Goldman Sachs:: Infrastructure - Risk of overcompensating in the proposed Land Acquisition bill

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India: Construction: Infrastructure
Equity Research
Risk of overcompensating in the proposed Land Acquisition bill
News
Media reports (e.g. India Express) suggest that the new Rural Development
Ministry has decided to accept the recommendations of the NAC (National
Advisory Commission) in full and is likely to present the bill for discussion
in the parliament in the upcoming monsoon session (starting 1
st
 Aug).
Analysis
We have discussed the proposed changes by NAC in our note dated 30
th
May 2011: New Land Acquisition Act could be a game changer, which were
targeted towards faster land acquisition process, though increasing project
cost, in our view.
Though we think a moderate increase in total project cost is likely (5-10%),
it can be digested without meaningfully impacting returns, if compensated
through a speedier process of land acquisition, in our view.
However, NAC’s recommendation for 100% Land acquisition by the
government for all projects involving displacement of 400 or more
households (very likely for most large projects) seems a step backward –
the earlier bill was proposing first 70% by private and rest 30% by the
government using eminent domain covenant, as needed.
Implications
We see two risks:
1) Although necessary to address structural issues, given that Land
acquisition has become a key political issue and UP state elections start in
less than 9 months, there is a risk that the new bill overcompensates on
populism at the expense of total project cost and speed of implementation.
2) Land acquisition is a state subject and hence this bill would only be a
guideline and various states would have the option to adopt or better the
covenants of the bill. This again opens the possibility of the bill being used
as a key leveraging tool in Centre vs. State laws, at the cost of speedier
implementation.
Our preference in Infra space is for the road companies IRB and ITNL
where 80% land is acquired by NHAI before awarding projects and both
these companies have enough projects on hand. In E&C, we prefer L&T,
BHEL and Sintex on order-book strength, stable balance sheets and
relatively reasonable valuations.