The latest production data for the so-called eight core sectors suggest the government has not been able to revive stalled infrastructure projects. The core group has around 38 per cent weight in the Index of Industrial Production (IIP). Averaged growth for the financial year, April 2014-March 2015, indicates these eight sectors saw 3.5 per cent growth in 2014-15 over 2013-14. That is the lowest growth in a decade and it comes off a low base.

The eight core sectors saw 0.1 per cent decline year-on-year (y-o-y) in March 2015, versus March 2014. Coal (up six per cent y-o-y), crude ( +1.7 per cent), fertilisers (+5.2 per cent) and electricity (up 1.7 per cent) have gained y-o-y for March 2015. But steel, cement, gas and, refined petro products have y-o-y declines. The cement and steel numbers suggest those two industries are in near-recession. Both industries saw four per cent declines y-o-y in March. Off take in these two commodities is driven by construction. Construction in turn is driven by activity in housing and commercial real estate, infrastructure and industrial projects. Steel demand is also driven by the automobile sector, shipping and other engineering applications.

Cement has import protection because it is hard to transport by sea. But steel faces competition from cheap imports. The domestic iron and steel industry is still reeling from mining bans, as well as struggling to compete on price. Global demand is weak and international prices are low, and as a result, iron ore and steel imports rose 70 per cent in the last financial year.

Cement has huge over-capacity. Domestic production would be around 300 million tonnes, with capacity at well above 400 million tonnes. A few cement majors have declared 2014-15 results. They have all seen profits drop by massive amounts. ACC, UltraTech Cement, Ambuja Cements and Shree Cement have all experienced net profit erosion of at least 25 per cent. The steel majors have not released results yet. Bhushan Steel is in trouble, with a massive debt overhang. Essar Steel has similar issues but is believed to be in the process of turnaround. However, HDFC Bank sold off Rs 550 crore worth of debt in Essar Steel recently at a large discount. Tata Steel's real problems could arise in Europe, where it is struggling to cope with threats of strikes in Britain. Jindal Steel and Power has been facing allegations from the Central Bureau of Investigation (CBI) about coal block allocations. Vedanta has other problems with the Cairn merger. Industry experts don't expect an immediate pick-up in cement demand. Steel could see better off-take as the auto industry cycle improves. But competing with imports will remain difficult. In the long term, construction must pick up to drive demand for these two commodities. One possibility is a general revival, where the estimated Rs 6,80,000 crore worth of stuck infra projects get rolling again and some new projects are initiated. Another possibility is the stimulus that could arise from the new 100 smart cities mega-project. That could drive demand.

The construction industry itself is fragmented. Many major players are financially stressed. What is more, construction companies are short of high-end equipment and also short of skilled labour. All these are barriers to efficiency.

Some construction businesses have tried to become project developers and thereby taken on more risk. Project delays have led to more money getting stuck. In general, there are high debts: equity ratios across the industry. Desperate attempts have been made to de-leverage by selling assets. There is a Catch-22. Only completed projects can find buyers and completed projects already have cash-flows to service debt.

There are multiple reasons why projects are stuck. These range from slow clearances, to contractual disputes, to over-optimistic projections, high interest rates, and also of course, problems with land acquisition. Multiple policy reviews are needed to reduce, if not eliminate, these frictions.

My sense is that, if construction revives, so will steel and cement. The industry fortunes are intimately connected. Incidentally, given the quanta of lender exposures, banking and specialised infra financing Non-Banking Financial Companies would also see a big bounce if construction activity improved. The consensus seems, little change is likely in the next six months (the first half of 2015-16). Earnings could remain at similar levels or decline through the next two quarters. But long-term prospects should be reasonable. As of now, cement and steel both seem over-valued and both sectors could see falling share prices. Recovery will depend on external factors. If policy action and more efficient processes do trigger construction activity, both steel and cement could see turnarounds. But there might be deep corrections in both industries before that occurs.