Infrastructure Investments The Race To Build

Updated: Jan 21 2007, 08:20am hrs
To the people of India, we make an appeal to join us with faith and confidence We have to build the noble mansion of free India where all her children may dwell
Pandit Jawaharlal Nehru

These are excerpts from the famous address to the nation on August 14, 1947, marking the independence of India from the British Raj in 1947. Cut to the present, 60- years later. Manmohan Singh the current Prime Minister in an address to the India-EU business summit said, We are aware that to sustain the growth momentum, we need to do much more in the field of infrastructure and improve its all-round availability and quality.

After a gap of 60 years, the current Prime Minister still speaks of building the nation again. A critic, underlining the lack of infrastructure in the country, would talk about the inefficiency of our politicians and inability of the system, resulting in poor infrastructure. Recent reports from Moodys also point towards the lack of infrastructure as an impediment to sustaining the 9% growth rate.

On the other hand, an opportunist would look with wide eyes at the ever-growing importance of infrastructure in building the mansion of a free and developed nation. On the back of the talks of more than $300 billion lined up for investment in infrastructure in India over the next five years, it becomes more than important to pay heed to the infrastructure story. It is an opportunity that cannot be missed.

Like it or not, the market will find ways of addressing this paucity, even if the government does not intervene actively. Rapid growth in telecom connectivity speaks volumes about this. Private players have simply created an international class infrastructure in India.

At the onset, it may seem that individual investors may not be able to participate in this opportunity. Funding infrastructure and reaping the benefits from it has been the privy of the large institutional agencies. However, this time around, it might not be the case. There are several avenues still open for investors to participate in.

The opportunity

Infrastructure, which essentially is the backbone of any economic activity, the support platform on which trade is carried out, covers a wide scope of activity like railways, roads, ports, aviation, logistics solutions, power, energy solutions and telecom. Urban infrastructure is another key area. Needless to say, these activities are crucial for the success of any economy in the long term.

For decades together the infrastructure has been the domain of the public sector. Strapped for funds, investments made by the private sector entities were not sufficient to fuel high growth.

Apart from funding paucity, bureaucratic bottlenecks and corruption has seen the available funds wither away. Even today lakhs of villages in India do not have round the year road connectivity, when 65% of Indian population stays in rural India. Barring a few pockets, most people in the country have no access to 24-hour electricity. Almost 80% of the people dont have access to safe drinking water.

Even a small investment in this area, economists say, will spur the economy and the multiplier effect will unleash a chain of prosperity. Since the base is small and the coverage wide (650 million people), the opportunity is unprecedented. This is nothing short of a global bomb of an opportunity that when erupted will create a reaction all around.

Road to riches

Consider the opportunity the roads throw up. Currently, Indias road network is the second largest in the world with roads in excess of 33 lakh kilometres.

Though it is one of the biggest, it is not capable to support the growing demand of the economy. It is not just the length but also the quality of the road along with the ability to construct an efficient road transport system that matters.

To support the 8% and above economic growth in times to come it is imperative that the road infrastructure in the country to be improved. Roads earlier under the golden quadrilateral project and now under National Highway Development Programme (NHDP) throw open a plethora of opportunities for the construction players. Also the Pradhan Mantri Gram Sadak Yojana (PMGSY) is the icing on the cake. Roads under NHDP are built on BOT and BOO basis with private participation, making it a less capital-intensive activity for the government.

Players like Gammon India, IVRCL Infrastructure and Nagarjuna Constructions are lining up to make most of the opportunity thrown open by the construction business. Stringent timelines for completion and penalty and other reward systems will encourage timely completion of projects and also sound collections. With multilateral agencies, like ADB, IFC coming on the scene some of the delays are expected to be done away with. The success and acceptability of the Mumbai-Pune expressway has spurred up action here and there are several other such paid expressways springing up.

Relying on rail

While the roads are springing up to link the nation, the railways, one of the largest rail networks in the world, are not far behind.

Over a period of time, the populist measures of governments have led to a case of a business run on the least investment activity and compromised on the service quality and safety.

It has stressed more on the higher utilisation levels. The recent initiatives on the freight rationalisation and private participation in corridors and container business talk about the changing times.

On the investment front, since railways are in the public domain, individual investor participation will not be as forthcoming. However, players like Texmaco, promoted by the KK Birla Group and a leader in the wagon business is one such player that can offer investors an opportunity to gain from the railways growth. Also players like Kernex Microsystems, that provides the railways with anti-collision devices and the software involved, can provide investment avenues.

Air and sea world

Opportunities seem to be coming in from the land, the sea and air as well. Huge investments are on cards for developing ports and container terminals. Here, based on the strong business focus and consistent profitability players like the public sector mini-ratna Dredging Corporation and SICAL appear to be a good bet in the long-run.

The same holds true for the more glamourous aviation sector as well. The mere attraction of running an airline seems to be attracting newer players, especially in the low-cost segment. However, cut-throat competition will have a pressure in having profitable margins and volatile fuel costs will threaten the profitability. Given this, there seems little investment argument for airlines.

However, double-digit growth in the domestic and international air traffic would necessitate the investment in the airport infrastructure. This is one of the reasons why certain fund managers believe in the prospects for GMR Infrastructure and GVK, that are involved in building airports in Delhi and Mumbai.

Power and energy

The demand for power is increasing at a higher rate than the rate at which the power capacities are added. Government initiatives like the Power for all by 2012 and Accelerated Power Development Reform Programme (APDRP) are aimed at increasing the power generation capacity from 1.15 lakh mw to 2 lakh mw by 2012. This will unleash power for investors as well.

Recently, private sector players Tata Power and Lanco Infratech have won two key mega power projects open for competitive bidding. Heavy engineering majors like ABB, Larsen & Toubro, Siemens, BHEL, Areva T&D are likely to see more action as the scene gets charged up. Some of the charge will also be transferred to the transmissions business. The power sector is plagued by around 40% transmission and distribution losses. Here, reforms are steadily gaining momentum in the desired direction and investments are expected to flow in the transmission and distribution activities. While transmission of power picks up, transport of gas is certainly gaining attention in the oil and energy sector. Players like Indraprastha Gas and GAIL are expected to gain from the transportation of gas in the light of increased gas applications. On the other hand, fortunes of refiners, marketers and oil explorers like ONGC are marred by the administered price mechanism. Any policy moves in the direction to rationalise this would see accelerated growth in earnings.

Connectivity

One of the major trends emerging in the infrastructure story is that of connectivity. Airports, roads, rail and ships are connecting people and commodities. Way ahead in this race is the telecom sector that has been connecting people literally at the speed of thought.

In the past five years, India has emerged as the second biggest market for telecom services. The growth is expected to continue over the next few years. Bharti Airtel, Reliance Communication, MTNL and IDEA Cellular are the key players slugging it out in the competitive telecom business.

The 3G services rollout and further value added services like content sales will add to the bottomline of these companies. All in all, this is a segment with high revenue visibility over the coming quarters.

And while infrastructure growth keeps happening, one sector to gain most from all this action will be the financiers. One can piggyback on the infrastructure financing companies to have a proxy play. Players like IDFC, PFC and SREI Infrastructure Finance are gearing up to shake off some of the lard built over the previous years and get most of the action.

Price for growth

The buzz word in the infrastructure business is action. The promise is clearly visible. There is little doubt that sound investments are being made. There are cash flows that are visible. Many investors are of a sound financial background. Many have experience of having developed world class projects. The technologies used are state-of-the-art. All of this sounds heady!

And therefore investors need to be careful. While there is growth, there is also the value attached to it and valuations also seem to be getting heady at the moment. Burgeoning order books are fuelling this premium. Investors therefore need to carefully observe the premium while investing in these businesses. In the long term it is not the order books but the profits earned by these companies are going to make a difference. Especially, the margins are getting pressurised due to rising input prices, competitive bidding process and rising interest payments.

A similar wave of infrastructure related boom was seen in the early nineties when the licence raj was done away with. Just about everybody jumped in the fray wanting a piece of the action. Many of these projects are relics now. And even some of the bigger names had to shelve projects. Hence the old phrase, Sales are vanity, profit is sanity and cash is reality holds true.

So while building the mansion of our free and developed nation, it would be better to do it after careful consideration, brick by brick.

Infrastructure Support

As core infrastructure creators get ready for action, investors can also look at supplier and ancillary businesses. Action in the infra- structure sectors often kicks off a similar activity in that of the related raw material industries and supplier industries. The margins and volumes improve in such industries as the booming businesses further grow. Here are some sectors and ideas.

Logistics is an area that offers tremendous growth as they enhance supply chains and build profitability. There are considerable service expansions happening in this area and global alliances getting forged. Fund managers are closely watching scrips like Gateway Distripark, Aegis Logistics and GATI in this segment.

Cement capacities are running at historically high utilisation levels to the tune of 96%. The cement demand is growing at more than 4% year-on-year. With little capacity addition in the near term, a demand-supply gap ensures firm cement prices, especially, in south India. Regional players like India Cement, Madras Cement and Dalmia Cement in south India have reported strong performances. In the north, national level players like Ultratech Cement, ACC and the regional players like Shree Cements are expected to benefit from this positive environment.

Electrical equipment manufacturers like Crompton Greaves, Thermax, EMCO, Bharat Bijlee, Easun Reyrolle along with transmission players like Jyoti Structures, RPG Transmission too have an access to this multi-billion opportunity. Also cable manufacturers will benefit from the surge in the transmission and distribution activities.

Capital equipment providers like road building equipment, cranes and mixers, are vital in infrastructure projects. Players like Ingersoll Rand, Sanghavi Movers are some of the likely beneficiaries in this segment.