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Policy initiatives on track but implementation has been slow
Power: Concerns over fuel supply; SEB finances not as bad
Highways: No major policy changes
Railways: Likely to be the next big opportunity
Meeting takeaways
We met Mr. B K Chaturvedi, Member of Planning Commission, and
Feedback Ventures (FV), an infrastructure consultant.
Long-term prospects good, challenges in the near term
Mr Chaturvedi believes that one should take a longer-term view on the
infrastructure sector. Most challenges are short term in nature; policies
are being framed to address some of the long-term challenges (example,
creating an enabling environment for infrastructure investments). Midyear
state elections (especially West Bengal) and a likely reshuffle of the
Cabinet of Ministers should provide impetus to infrastructure
development in the near term. High financing cost is a major challenge,
and is likely to continue for the next 12 months. We continue to like
Larsen &Toubro (LT IN, TP: INR1,850, CP: INR1,628, BUY) and IRB
Infrastructure (IRB IN, TP INR301, CP: INR1,98.5, BUY) in the sector.
Power – capacity addition likely despite challenges
In the 11th Five-Year Plan (FY08-12) at least 55 GW of capacity is likely
to be added despite challenges. Mr. Chaturvedi opines that financial
position of the SEBs is not as bad as is generally perceived, except for
some North-Eastern states. Challenges in the coal sector with respect to
capacity and transportation are short term. Capacity expansion is being
planned both on mining and transportation fronts. Alternative sources
such as imports of coal and use of gas is being encouraged. As for gas
allocation, capacity already installed and ready for generation will be
preferred over future capacity. Near term, some private developers are
fast-tracking execution of gas-generation capacities, but at their own risk.
Highways – no major policy changes
The Planning Commission has substantially completed policy initiatives in
the highways sector. However, implementation of the second set of
recommendations is likely only on appointment of a permanent Chairman
of the NHAI. Competition has increased due to the hiatus in project
awardings. Some bidders are looking at projects on a holistic basis,
including construction margins, which explains certain aggressive bids.
FV believes certain recent bids have been aggressive, but it does not rule
out the possibility of these projects turning profitable. The possible ways
of making these bids profitable is to reduce capital costs via innovative
engineering techniques/design allowed by the concession agreements.
Separately, certain players have a location advantage that can help them
efficiently execute the project.
Other sectors moving slowly; railways promising
Development in other sectors has been very slow. The ports sector has
been ahead of other smaller sectors (likely capacity of 1.2b tonnes,
against a target of 1.5b tonnes at the end of the 11th Plan). Airport-related
development from here on has been taken up by the public authorities;
private-sector interest is only in certain green-field opportunities (Navi
Mumbai, etc). Railways is likely to be opened up for private investment
after the West Bengal elections; no major technical capabilities are
required for this opportunity.
Takeaways from meeting with Mr B K Chaturvedi
We discussed the challenges facing the infrastructure sector in the present environment
with Mr. B K Chaturvedi, Member of Planning Commission.
Mr. Chaturvedi believes that one should take a longer-term view on the infrastructure
sector. He believes that most challenges are short term in nature, and policies are
being framed to take care of some of the long-term challenges (which would promote
infrastructure investments).
With regards to issues in the power sector, we specifically discussed the financial
position of the State Electricity Boards (SEBs), coal requirements, and fuel-allocation
policy.
Mr. Chaturvedi opines that the financial position of the SEBs is not as bad as is
generally perceived, except for certain North-Eastern states. He believes the respective
state governments would support the SEBs in meeting their power-procurement
obligations. The Finance Commission has provided guidance to the states on curbing
their deficits (to 3-5%), and the states’ Annual Plans include financial support to SEBs.
That said, Mr. Chaturvedi believes there is a need for a permanent solution such that
SEBs can pass on the higher cost of power. He also said that some of the North-
Eastern states are already planning to implement (or have implemented) such plans.
Power-generation capacity of 55 GW is likely to be added in the 11th Five-Year Plan.
Furthermore, Mr. Chaturvedi believes coal shortage is a short-term challenge.
Increasing investments in the expansion of mining capacity and the transportation
sector are likely to solve the issue of fuel shortages for the power sector. The
Empowered Group of Ministers will strictly allocate gas according to the gas allocation
policy. Capacity that is already installed and ready for generation will be preferred for
gas allocation over future capacity. In the near term, some of the private power
generators are fast-tracking execution of the some of their gas-generation capacities,
but they are doing so at their own risk.
Reduction in the production of coal or gas is again a short-term issue, according to Mr.
Chaturvedi. Availability of gas is also likely to improve after the recent deal between
Reliance Industries (RIL IN) and British Petroleum (BP LN, Not rated). The deal is likely
to encourage the use of newer exploration technologies, thereby increasing the
availability of gas. Shale gas exploration is being undertaken as an alternative source of
gas. Additionally, he stated that roughly half the blocks allocated in the New Exploration
Licensing Policy (NELP) are yet to be explored.
Mr. Chaturvedi encourages the use of liquefied natural gas (LNG)/re-gasified LNG
(RLNG). The viability of power produced with high-cost fuel has to be viewed in
concurrence with the different class of customers. He cited examples where there is still
demand from power consumers in Gujarat at higher prices in return for assured stable
supply of gas. From the regulators’ side, they are in the process of forming policies to
determine gas prices using a ‘pooling mechanism’. As for coal pricing, Coal India (CIL
IN, Not rated) has already pegged the cost of grade A and B coal to global prices.
In the highways sector, all support from the Planning Commission has been given in
terms of policy relaxation (in the form of the recommendations made in August 2009).
The second set of recommendations (which include fast-tracking of the dispute
resolution process) is likely to be adopted after the Chairman for the NHIA is appointed.
Currently, the Secretary of Department of Road Transport and Highways is also holding
the position of NHAI’s Chairman as a stop-gap arrangement.
On the ports sector, Mr. Chaturvedi said that the sector will not be completely opened
up to market forces at one go. He is satisfied with the development that has taken place
in the non-major ports segment. During the 11th Five-Year Plan, overall capacity
augmentation is likely to be 1.2b tones, short of the 1.5b tonnes target. Legal disputes
have been a major hurdle in the ports sector, but these again are short term in nature,
according to Mr. Chaturvedi.
Railways development has been a disappointment for Mr Chaturvedi. He expects
development to gather pace after the West Bengal elections.
In the airports sector, Chennai and Kolkata are being developed currently; no other
major green-field airport (except for Navi Mumbai) is on the anvil.
The details for the 12th Five-Year Plan (April 2012-March 2017) are likely to be released
during September-December 2011. An approach paper is currently being developed,
which is due to be finalised in mid-2011.
Meeting with Feedback Ventures
Feedback Ventures (FV) is an independent infrastructure consultant.
Competition has increased due to the hiatus on awardings. Some bidders are looking at
projects on a holistic basis, including construction margins.
FV believes that certain recent bids have been aggressive. However, it does not rule
out the possibility of the bids turning out to be profitable. The possible ways of making
these bids profitable is to reduce capital costs via innovative engineering
techniques/design allowed by the concession agreements. Separately, certain players
have location advantage that can help them efficiently execute the project.
More policy changes/impetuses to sector are likely after the West Bengal elections,
according to FV. These changes could also include a major reshuffle in the Cabinet of
Ministers.
FV remains concerned about the high cost of financing. It is very likely that the current
tight money situation could continue over the next 12 months.
For the highways sector, FV is satisfied with the pace of awards, but it feels more
administrative changes (including appointment of a stable chairman of NHAI) are likely.
FV is very bullish on railways and expects the sector to be opened up to private
investment after the West Bengal elections. The consultant believes that jobs/projects
in this sector do not require a high level of technical expertise. For instance, highway
operators can leverage their execution expertise to the railways sector.
Challenges in the construction sector are likely to persist because of poor execution
management of projects. FV believes that poor management has been a function of
scale. The smaller players are better able to execute their projects compared to the
mid-to-large players. From an investment perspective, invest in smaller and niche
players and exit as they gain scale, which is when execution management becomes
challenging.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Policy initiatives on track but implementation has been slow
Power: Concerns over fuel supply; SEB finances not as bad
Highways: No major policy changes
Railways: Likely to be the next big opportunity
Meeting takeaways
We met Mr. B K Chaturvedi, Member of Planning Commission, and
Feedback Ventures (FV), an infrastructure consultant.
Long-term prospects good, challenges in the near term
Mr Chaturvedi believes that one should take a longer-term view on the
infrastructure sector. Most challenges are short term in nature; policies
are being framed to address some of the long-term challenges (example,
creating an enabling environment for infrastructure investments). Midyear
state elections (especially West Bengal) and a likely reshuffle of the
Cabinet of Ministers should provide impetus to infrastructure
development in the near term. High financing cost is a major challenge,
and is likely to continue for the next 12 months. We continue to like
Larsen &Toubro (LT IN, TP: INR1,850, CP: INR1,628, BUY) and IRB
Infrastructure (IRB IN, TP INR301, CP: INR1,98.5, BUY) in the sector.
Power – capacity addition likely despite challenges
In the 11th Five-Year Plan (FY08-12) at least 55 GW of capacity is likely
to be added despite challenges. Mr. Chaturvedi opines that financial
position of the SEBs is not as bad as is generally perceived, except for
some North-Eastern states. Challenges in the coal sector with respect to
capacity and transportation are short term. Capacity expansion is being
planned both on mining and transportation fronts. Alternative sources
such as imports of coal and use of gas is being encouraged. As for gas
allocation, capacity already installed and ready for generation will be
preferred over future capacity. Near term, some private developers are
fast-tracking execution of gas-generation capacities, but at their own risk.
Highways – no major policy changes
The Planning Commission has substantially completed policy initiatives in
the highways sector. However, implementation of the second set of
recommendations is likely only on appointment of a permanent Chairman
of the NHAI. Competition has increased due to the hiatus in project
awardings. Some bidders are looking at projects on a holistic basis,
including construction margins, which explains certain aggressive bids.
FV believes certain recent bids have been aggressive, but it does not rule
out the possibility of these projects turning profitable. The possible ways
of making these bids profitable is to reduce capital costs via innovative
engineering techniques/design allowed by the concession agreements.
Separately, certain players have a location advantage that can help them
efficiently execute the project.
Other sectors moving slowly; railways promising
Development in other sectors has been very slow. The ports sector has
been ahead of other smaller sectors (likely capacity of 1.2b tonnes,
against a target of 1.5b tonnes at the end of the 11th Plan). Airport-related
development from here on has been taken up by the public authorities;
private-sector interest is only in certain green-field opportunities (Navi
Mumbai, etc). Railways is likely to be opened up for private investment
after the West Bengal elections; no major technical capabilities are
required for this opportunity.
Takeaways from meeting with Mr B K Chaturvedi
We discussed the challenges facing the infrastructure sector in the present environment
with Mr. B K Chaturvedi, Member of Planning Commission.
Mr. Chaturvedi believes that one should take a longer-term view on the infrastructure
sector. He believes that most challenges are short term in nature, and policies are
being framed to take care of some of the long-term challenges (which would promote
infrastructure investments).
With regards to issues in the power sector, we specifically discussed the financial
position of the State Electricity Boards (SEBs), coal requirements, and fuel-allocation
policy.
Mr. Chaturvedi opines that the financial position of the SEBs is not as bad as is
generally perceived, except for certain North-Eastern states. He believes the respective
state governments would support the SEBs in meeting their power-procurement
obligations. The Finance Commission has provided guidance to the states on curbing
their deficits (to 3-5%), and the states’ Annual Plans include financial support to SEBs.
That said, Mr. Chaturvedi believes there is a need for a permanent solution such that
SEBs can pass on the higher cost of power. He also said that some of the North-
Eastern states are already planning to implement (or have implemented) such plans.
Power-generation capacity of 55 GW is likely to be added in the 11th Five-Year Plan.
Furthermore, Mr. Chaturvedi believes coal shortage is a short-term challenge.
Increasing investments in the expansion of mining capacity and the transportation
sector are likely to solve the issue of fuel shortages for the power sector. The
Empowered Group of Ministers will strictly allocate gas according to the gas allocation
policy. Capacity that is already installed and ready for generation will be preferred for
gas allocation over future capacity. In the near term, some of the private power
generators are fast-tracking execution of the some of their gas-generation capacities,
but they are doing so at their own risk.
Reduction in the production of coal or gas is again a short-term issue, according to Mr.
Chaturvedi. Availability of gas is also likely to improve after the recent deal between
Reliance Industries (RIL IN) and British Petroleum (BP LN, Not rated). The deal is likely
to encourage the use of newer exploration technologies, thereby increasing the
availability of gas. Shale gas exploration is being undertaken as an alternative source of
gas. Additionally, he stated that roughly half the blocks allocated in the New Exploration
Licensing Policy (NELP) are yet to be explored.
Mr. Chaturvedi encourages the use of liquefied natural gas (LNG)/re-gasified LNG
(RLNG). The viability of power produced with high-cost fuel has to be viewed in
concurrence with the different class of customers. He cited examples where there is still
demand from power consumers in Gujarat at higher prices in return for assured stable
supply of gas. From the regulators’ side, they are in the process of forming policies to
determine gas prices using a ‘pooling mechanism’. As for coal pricing, Coal India (CIL
IN, Not rated) has already pegged the cost of grade A and B coal to global prices.
In the highways sector, all support from the Planning Commission has been given in
terms of policy relaxation (in the form of the recommendations made in August 2009).
The second set of recommendations (which include fast-tracking of the dispute
resolution process) is likely to be adopted after the Chairman for the NHIA is appointed.
Currently, the Secretary of Department of Road Transport and Highways is also holding
the position of NHAI’s Chairman as a stop-gap arrangement.
On the ports sector, Mr. Chaturvedi said that the sector will not be completely opened
up to market forces at one go. He is satisfied with the development that has taken place
in the non-major ports segment. During the 11th Five-Year Plan, overall capacity
augmentation is likely to be 1.2b tones, short of the 1.5b tonnes target. Legal disputes
have been a major hurdle in the ports sector, but these again are short term in nature,
according to Mr. Chaturvedi.
Railways development has been a disappointment for Mr Chaturvedi. He expects
development to gather pace after the West Bengal elections.
In the airports sector, Chennai and Kolkata are being developed currently; no other
major green-field airport (except for Navi Mumbai) is on the anvil.
The details for the 12th Five-Year Plan (April 2012-March 2017) are likely to be released
during September-December 2011. An approach paper is currently being developed,
which is due to be finalised in mid-2011.
Meeting with Feedback Ventures
Feedback Ventures (FV) is an independent infrastructure consultant.
Competition has increased due to the hiatus on awardings. Some bidders are looking at
projects on a holistic basis, including construction margins.
FV believes that certain recent bids have been aggressive. However, it does not rule
out the possibility of the bids turning out to be profitable. The possible ways of making
these bids profitable is to reduce capital costs via innovative engineering
techniques/design allowed by the concession agreements. Separately, certain players
have location advantage that can help them efficiently execute the project.
More policy changes/impetuses to sector are likely after the West Bengal elections,
according to FV. These changes could also include a major reshuffle in the Cabinet of
Ministers.
FV remains concerned about the high cost of financing. It is very likely that the current
tight money situation could continue over the next 12 months.
For the highways sector, FV is satisfied with the pace of awards, but it feels more
administrative changes (including appointment of a stable chairman of NHAI) are likely.
FV is very bullish on railways and expects the sector to be opened up to private
investment after the West Bengal elections. The consultant believes that jobs/projects
in this sector do not require a high level of technical expertise. For instance, highway
operators can leverage their execution expertise to the railways sector.
Challenges in the construction sector are likely to persist because of poor execution
management of projects. FV believes that poor management has been a function of
scale. The smaller players are better able to execute their projects compared to the
mid-to-large players. From an investment perspective, invest in smaller and niche
players and exit as they gain scale, which is when execution management becomes
challenging.
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