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Indian infrastructure
On the road, in Delhi
Event
We attended two conferences in New Delhi over the last two days – one on
PPP in the national highways sector and the other on infrastructure financing.
We present key takeaways from the same.
Impact
NHAI making decent progress on targets, EPC model to make a
comeback: The National highway authority of India (NHAI) expects to
maintain the momentum in project awards over next 2-3years, and intends to
award projects totalling 7,300km in FY12E. NHAI outlined its intention to
award 20,000km to be converted from 1-lane to 2-lanes under NHDP-IV in
12th plan on EPC turnkey basis. Construction companies would be key
beneficiaries of this move.
Varied views emerge on high-premium road sector awards: Recent road
project awards with high premium (GMR and IRB’s roads) attracted
considerable debate. While bankers and government agencies remain
confident of the winning developer’s execution and debt servicing capabilities,
some developers questioned the viability of such ‘suicide’ bids. NHAI
attributed higher-than-expected bids to the relatively low number of projects
available for bidding, difference in traffic estimates (private estimates higher
than NHAI’s 5% growth) and strategic decisions for business houses.
Policy action needed to overcome financing gap for 12th plan targets:
The Banking community emphasised the need to introduce long-term
infrastructure bonds and to tap insurance and pension funds to fund the mega
US$1tn infrastructure expenditure of the 12th plan. Other demands included
allowing infra lending to be classified as priority sector lending and relaxing
liquidity requirements.
No true “non-recourse financing” in the infra space exposes developers’
balance sheets to large risk: Contrary to a widely held perception,
participants admitted that many of the infra projects are getting financed with
significant collateral from promoters. In road projects, difference between
NHAI project cost and actual cost is underwritten by promoter of the SPV.
Similarly, entire debt is often underwritten during construction phase. This
makes balance sheets of the developers much more risky than perception.
Outlook
Outlook on infra to remain clouded till policy action: While we believe in
the long-term growth story in the Indian infrastructure space, we think that
policy action around clearances, land acquisition, fuel security are needed to
improve the outlook on the space.
Remain very selective across the space: We continue to prefer L&T as our
top pick in the large cap Indian infrastructure space as we remain excited
about its earnings growth CAGR of ~28% over FY12-13E. We like Gujarat
Pipavav Port (GPPV IN, Rs65, OP, TP: Rs81) as it turns free-cash flow
positive in CY11E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian infrastructure
On the road, in Delhi
Event
We attended two conferences in New Delhi over the last two days – one on
PPP in the national highways sector and the other on infrastructure financing.
We present key takeaways from the same.
Impact
NHAI making decent progress on targets, EPC model to make a
comeback: The National highway authority of India (NHAI) expects to
maintain the momentum in project awards over next 2-3years, and intends to
award projects totalling 7,300km in FY12E. NHAI outlined its intention to
award 20,000km to be converted from 1-lane to 2-lanes under NHDP-IV in
12th plan on EPC turnkey basis. Construction companies would be key
beneficiaries of this move.
Varied views emerge on high-premium road sector awards: Recent road
project awards with high premium (GMR and IRB’s roads) attracted
considerable debate. While bankers and government agencies remain
confident of the winning developer’s execution and debt servicing capabilities,
some developers questioned the viability of such ‘suicide’ bids. NHAI
attributed higher-than-expected bids to the relatively low number of projects
available for bidding, difference in traffic estimates (private estimates higher
than NHAI’s 5% growth) and strategic decisions for business houses.
Policy action needed to overcome financing gap for 12th plan targets:
The Banking community emphasised the need to introduce long-term
infrastructure bonds and to tap insurance and pension funds to fund the mega
US$1tn infrastructure expenditure of the 12th plan. Other demands included
allowing infra lending to be classified as priority sector lending and relaxing
liquidity requirements.
No true “non-recourse financing” in the infra space exposes developers’
balance sheets to large risk: Contrary to a widely held perception,
participants admitted that many of the infra projects are getting financed with
significant collateral from promoters. In road projects, difference between
NHAI project cost and actual cost is underwritten by promoter of the SPV.
Similarly, entire debt is often underwritten during construction phase. This
makes balance sheets of the developers much more risky than perception.
Outlook
Outlook on infra to remain clouded till policy action: While we believe in
the long-term growth story in the Indian infrastructure space, we think that
policy action around clearances, land acquisition, fuel security are needed to
improve the outlook on the space.
Remain very selective across the space: We continue to prefer L&T as our
top pick in the large cap Indian infrastructure space as we remain excited
about its earnings growth CAGR of ~28% over FY12-13E. We like Gujarat
Pipavav Port (GPPV IN, Rs65, OP, TP: Rs81) as it turns free-cash flow
positive in CY11E.
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