Roads & Highways Sector Initiation - Get On The Roads Again: SBI Cap

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Roads & Highways Sector - Overweight

GET ON THE ROADS AGAIN

Roads & Highways sector reforms carried out during the past few years has led to a greater optimism of sector performance from various stake holders. During the first half of the year, policy changes brought about desired results, leading to a large number of projects being awarded, revival of investor interest and more definite future plans. However, the second half of the year has been a complete contrast, with irregularities and inquires at National Highways Authority of India (NHAI) along with slower than expected award activity impacting the growth in the sector. This, when coupled with difficult short term macro economic conditions and forced negative policy changes by Ministry of Road Transport & Highways (MoRTH), has caused investors, contractors and operators to sit on the sidelines. We believe the lull in award activity is a temporary phenomenon and expect positive policy reforms to renew the interest of various stakeholders in the sector.

Keeping in view the huge infrastructure investment needed to sustain current growth levels as well as to accomplish the higher growth targets, we believe the sector is poised to witness heightened activity in the next one- two months, thereby benefiting the existing players in the sector. We initiate the coverage of IRB and ITNL with BUY rating which we believe will be major beneficiaries among others.

Road Sector – Opportunities galore 

Infrastructure is both a cause and a consequence of economic growth. Physical infrastructure is essential for manufacturing, services, trade and even human capital, while rising incomes and rapid urbanization drive demand for electricity, transport, telecom and housing which in turn drives demand for infrastructure investment. However, short term economic growth can be achieved by not taking all sections of society into account but envisaging a long-term economic prosperity will require a focused approach of inclusive growth. Given the growing population, income levels and rapid urbanization, the need to develop the road network of the country to match heightened economic activity is of vital importance.

Strong pipeline of projects to be awarded: NHAI is expected to award 5000 km of new projects during the next one - two months with a total value ~ Rs 700bn. Given the strong pipeline of projects to be awarded, each having specific award dates, will provide much sought after relief to the various players in the sector.

12^th plan to provide more than $150bn opportunity: The Twelfth Plan is likely to see investment of ~$1 trillion in developing the country’s physical infrastructure to sustain the growing demand and is likely to see investment of more than $150bn go towards the development of the country’s poor road and highway infrastructure.

20 Km / per day still can be achieved: The target set by the MoRTH of constructing 20 km of national highways per day, as well as NHAI’s targets of awarding projects under the work plan I and II have been missed and if significant measures are not taken, it will further hamper growth of the sector. MoRTH is expected to award 12,000 km of roads projects annually till 2012-13 which could also take care of the slow award activity during recent times.

Urbanization to further drive demand for roads: By 2018, Indian cities are expected to grow by about CAGR 30%. This flood of new urbanites will require investment on a massive scale, in electricity, housing, transport, water and a host of other public services. Thus, huge investment is required to ensure proper transportation systems are put in place for movement of people and goods from one place to another.