associated with the real estate development. Hence, a majority of these projects are likely to be awarded on an EPC mode for the station redevelopment part, while the commercial development is to be taken up separately. With the relaxations of procedures and the increase of the lease period for commercial area to 99 years, the viability of these projects has increased. Nevertheless, the funding for these projects will need to be arranged by the sponsors like IRSDC, and NBCC till the time the commercial development around these stations is monetised. Thus, the pace of the project awards would also be dependent on the viability of the stations and the funds available with the implementing agencies.
“ICRA has maintained a Stable outlook on the construction sector with the expected healthy order inflows and pace of execution, primarily supported by the increased investments in infrastructure. The construction GVA growth has improved to 8.9% in FY2019 as per advance estimates. The banking credit to the construction and infrastructure sectors has also witnessed an uptick in FY2019, after muted growth in the previous year, supported by roads and other infrastructure segments. Though the order inflows are likely to be muted in H1-FY2020 due to the Lok Sabha election, it is likely to pick up pace in the second half of the financial year. With adequate orders in hand, companies with healthy balance sheets are expected to demonstrate stable performance” adds Mr. Jain.