The Saudi Investment Authority is looking to invest US$750 million in an infrastructure fund for development in India. What does this mean for GCC efforts to grow the construction industry beyond the Arabian Peninsula?
August 20, 2012 2:16 by kippreport
According to a recent survey by the Indian Federation of Chambers of Commerce and Industry, 53 percent of Indian companies in the poll said they have been “adversely impacted” by the continuing European economic crisis. Some three quarters of companies said European stagnation has cost them up to 15 percent of their business generation. As a result, more than 30 percent of those surveyed said they are looking past the eurozone with a key eye on the Mena region and even North America.
Most of India’s states are larger than most European countries. And they hold a lot more economic promise as well. Saudi’s US$750 million investment is just the tip of an economic iceberg. “India needs an investment of close to a trillion dollars in the next five to seven years to build and expand its existing infrastructure to be able to sustain a GDP growth rate of [between] 8 and 9 percent,” Indian finance minister Pranab Mukherjee said in New Dehli at the beginning of the year to a Saudi Arabian delegation, which included commerce minister Tawfeeq bin Fouzan al Rabea.
Particularly important for Saudi Arabia is the enormous Indian demand for energy. “India would be happy to participate in the exploration and production activities with Saudi Arabia in our two countries and also in third countries. India has national plans to build refineries and petrochemical projects,” Mr. Mukherjee said.
Indeed, a recent Bank of America-Merrill Lynch analysis of the Middle East-North Africa construction sector says that Saudi Arabia’s booming industry is a relatively inexpensive investment play. Consider this: Saudi Arabia accounts for neatly half of the Menaproject pipeline — a construction project valued at US$401 billion. In fact, Merrill Lynch analysts recommend even non-Saudi companies with exposure to that country’s booming construction sector.
That includes United Arab Emirates-based DSI, which has 54 percent of its total backlog exposed to the Saudi Arabian market, according to Merrill Lynch. Other factors that make the company an attractive investment are its healthy balance sheet (AED97 million, or US$26.4 million, of net cash), strong revenue growth (management expects 25 percent in 2012) and the fact that stock trades at a 29 percent discount to its Mena peers, according to a recent Merrill Lynch report.
Saudi giant Al-Khodari is another construction company to watch. The firm’s management says it expects new contract awards to double this year, translating into SAR2 billion (US$533.3 million). “Al-Khodari has the highest profitability within the Mena construction space,” says the Merrill Lynch analysis. “Management expects contracting gross margins to remain in the 19 to 23 percent range in the medium term. This is higher than peers DSI (14.7 percent) and Arabtec (12.1 percent).”
In all, Merrill expects Saudi Arabia’s economy to grow at a 5 percent pace this year. Although that’s not as rapid as India, it’s clearly robust compared to the ailing economies of Europe. That’s another reason why the construction giants of Saudi Arabia and the rest of the GCC view their massive neighbor across the Arabian sea as a good extension of their industry. The relationship between the GCC and India is symbiotic because of the subcontinent’s rising demand for oil and services, as well as the infrastructure that provides those services. And with the price of oil remaining high, the GCC’s economies remain robust.