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Industrials
India
Ironing out central government infrastructure spending. We look through budget
documents to iron out elements of infrastructure spending of Rs2.2 tn. We note (1) the
bulk of actual cash allocation is towards rural infrastructure (Rs570 bn rural and Rs146
bn urban), (2) roads (Rs283 bn) and railways (Rs566 bn) receive support but are largely
funded from cess and internal accruals and (3) PSUs contribute most to commercial
infrastructure (Rs2.97 tn, of which Rs816 bn towards infrastructure) but with negligible
government support. Fresh steps to augment debt funds are positive but may take time.
Ironing out infrastructure spending of Rs2.2 tn mentioned in union budget
We attempt to iron out infrastructure spending of Rs2.2 tn by government referred in the budget
speech. We note the following (1) the bulk of it is actually funded by PSUs (Rs816 bn) in power
(Rs576 bn), IT (BSNL – Rs175 bn) etc., (2) roads (Rs283 bn) and railways (Rs566 bn) receive some
support (which is also just re-routing of cess collection on auto fuels) from the government but
also have sizeable internal accruals, (3) actual cash spending by government is only in rural
infrastructure (Rs570 bn) and a very small portion in urban (Rs146 bn).
Non-rural infrastructure development primarily funded by PSUs with minimal government support
We note that majority of government allocations are towards various schemes primarily focused
on rural infrastructure development. Apart from support from central allocation to roads and
railways, most non-rural infrastructure development is being funded by commercial forces,
including capital expenditure planning of public sector enterprises such as NTPC and PGCIL. Public
sector enterprises have a total planned outlay of Rs2.97 tn (US$65.7 bn) in FY2012BE. Out of this,
infra sector spending is Rs820 bn. Thus, an appropriate regulatory framework to catalyze
investments for such sectors is more important than central allocations.
Some fresh steps to augment debt funding for infrastructure sector—may take time to bear fruit
Some fresh measures introduced in this budget to boost infrastructure funding include
(1) infrastructure debt funds for routing foreign funds into Indian infrastructure with lower
withholding taxes, and (2) higher limit for foreign institutional investments in corporate bonds
including unlisted infrastructure SPVs with trading allowed among FIIs. Other routine steps include
(1) issue of tax-free infrastructure bonds to the tune of Rs300 bn towards infrastructure
development in railways, ports, housing and highways, (2) higher disbursement target of Rs250 bn
for IIFCL in FY2012BE (versus Rs200 bn in FY2011RE), and (3) we believe that this reflects
government’s resolve to augment funding for the infrastructure sector and being innovative in
attracting foreign debt funds to the sector.
Increase in defense capital spending by 14%; augers well for BEL
The government increased the planned capital expenditure on defense sector to Rs691 bn in
FY2012, up 14% yoy from Rs608 bn in FY2011RE (revised estimate marginally higher than FY2011
budget estimate of Rs600 bn). This will be positive for Bharat Electronics.
SEZ developers to be subject to MAT; not much impact in MPSEZ valuation
The government has cited that SEZ developers and units would be brought under the purview of
MAT. We have accordingly built in MAT payment in our model for MPSEZ. However, there is not
much impact on the company valuation as MAT credit would nullify near-term earnings impact
and the utilization of credit in cash terms later reduces valuation impact. Retain BUY, TP of Rs160.
Ironing out infrastructure spending of Rs2.2 tn mentioned in union budget
We attempt to iron out infrastructure spending of Rs2.2 tn by government referred in the
budget speech. We note the following (1) the bulk of it is actually funded by PSUs (Rs816 bn)
in power (Rs576 bn), IT (BSNL – Rs175 bn) etc., (2) roads (Rs283 bn) and railways (Rs566 bn)
receive some support (which is also just re-routing of cess collection on auto fuels) from the
government but also have sizeable internal accruals, and (3) actual cash spending by the
government is only in rural infrastructure (Rs570 bn) and a very small portion in urban
(Rs146 bn).
Government spending via various planned schemes—focus on rural
development
The government has allocated Rs716 bn towards asset creation schemes for infrastructure
development in the Union Budget FY2012, a growth of only 10% over FY2011RE (Revised
Estimate) of Rs651 bn and 14.7% over FY2011BE (Budget Estimate). The primary focus of
the allocation continues to be rural development as majority of the total allocation is
towards rural schemes. The Bharat Nirman program (includes schemes RGGVY, PGSY, AIBP,
IAY and ARWSP) has been the principal instrument used for planned outlays for rural
infrastructure development. The government has allocated about Rs570 bn towards Bharat
Nirman in FY2012BE, about Rs100 bn higher than FY2011BE.
The non-rural focus schemes (Jawaharlal Nehru National Urban Renewal Mission - JNNURM
and Restructure Accelerated Power Development and Reforms Program - APDRP) were
allocated Rs146 bn in FY2012E. This is a strong growth over FY2011RE of Rs101 bn but a
decline of about 5% versus FY2011BE
Roads, railways constitute other key areas of direct government spending in infra
Expenditure towards roads, railways and aviation sectors forms other major areas of
government outlays in the infrastructure sector. These outlays are done via key government
organizations such as NHAI, Indian Railways, and Airport Authority of India. The government
has planned an outlay of Rs875 bn towards these sectors, a growth of 24% over FY2011RE.
Of this, about Rs421 bn is expected to be met through budget allocations and the remaining
Rs454 bn through internal allocations.
Non-rural infrastructure development primarily funded by commercial
enterprises
We highlight that apart from minor support from central allocation to roads and railways,
most non-rural infrastructure development is being funded by commercial forces, including
capital expenditure planning of public sector enterprises such as NTPC, PGCIL etc. Apart
from the government allocations, public sector enterprises have a total planned outlay of
Rs2.97 tn (US$65.7 bn) in FY2012BE. Of this about Rs816 bn is towards the infrastructure
sector (rows marked in grey in the exhibit below). Thus, an appropriate regulatory
framework to catalyze investments for such sectors becomes increasingly more important
than central allocations in playing listed stocks under our coverage.
Total planned expenditure of public sector enterprises has been increased by 23% over
FY2011RE to Rs3 tn (US$65.71 bn) in FY2012BE. However, the growth is only a moderate
6.6% over FY2011 budget estimate of Rs2.8 tn (US$61.6 bn). The growth was primarily led
by the power, steel and railways ministries which cumulatively account for about 45.5% of
the total planned outlay. Planned outlay of the petroleum and natural gas ministry (25% of
total) also recorded a moderate growth of about 7% (over FY2011RE and FY2011BE). We
note that planned outlay by Coal India Ltd is expected to significantly decline to about Rs42
bn (from Rs54 bn for FY2011RE and Rs98 bn for FY2011BE).
Several measures to augment funding in infrastructure sector
The government has introduced several measures in this budget with an aim to boost
funding for infrastructure projects. Key measures include:
` Notified infrastructure debt funds with a reduced withholding tax rate of 5% (versus
current rate of 20%); further, income from the fund would be exempt from tax.
` Tax-free infrastructure bonds to the tune of Rs300 bn to be issued by various
government undertakings in 2012 towards infrastructure development in railways, ports,
housing and highways. This includes Rs100 bn by Indian Railway Finance Corp., Rs100 bn
by National Highway Authority of India (NHAI), Rs50 bn by HUDCO and Rs50 bn by the
ports sector.
` Higher disbursement target for IIFCL of Rs250 bn in FY2012BE versus expected Rs200
bn in FY2011 to provide long-term financial assistance to infrastructure projects.
` Higher limit for FII investment in infrastructure corporate bonds by an additional
US$20 bn, taking the limit to US$25 bn. FIIs would also be permitted to invest in unlisted
bonds (of infrastructure SPVs) with a minimum lock-in period of three years; however,
they would be allowed to trade between themselves during the lock-in period.
We believe that this reflects government’s resolve to augment funding for the infrastructure
sector and being innovative in attracting foreign debt funds to the sector.
Increase in defense capital spending by 14%; augers well for BEL, L&T
The government increased the planned capital expenditure on defense sector to Rs691 bn in
FY2012, up 14% yoy from Rs608 bn in FY2011RE (revised estimate marginally higher than
FY2011 budget estimate of Rs600 bn). We believe that this would be positive for Bharat
Electronics and some other associated players as well such as L&T. BEL’s addressable area
grew by about 12% over FY2011RE to Rs192 bn.
SEZ developers to be brought under purview of MAT—impact on MPSEZ
The government has specified that Minimum Alternate Tax (MAT) would be levied upon SEZ
developers as well as units operating in SEZs. This would impact MPSEZ which used to be a
zero-tax company as it was an SEZ developer. We have revised our model on MPSEZ to
incorporate MAT.
Build MAT taxation; MAT credit nullifies near-term earnings impact and the
utilization of credit in cash terms later reduces valuation impact
We have modeled MAT payment of 20% (18.5% plus 5% surcharge etc.), built a MAT
credit against this tax and utilized this tax credit fully in setting off actual cash tax payment
once the company comes out of the MAT regime. There is no impact on near-term reported
earnings as the accounting MAT credit nullifies the cash payment for MAT till FY2018E.
During FY2019E and FY2020E, accumulated MAT credit is utilized to set off actual cash
taxes (gets cash benefit from accounting MAT credit so far). Timing mismatch between MAT
payment and its set-off creates a marginal impact on the valuation of the company.
Slight adjustment to per ton realization based on 9MFY11 track record increases
value for the port asset
We have also adjusted the average realization per metric ton of volume slightly higher as
9MFY11 realization of about Rs340 per ton was higher than our assumption. This change
has negated the valuation change from MAT taxation for Mundra port valuation. Our port
valuation has been revised upwards to Rs129 from Rs121 based on net effect of slightly
higher realization and MAT taxation.
Reduce SEZ valuation on slower absorption and effect of MAT on financials; SEZ is
not the key driver of earnings or valuation
SEZ absorption would be affected by MAT taxation on developers as well as units. However,
SEZ valuation and its earnings contribution is not a key driver for Mundra Ports as only 5-6%
of earnings for the entire company is supposed to originate from SEZ. In terms of value also
SEZ contributes only 9% to our total valuation of the company. SEZ valuation is of Rs14 per
share (Rs29 bn in NPV terms is just 1.3X FY2013E EBITDA from Mundra Port).
Moderately revise earnings; retain BUY and target price of Rs160/share
We have retain our SOTP-based target price of Rs160/share comprised of (1) Rs129/share
from the Mundra port business (FY2012E-based DCF valuation), (2) Rs14/share from the SEZ
business, (3) Rs4.6/share from Dahej port value, (4) Rs4.3/share from Mormugao and Hazira
ports, and (5) Rs1.7/share from book value of investments in Adani Logistics.
Mundra port trades at about 20X FY2012E and 13.5X FY2013E earnings. Mundra Port
adjusted for other assets like SEZ and other ports trades at about 15.5X FY2012E and 11.3X
FY2013E EV/EBITDA.
We retain our BUY rating on MPSEZ based on (1) about 18% upside to our target price and
more reasonable valuations, (2) strong likely near-term earnings growth led by long-term
fixed contracts, (3) visible strong cash flow generation (expected EBITDA of Rs13 bn in
FY2011E), (4) relatively low leverage on balance sheet making it relatively insensitive to
interest rates versus other infrastructure players, (5) low dependence on market cycles as
majority of port volumes are linked to energy imports (coal for upcoming power plants), (6)
long-term potential to add capacity at Mundra port led by availability of large waterfront,
and (7) good historical track record in terms of capacity and volume ramp-up.
Key risks relate to (1) inability to sustain tariffs at current/projected levels, (2) potential
utilization of strong cash flows, (3) delays in associated infrastructure projects (power plant,
refineries etc), and (4) slower-than-expected SEZ area absorption.
Domestic equipment supply to mega/UMPPs exempt from excise duty
Capital goods imports for UMPPs and mega power projects are exempt from customs duty
as well as countervailing duty (in lieu of domestic excise duty). This exemption to imports
was available for expansion projects as well. Correspondingly, supply to these plants from
domestic equipment manufacturers is exempt from excise duty as well as all other local taxes.
Domestic equipment supply was always exempt from domestic excise duty but
expansion was not covered earlier
This exemption was not notified so far for expansion projects (only for greenfield projects)
which has been corrected in this budget. For instance, expansion of Rajpura project from
1,400 MW to 2,100 MW. The first approval for 1,400 MW would include local excise duty
exemption under the old rules, but under the old rule additional unit would not have
enjoyed the excise duty exemption.
Mega power policy has been significantly liberalized in last 2-3 years; almost every
project qualifying for mega power projects status and thus duty-free imports
We note that the mega power policy has been significantly liberalized (covenants limiting
qualification of a power project as a mega power project have been substantially diluted
earlier over last two-three years), making way for many more projects to qualify for mega
power status and thus duty free imports. Two critical rules which limited qualification under
mega power policy which have earlier been removed were (1) interstate sale and (2)
privatization of distribution of electricity in cities (> 1 mn population) of beneficiary states.
Higher frequency of projects qualifying for duty-free imports would have brought spotlight
to minor disincentives for local industry in such a policy and one such disincentive is being
remedied now.
Any project of 1,000 MW in case of thermal and 500 MW in case of hydro can possibly
qualify for mega power projects status, subject to approvals.
Brief on various government schemes
` RGGVY. The Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) was launched in April
2005 with the objective of improving rural electricity infrastructure and providing
electricity to all homes, including free-of-charge power access to families below the
poverty line. Under the scheme, 90% capital subsidy is provided towards the overall cost
of the projects while the remaining 10% of the project cost is contributed by states
through their own resources or loan from financial institutions. The scheme covers the
following infrastructure (1) rural electricity distribution backbone of 33/11 KV (or 66/11
KV) sub-stations, (2) village electrification infrastructure including provision of distribution
transformers, and (3) decentralized generation-cum-distribution where grid connectivity is
unviable.
` R-APDRP. The Restructure Accelerated Power Development and Reforms Program
(APDRP) was launched as a means of restoring the commercial viability of the power
distribution sector amidst alarming levels of T&D losses of about Rs206 bn in FY2004. The
Power Finance Corporation (PFC) acts as nodal agency for the scheme for strengthening
and up-gradation of sub-transmission and distribution network of up to 66 KV T&D
network. Projects under the scheme are executed in two parts (1) Part–A consists of
preparation of baseline data, and (2) Part–B consists of improvements and modernization
of the T&D infrastructure.
` JNNURM. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was launched
with the aim to integrate infrastructure development for select cities and to ensure
adequate funds to meet the deficiencies in urban infrastructure services. The mission
comprises (1) sub-mission for urban infrastructure and governance administered by the
Ministry of Urban Development, and (2) sub-mission for basic services to the urban poor
administered by the Ministry of Urban Employment and Poverty Alleviation. Projects
eligible for assistance under JNNURM include (1) urban renewal, i.e. redevelopment of
inner (old) city areas, (2) water supply, sanitation and waste management, (3) urban
transportation—roads, MRTS, and metro projects, (4) slum development and
rehabilitation, including affordable housing, water supply, sewage, drainage, street
lighting and environmental improvement, and (5) health, education and social security
schemes for the urban poor.
` NHAI. Allocation for NHAI in the budget may not have a direct correlation with the
quantum of the road projects the authority would tender as the total spending by the
authority is a function of the outcome of the bidding process. For instance, if many
project are tendered with NHAI grants versus revenue sharing, the authority would
potentially exhaust its budgeted allocation over a fewer number of projects. A significant
part of the central allocation for NHAI is funded by cess on auto fuels. Of the Rs2/litre
cess collected on motor fuels (1) Rs0.5 is earmarked for NHAI, (2) of the Rs1.5/litre
remaining – 50% of the cess on high speed diesel is earmarked for the PMGSY scheme
while the rest is split between NHAI (57.5%), Railways (12.5%) and state road projects
(30%).
` PMGSY. Acknowledging road connectivity as a key component for rural development,
the PMGSY scheme was launched in December 2000 to provide all-weather access to
unconnected habitations (defined as a cluster of population, living in an area, the location
of which does not change over time). PMGSY is a 100% centrally sponsored scheme;
50% of the cess on high speed diesel is earmarked to fund this scheme. Expenditure on
the up-gradation of existing road cannot exceed 20% of the state’s allocation, and is thus
not the central focus of the scheme, as long as eligible unconnected habitations in the
state still exist.
` AIBP. The Accelerated Irrigation Benefits Program (AIBP) was conceived in FY1997 to
provide financial assistance to states to complete various ongoing irrigation projects in the
country. AIBP extends financial assistance as grants to the irrigation projects as an
incentive to the states for creating irrigation infrastructure in the country. The scheme
was originally launched as a central loan assistance scheme but was later enhanced with a
grant component. Grants equal to 25% of the project cost for major and medium
irrigation projects (90% for projects in special category states) are provided to the
selected projects. The sanctioned grants are released in two installments—the first
component amounting to 90% of the total is released immediately while the second is
after the confirmation of expenditure.
` ARWSP. The Accelerated Rural Water Supply Program (ARWSP) was introduced in to
assist the sates and union territories to accelerate the pace of coverage of drinking water
supply. Under the modified guidelines for National Rural Water Supply (NRWS) program
for the XI plan, the scheme earmarks total allocation into funds for increasing coverage,
water quality improvement and sustainability. Projects are funded on a 50:50 basis by the
centre and the state (90:10 for NE State and J&K).
` IAY. The Indira Awaas Yojana (IAY) aims to provide financial assistance to the rural poor
for the construction of homes. Funding of IAY is shared between the centre and state in
the ratio of 75:25. The financial assistance provided for new construction under IAY is
Rs.35,000–38,000 per unit. Further, provision has been made to extend lower interest
rates for construction of IAY houses in rural areas. The centre releases the funds to a
district in two installments; the first amounting to 50% of the total allocation is released
in the beginning of the financial year subject to the condition that the second installment
during the previous year was claimed and released without any condition. Payments are
made to the beneficiary on a staggered basis depending on the progress of the work.
Installments of payment to be linked to the progress of work can be decided by the State
Government or at the District level.
` NREGS. National Rural Employment Guarantee Scheme (NREGS), one of the largest
centrally funded schemes in India, aims to enhance livelihood security in rural areas by
providing at least 100 days of guaranteed wage employment in a financial year to every
household whose adult members volunteer for unskilled manual work. The scheme aims
to strengthen the natural resource base of rural livelihood by focusing on work in areas
such as water management, land development, and road connectivity so as to create
durable local assets and potentially eradicate poverty
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Industrials
India
Ironing out central government infrastructure spending. We look through budget
documents to iron out elements of infrastructure spending of Rs2.2 tn. We note (1) the
bulk of actual cash allocation is towards rural infrastructure (Rs570 bn rural and Rs146
bn urban), (2) roads (Rs283 bn) and railways (Rs566 bn) receive support but are largely
funded from cess and internal accruals and (3) PSUs contribute most to commercial
infrastructure (Rs2.97 tn, of which Rs816 bn towards infrastructure) but with negligible
government support. Fresh steps to augment debt funds are positive but may take time.
Ironing out infrastructure spending of Rs2.2 tn mentioned in union budget
We attempt to iron out infrastructure spending of Rs2.2 tn by government referred in the budget
speech. We note the following (1) the bulk of it is actually funded by PSUs (Rs816 bn) in power
(Rs576 bn), IT (BSNL – Rs175 bn) etc., (2) roads (Rs283 bn) and railways (Rs566 bn) receive some
support (which is also just re-routing of cess collection on auto fuels) from the government but
also have sizeable internal accruals, (3) actual cash spending by government is only in rural
infrastructure (Rs570 bn) and a very small portion in urban (Rs146 bn).
Non-rural infrastructure development primarily funded by PSUs with minimal government support
We note that majority of government allocations are towards various schemes primarily focused
on rural infrastructure development. Apart from support from central allocation to roads and
railways, most non-rural infrastructure development is being funded by commercial forces,
including capital expenditure planning of public sector enterprises such as NTPC and PGCIL. Public
sector enterprises have a total planned outlay of Rs2.97 tn (US$65.7 bn) in FY2012BE. Out of this,
infra sector spending is Rs820 bn. Thus, an appropriate regulatory framework to catalyze
investments for such sectors is more important than central allocations.
Some fresh steps to augment debt funding for infrastructure sector—may take time to bear fruit
Some fresh measures introduced in this budget to boost infrastructure funding include
(1) infrastructure debt funds for routing foreign funds into Indian infrastructure with lower
withholding taxes, and (2) higher limit for foreign institutional investments in corporate bonds
including unlisted infrastructure SPVs with trading allowed among FIIs. Other routine steps include
(1) issue of tax-free infrastructure bonds to the tune of Rs300 bn towards infrastructure
development in railways, ports, housing and highways, (2) higher disbursement target of Rs250 bn
for IIFCL in FY2012BE (versus Rs200 bn in FY2011RE), and (3) we believe that this reflects
government’s resolve to augment funding for the infrastructure sector and being innovative in
attracting foreign debt funds to the sector.
Increase in defense capital spending by 14%; augers well for BEL
The government increased the planned capital expenditure on defense sector to Rs691 bn in
FY2012, up 14% yoy from Rs608 bn in FY2011RE (revised estimate marginally higher than FY2011
budget estimate of Rs600 bn). This will be positive for Bharat Electronics.
SEZ developers to be subject to MAT; not much impact in MPSEZ valuation
The government has cited that SEZ developers and units would be brought under the purview of
MAT. We have accordingly built in MAT payment in our model for MPSEZ. However, there is not
much impact on the company valuation as MAT credit would nullify near-term earnings impact
and the utilization of credit in cash terms later reduces valuation impact. Retain BUY, TP of Rs160.
Ironing out infrastructure spending of Rs2.2 tn mentioned in union budget
We attempt to iron out infrastructure spending of Rs2.2 tn by government referred in the
budget speech. We note the following (1) the bulk of it is actually funded by PSUs (Rs816 bn)
in power (Rs576 bn), IT (BSNL – Rs175 bn) etc., (2) roads (Rs283 bn) and railways (Rs566 bn)
receive some support (which is also just re-routing of cess collection on auto fuels) from the
government but also have sizeable internal accruals, and (3) actual cash spending by the
government is only in rural infrastructure (Rs570 bn) and a very small portion in urban
(Rs146 bn).
Government spending via various planned schemes—focus on rural
development
The government has allocated Rs716 bn towards asset creation schemes for infrastructure
development in the Union Budget FY2012, a growth of only 10% over FY2011RE (Revised
Estimate) of Rs651 bn and 14.7% over FY2011BE (Budget Estimate). The primary focus of
the allocation continues to be rural development as majority of the total allocation is
towards rural schemes. The Bharat Nirman program (includes schemes RGGVY, PGSY, AIBP,
IAY and ARWSP) has been the principal instrument used for planned outlays for rural
infrastructure development. The government has allocated about Rs570 bn towards Bharat
Nirman in FY2012BE, about Rs100 bn higher than FY2011BE.
The non-rural focus schemes (Jawaharlal Nehru National Urban Renewal Mission - JNNURM
and Restructure Accelerated Power Development and Reforms Program - APDRP) were
allocated Rs146 bn in FY2012E. This is a strong growth over FY2011RE of Rs101 bn but a
decline of about 5% versus FY2011BE
Roads, railways constitute other key areas of direct government spending in infra
Expenditure towards roads, railways and aviation sectors forms other major areas of
government outlays in the infrastructure sector. These outlays are done via key government
organizations such as NHAI, Indian Railways, and Airport Authority of India. The government
has planned an outlay of Rs875 bn towards these sectors, a growth of 24% over FY2011RE.
Of this, about Rs421 bn is expected to be met through budget allocations and the remaining
Rs454 bn through internal allocations.
Non-rural infrastructure development primarily funded by commercial
enterprises
We highlight that apart from minor support from central allocation to roads and railways,
most non-rural infrastructure development is being funded by commercial forces, including
capital expenditure planning of public sector enterprises such as NTPC, PGCIL etc. Apart
from the government allocations, public sector enterprises have a total planned outlay of
Rs2.97 tn (US$65.7 bn) in FY2012BE. Of this about Rs816 bn is towards the infrastructure
sector (rows marked in grey in the exhibit below). Thus, an appropriate regulatory
framework to catalyze investments for such sectors becomes increasingly more important
than central allocations in playing listed stocks under our coverage.
Total planned expenditure of public sector enterprises has been increased by 23% over
FY2011RE to Rs3 tn (US$65.71 bn) in FY2012BE. However, the growth is only a moderate
6.6% over FY2011 budget estimate of Rs2.8 tn (US$61.6 bn). The growth was primarily led
by the power, steel and railways ministries which cumulatively account for about 45.5% of
the total planned outlay. Planned outlay of the petroleum and natural gas ministry (25% of
total) also recorded a moderate growth of about 7% (over FY2011RE and FY2011BE). We
note that planned outlay by Coal India Ltd is expected to significantly decline to about Rs42
bn (from Rs54 bn for FY2011RE and Rs98 bn for FY2011BE).
Several measures to augment funding in infrastructure sector
The government has introduced several measures in this budget with an aim to boost
funding for infrastructure projects. Key measures include:
` Notified infrastructure debt funds with a reduced withholding tax rate of 5% (versus
current rate of 20%); further, income from the fund would be exempt from tax.
` Tax-free infrastructure bonds to the tune of Rs300 bn to be issued by various
government undertakings in 2012 towards infrastructure development in railways, ports,
housing and highways. This includes Rs100 bn by Indian Railway Finance Corp., Rs100 bn
by National Highway Authority of India (NHAI), Rs50 bn by HUDCO and Rs50 bn by the
ports sector.
` Higher disbursement target for IIFCL of Rs250 bn in FY2012BE versus expected Rs200
bn in FY2011 to provide long-term financial assistance to infrastructure projects.
` Higher limit for FII investment in infrastructure corporate bonds by an additional
US$20 bn, taking the limit to US$25 bn. FIIs would also be permitted to invest in unlisted
bonds (of infrastructure SPVs) with a minimum lock-in period of three years; however,
they would be allowed to trade between themselves during the lock-in period.
We believe that this reflects government’s resolve to augment funding for the infrastructure
sector and being innovative in attracting foreign debt funds to the sector.
Increase in defense capital spending by 14%; augers well for BEL, L&T
The government increased the planned capital expenditure on defense sector to Rs691 bn in
FY2012, up 14% yoy from Rs608 bn in FY2011RE (revised estimate marginally higher than
FY2011 budget estimate of Rs600 bn). We believe that this would be positive for Bharat
Electronics and some other associated players as well such as L&T. BEL’s addressable area
grew by about 12% over FY2011RE to Rs192 bn.
SEZ developers to be brought under purview of MAT—impact on MPSEZ
The government has specified that Minimum Alternate Tax (MAT) would be levied upon SEZ
developers as well as units operating in SEZs. This would impact MPSEZ which used to be a
zero-tax company as it was an SEZ developer. We have revised our model on MPSEZ to
incorporate MAT.
Build MAT taxation; MAT credit nullifies near-term earnings impact and the
utilization of credit in cash terms later reduces valuation impact
We have modeled MAT payment of 20% (18.5% plus 5% surcharge etc.), built a MAT
credit against this tax and utilized this tax credit fully in setting off actual cash tax payment
once the company comes out of the MAT regime. There is no impact on near-term reported
earnings as the accounting MAT credit nullifies the cash payment for MAT till FY2018E.
During FY2019E and FY2020E, accumulated MAT credit is utilized to set off actual cash
taxes (gets cash benefit from accounting MAT credit so far). Timing mismatch between MAT
payment and its set-off creates a marginal impact on the valuation of the company.
Slight adjustment to per ton realization based on 9MFY11 track record increases
value for the port asset
We have also adjusted the average realization per metric ton of volume slightly higher as
9MFY11 realization of about Rs340 per ton was higher than our assumption. This change
has negated the valuation change from MAT taxation for Mundra port valuation. Our port
valuation has been revised upwards to Rs129 from Rs121 based on net effect of slightly
higher realization and MAT taxation.
Reduce SEZ valuation on slower absorption and effect of MAT on financials; SEZ is
not the key driver of earnings or valuation
SEZ absorption would be affected by MAT taxation on developers as well as units. However,
SEZ valuation and its earnings contribution is not a key driver for Mundra Ports as only 5-6%
of earnings for the entire company is supposed to originate from SEZ. In terms of value also
SEZ contributes only 9% to our total valuation of the company. SEZ valuation is of Rs14 per
share (Rs29 bn in NPV terms is just 1.3X FY2013E EBITDA from Mundra Port).
Moderately revise earnings; retain BUY and target price of Rs160/share
We have retain our SOTP-based target price of Rs160/share comprised of (1) Rs129/share
from the Mundra port business (FY2012E-based DCF valuation), (2) Rs14/share from the SEZ
business, (3) Rs4.6/share from Dahej port value, (4) Rs4.3/share from Mormugao and Hazira
ports, and (5) Rs1.7/share from book value of investments in Adani Logistics.
Mundra port trades at about 20X FY2012E and 13.5X FY2013E earnings. Mundra Port
adjusted for other assets like SEZ and other ports trades at about 15.5X FY2012E and 11.3X
FY2013E EV/EBITDA.
We retain our BUY rating on MPSEZ based on (1) about 18% upside to our target price and
more reasonable valuations, (2) strong likely near-term earnings growth led by long-term
fixed contracts, (3) visible strong cash flow generation (expected EBITDA of Rs13 bn in
FY2011E), (4) relatively low leverage on balance sheet making it relatively insensitive to
interest rates versus other infrastructure players, (5) low dependence on market cycles as
majority of port volumes are linked to energy imports (coal for upcoming power plants), (6)
long-term potential to add capacity at Mundra port led by availability of large waterfront,
and (7) good historical track record in terms of capacity and volume ramp-up.
Key risks relate to (1) inability to sustain tariffs at current/projected levels, (2) potential
utilization of strong cash flows, (3) delays in associated infrastructure projects (power plant,
refineries etc), and (4) slower-than-expected SEZ area absorption.
Domestic equipment supply to mega/UMPPs exempt from excise duty
Capital goods imports for UMPPs and mega power projects are exempt from customs duty
as well as countervailing duty (in lieu of domestic excise duty). This exemption to imports
was available for expansion projects as well. Correspondingly, supply to these plants from
domestic equipment manufacturers is exempt from excise duty as well as all other local taxes.
Domestic equipment supply was always exempt from domestic excise duty but
expansion was not covered earlier
This exemption was not notified so far for expansion projects (only for greenfield projects)
which has been corrected in this budget. For instance, expansion of Rajpura project from
1,400 MW to 2,100 MW. The first approval for 1,400 MW would include local excise duty
exemption under the old rules, but under the old rule additional unit would not have
enjoyed the excise duty exemption.
Mega power policy has been significantly liberalized in last 2-3 years; almost every
project qualifying for mega power projects status and thus duty-free imports
We note that the mega power policy has been significantly liberalized (covenants limiting
qualification of a power project as a mega power project have been substantially diluted
earlier over last two-three years), making way for many more projects to qualify for mega
power status and thus duty free imports. Two critical rules which limited qualification under
mega power policy which have earlier been removed were (1) interstate sale and (2)
privatization of distribution of electricity in cities (> 1 mn population) of beneficiary states.
Higher frequency of projects qualifying for duty-free imports would have brought spotlight
to minor disincentives for local industry in such a policy and one such disincentive is being
remedied now.
Any project of 1,000 MW in case of thermal and 500 MW in case of hydro can possibly
qualify for mega power projects status, subject to approvals.
Brief on various government schemes
` RGGVY. The Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) was launched in April
2005 with the objective of improving rural electricity infrastructure and providing
electricity to all homes, including free-of-charge power access to families below the
poverty line. Under the scheme, 90% capital subsidy is provided towards the overall cost
of the projects while the remaining 10% of the project cost is contributed by states
through their own resources or loan from financial institutions. The scheme covers the
following infrastructure (1) rural electricity distribution backbone of 33/11 KV (or 66/11
KV) sub-stations, (2) village electrification infrastructure including provision of distribution
transformers, and (3) decentralized generation-cum-distribution where grid connectivity is
unviable.
` R-APDRP. The Restructure Accelerated Power Development and Reforms Program
(APDRP) was launched as a means of restoring the commercial viability of the power
distribution sector amidst alarming levels of T&D losses of about Rs206 bn in FY2004. The
Power Finance Corporation (PFC) acts as nodal agency for the scheme for strengthening
and up-gradation of sub-transmission and distribution network of up to 66 KV T&D
network. Projects under the scheme are executed in two parts (1) Part–A consists of
preparation of baseline data, and (2) Part–B consists of improvements and modernization
of the T&D infrastructure.
` JNNURM. Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was launched
with the aim to integrate infrastructure development for select cities and to ensure
adequate funds to meet the deficiencies in urban infrastructure services. The mission
comprises (1) sub-mission for urban infrastructure and governance administered by the
Ministry of Urban Development, and (2) sub-mission for basic services to the urban poor
administered by the Ministry of Urban Employment and Poverty Alleviation. Projects
eligible for assistance under JNNURM include (1) urban renewal, i.e. redevelopment of
inner (old) city areas, (2) water supply, sanitation and waste management, (3) urban
transportation—roads, MRTS, and metro projects, (4) slum development and
rehabilitation, including affordable housing, water supply, sewage, drainage, street
lighting and environmental improvement, and (5) health, education and social security
schemes for the urban poor.
` NHAI. Allocation for NHAI in the budget may not have a direct correlation with the
quantum of the road projects the authority would tender as the total spending by the
authority is a function of the outcome of the bidding process. For instance, if many
project are tendered with NHAI grants versus revenue sharing, the authority would
potentially exhaust its budgeted allocation over a fewer number of projects. A significant
part of the central allocation for NHAI is funded by cess on auto fuels. Of the Rs2/litre
cess collected on motor fuels (1) Rs0.5 is earmarked for NHAI, (2) of the Rs1.5/litre
remaining – 50% of the cess on high speed diesel is earmarked for the PMGSY scheme
while the rest is split between NHAI (57.5%), Railways (12.5%) and state road projects
(30%).
` PMGSY. Acknowledging road connectivity as a key component for rural development,
the PMGSY scheme was launched in December 2000 to provide all-weather access to
unconnected habitations (defined as a cluster of population, living in an area, the location
of which does not change over time). PMGSY is a 100% centrally sponsored scheme;
50% of the cess on high speed diesel is earmarked to fund this scheme. Expenditure on
the up-gradation of existing road cannot exceed 20% of the state’s allocation, and is thus
not the central focus of the scheme, as long as eligible unconnected habitations in the
state still exist.
` AIBP. The Accelerated Irrigation Benefits Program (AIBP) was conceived in FY1997 to
provide financial assistance to states to complete various ongoing irrigation projects in the
country. AIBP extends financial assistance as grants to the irrigation projects as an
incentive to the states for creating irrigation infrastructure in the country. The scheme
was originally launched as a central loan assistance scheme but was later enhanced with a
grant component. Grants equal to 25% of the project cost for major and medium
irrigation projects (90% for projects in special category states) are provided to the
selected projects. The sanctioned grants are released in two installments—the first
component amounting to 90% of the total is released immediately while the second is
after the confirmation of expenditure.
` ARWSP. The Accelerated Rural Water Supply Program (ARWSP) was introduced in to
assist the sates and union territories to accelerate the pace of coverage of drinking water
supply. Under the modified guidelines for National Rural Water Supply (NRWS) program
for the XI plan, the scheme earmarks total allocation into funds for increasing coverage,
water quality improvement and sustainability. Projects are funded on a 50:50 basis by the
centre and the state (90:10 for NE State and J&K).
` IAY. The Indira Awaas Yojana (IAY) aims to provide financial assistance to the rural poor
for the construction of homes. Funding of IAY is shared between the centre and state in
the ratio of 75:25. The financial assistance provided for new construction under IAY is
Rs.35,000–38,000 per unit. Further, provision has been made to extend lower interest
rates for construction of IAY houses in rural areas. The centre releases the funds to a
district in two installments; the first amounting to 50% of the total allocation is released
in the beginning of the financial year subject to the condition that the second installment
during the previous year was claimed and released without any condition. Payments are
made to the beneficiary on a staggered basis depending on the progress of the work.
Installments of payment to be linked to the progress of work can be decided by the State
Government or at the District level.
` NREGS. National Rural Employment Guarantee Scheme (NREGS), one of the largest
centrally funded schemes in India, aims to enhance livelihood security in rural areas by
providing at least 100 days of guaranteed wage employment in a financial year to every
household whose adult members volunteer for unskilled manual work. The scheme aims
to strengthen the natural resource base of rural livelihood by focusing on work in areas
such as water management, land development, and road connectivity so as to create
durable local assets and potentially eradicate poverty
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