Recent government initiatives on the infrastructure front have led to optimism about the end of ‘policy paralysis’. A meeting chaired by the Prime Minister had recently set sectoral targets for infra for FY13. In this light, we analyse the targets and their feasibility. In the roads space, concerns on funding and EPC regulatory framework may hamper project award, though road construction should improve. Railway PPP projects may not see much progress, but the Dedicated Freight Corridor (DFC) is likely to sail through. Goa airport award is likely to be the only silver lining in the airport sector while project award in ports sector is likely to be sluggish. In the power space, concerns on fuel supply may hamper capacity addition. We remain bullish on the road development space and reiterate IL&FS Transportation (ITNL) and Sadbhav Engineering (Sadbhav) as our top picks. Among contractors, we prefer NCC and Simplex.
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Road space: Project award may take a hit; execution to improve
Road project award more than doubled over FY10-12 to ~8,000 km in FY12. FY13 target at 9,500 km is challenging, since it includes 2,000-3,000 km of EPC projects for which the regulatory framework is not in place. Also, concerns on BOT project funding implies that project award may take a hit—in worst case scenario, we anticipate FY13 project award to be at ~6,500-7,000 km, all on BOT basis. FY13 road building target at 12.3 km/day is achievable due to progress on land acquisition.
Power and ports: Government support need of the hour
Within the power space, while construction of regulated projects (largely owned by PSUs) may proceed smoothly, private developers are likely to go slow driven by fuel availability concerns. Similarly, port award target looks ambitious considering the regulatory and other headwinds faced by the sector.
Railways and airports: High hopes, but challenges galore
Within railways, DFC is likely to roll out smoothly, largely meeting its FY13 targets. However, plans to award PPP projects in railways look ambitious due to lack of regulatory progress. Similarly, airport project award also has its own challenges with only Goa airport making the requisite progress.
Outlook: Waking from slumber, but government support key
The importance of a supportive policy framework is evident from the success of roads and relative failure of other infra segments over the past few years. Recent government initiatives in infra, while promising, will require continued support to alleviate regulatory/other issues which have plagued the sector. We are bullish on road developers like ITNL (BUY/SO) and Sadbhav (BUY/SO), given momentum in project award and declining competition. Among contractors, we believe NCC (BUY/SO) and Simplex (HOLD/SP) will benefit from government thrust on infrastructure.
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