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India Construction &
Infrastructure
A Mixed Message – Challenging
Present but Hopeful Future
Our key takeaway from the week-long infrastructure
trip we organized is that companies are extremely
cautious given the macro environment, while the
Government is optimistic that they will find
solutions to the various problems at hand.
Given the state of flux in the infrastructure sector, we
hosted a series of meetings with Ministries / Govt
agencies to get a macro viewpoint and met with a variety
of companies to assess the situation from a micro
viewpoint. Our key takeaways are:
Companies are Worried: Companies in the space are
facing a situation where it seems that everything that
could go wrong has gone wrong. Coal shortages, land
hassles, labor availability, high interest rates, adverse
currency movement, low ordering environment and
intense competition for the few projects that are
available are several problems that companies in the
India construction & infrastructure space are facing.
Government remains Optimistic: On the other hand
our interaction with the ministries indicates that the glass
is half full, and given India’s size and momentum, growth
should continue to be robust (especially vs rest of the
world), though slower than the last few years. They
indicated that there are solutions (though not
necessarily perfect ones) in the pipeline to some key
issues such as the T&D Losses and renegotiation of
PPAs for power plants (especially to account for
non-delivery by Coal India on its commitments).
Our Conclusion: Our view is that the private sector’s
confidence to invest in capacity creation remains low &
that both public and private capex are likely to take
longer to recover this time. While the big-ticket reforms
by the government have the potential to boost corporate
confidence, the nearness to elections (F2014e) is likely
to keep the corporate sector on the sidelines.
Key Takeaways from the Govt Agencies/Ministry Meetings
Company
Management
Key Takeaway
Jaiprakash
Associates
Mr Suren Jain,
MD & CEO of
JPVL
1. Restructuring Underway in Cement: The company is in discussions with a foreign player to divest
part of its cement stake in the West & Southern region plants (9.8 mn tons operational capacity, with
another 10 mtpa in various stages of development) in order to reduce the debt at the parent level.
2. Yamuna Expressway: Expect the project to be ready by Dec-11 and should open to the public by
Apr-11. Real estate sales in the Jaypee Infratech are seeing good momentum with realization
moving up to Rs4,300/ sq ft. in H1F12 vs. average realization of around Rs 3,200/sq ft overall.
3. Funding Gap of US$300 mn at Power: JPA has 1.7 GW of operational hydropower capacity and expects to
commission 5,500 MW over the next three years. The management expects 50% of the capex requirement of
$600 mn for this commissioning schedule to be funded from internal accruals, while the rest would come from
extermal sources (equity raising, FCCBs, securitization of existing plants, etc.).
Ministry of
Environment
Dr Nalini
Bhat, Advisor
to the Ministry
1. Stringent Regulatory Environment Here to Stay: Since 2009, the Environment Ministry has
streamlined the process and introduced new regulations to ensure that forest reserves and natural
resources are utilized in an optimum manner.
2. No Concessions on Complying with the Law: Dr. Bhat believes Indian promoters have taken the
law for granted and taken business risks by investing in projects that don’t have the necessary
environment clearances. While concessions can be given on the pollution loads etc, there cannot
be concessions on complying with the law, he said. The ministry is working with Ministry of
Corporate Affairs to hold directors responsible for ensuring compliance with environmental laws.
3. Risk to Future Projects Reducing: Following the success of the oil block bidding, the
Environment Ministry is now working with the Coal Ministry to ensure that the blocks that come up
for bidding for the private sector in F2012 have the necessary clearance before they are bid out. The
government’s plan is to conduct a detailed forestry survey and a geological survey across India to
demarcate inviolate areas, and create clarity for the future.
Dongfang
Electric
Mr Li Qi, India
representativ
e of DEC
1. Orders in India: DEC has received orders of 40 GW from Indian IPPs & State Govts. Of this, 9GW
(28 units) are operational; DEC expects to deliver 31 GW in the next 3-5 years. Majority of the
orders are from private IPPs like Lanco, Adani, Abhijeet.
2. Plans for India: India is a very important market for DEC. It is evaluating a strategy to set up
facilities for BTG manufacturing and stores & spares there. Currently, DEC has a stores & spares
warehouse facility in Kolkata, which provides technical support, supplies spare parts and after-sales
services to clients in India.
3. Wind power equipment plans: DEC has received international quality certification from the
German testing agency TUV Sud for its 1.5MW wind turbine. Last year it signed a $203m contract
with KSK Energy Ventures to supply 166 of its 1.5MW turbines.
4. Indian experience thus far: For its initial couple of plants apart from BTG, DEC also undertook the
engineering procurement construction (EPC) portion of the orders. However, due to time and cost
overruns faced in these projects, it has been sub-contracting the EPC portion to third-party
contractors and will limit itself to supplying the BTG equipment.
Company
Management
Key Takeaway
Planning
Commission
Mr Gajendra
Haldea,
Member
Planning
commission
1. Undue Pessimism Around: Though India is plagued with problems of high inflation & interest
rates, coal deficit situation etc, there is undue pessimism currently. Government will come up with a
solution on the coal pass through issue, whereby both private parties and the government will have
to compromise.
2. Progress on DFC: Land acquisition for the Dedicated Freight Corridor (DFC) has been moving at
a steady pace and contracts may be awarded in the next 2 years. DFC should be operational by
the end of the 12th plan.
3. Investments for 12th plan: Infrastructure investments have risen to 6.7% of GDP as the 11th plan
with the private sector is contributing 36% and should go up to 50% in the 12th plan. Roads have
already seen a steady pick-up in investments and Railways & Power will have to drive the next leg
of growth.
4. Financing: Since banks are reaching their sectoral limits for granting new loans to power sector,
the government has proposed an infrastructure debt fund to help refinance the projects that are
operational and free up the limits for lending to new projects.
PFC
Mr Satnam
Singh,
Chairman &
MD
1. Concerns on SEB’s Financial Health Exaggerated: PFC has been lending to State discoms for
25 years and over that time frame had seen only one NPA (from the Bihar SEB), which has also
been collected in F1Q12.
2. Restructured APDRP Implementation to Reduce T&D Losses: PFC is the nodal agency for the
restructured APDRP, which plans to use IT to reduce losses in 1,400 towns in India (which account
for 40% of power consumption in the country). By March 2012, the company expects 500 of the
1,400 towns to be connected. The new structure is creating accountability for the states, with UP,
Rajasthan, and MP already having come back with time bound plans for loss reduction.
3. Fuel Pass-through Issue Needs to be Resolved: While the government has not made any
commitments on Case 1 bids, on the rest, pass-through for change in coal prices, mix (import vs.
linkage) will need to be given..
Tecpro
Systems
Mr
Khulbhushan
Arora, CFO
1. Slow Order Inflows but Execution on Track: Due to a delay in commissioning plants, Tecpro
has seen a slowdown in order inflows for Balance-of plant. In H1F12 the company received Rs 14
bn of orders vs its target of Rs 45 bn for F12. However, with an order book of Rs 42 bn at 2.1x F11
revenues, the company is confident of achieving 35% revenue growth.
2. Though private player orders have slowed down, state owned companies like NTPC, NMDC &
SAIL are calling for tenders for the BoP portion, which is seeing bidding interest from Tecpro, L&T,
TRF, Tata projects to name a few.
3. Labour Shortages: The National Rural Employment Guarantee Scheme (NREGA) has led to a
shortage of labour force in isolated cases in the system.
Company
Management
Key Takeaway
Lanco Infra
Mr Suresh
Kumar, CFO
1. Update on Griffin coal: Griffin is currently mining 4 MTPA of coal, of which 3 MT is being supplied
to the local Australian clients as per agreement and 0.7-1 MT is being exported. Lanco expects
production to ramp up to 20 MTPA.
2. Focusing on 9.3 GW of power: Lanco currently has 4 GW of capacity. Given the uncertainties on
fuel availability, both coal and gas, the company is focused on getting 9.3 GW of capacity
operational first.
3. Equity requirements can be internally financed: Including the equity required for the Griffin coal
block & 9.3 GW of power, Lanco has a total equity commitment of $1.1 bn to be infused over the
next 3 years. With $6 bn worth of order book, Lanco is confident of generating $600 mn from it
along with $450 mn from its existing power plants. This, along with $350 mn of cash available on
hand, should fund its equity requirement for all its projects.
4. Expects Transmission to be a key challenge ahead: Apart from coal availability, Lanco
believes that availability of transmission capacity will be the key challenge due to delays by PGCIL
in setting up transmission lines. Lanco is already facing this issue with their Udupi plant.
Punj Lloyd
Mr Anil Jain,
Head Investor
relations
1. Competitive Intensity very high in India: Punj highlighted that the industry is facing the perfect
storm – high competitive intensity in an environment of low orders, high interest costs, expanding
working capital cycles, and high commodity prices. Hence it has become very difficult to win orders
in India.
2. Update on Simon Carves (SC): An administrator has been appointed to dispose of assets &
liabilities and has ring fenced the liabilities of SC. Excluding the loans to SC which have been
written off over a period of time, Punj has a maximum liability of Rs 1.3 bn as regards SC.
3. Exposure to Libya: Punj has 15% of its order book from Libya. Given the social unrest in the
region, Punj expects any new government to focus on creating infrastructure. All the contracts
entered into are insured and valid, which it expects to execute when the situation improves on
ground.
4. Rupee Depreciation will benefit the company as a lot of revenues are in foreign currency.
National
Highway
Authority of
India (NHAI)
Mr Nihar
Ranjan Dash,
Chief GM
Finance
1. Awards will be in spurts: In F12 NHAI has awarded ~3,300 kms of projects and will award 4,200
kms by Dec-11. However, given the bureaucratic process involved, iincluding engineer’s feasibility
report, approval from the PPAC etc, road awards will come in spurts and cannot be evened out.
2. Cannot control the bids of private developers: The premium received by NHAI has been way
above their own expectations in a lot of projects. Developers have their own view on inflation,
traffic growth and their cost of funds and banks also undertake due diligence while lending to a
project, and hence NHAI cannot control the price at which developers bid.
3. ‘Substitution’ clause invoked if developers default: NHAI assumes 5% traffic growth for all
projects while bidding out. In the event of developers defaulting to lenders, NHAI will invoke the
‘substitution clause’ whereby the original developer is substituted with a new developer or else it
has to repay the lenders as per the concession agreement.
4. Land acquisition status much better: Apart from a few states like Goa & Kerala, the last couple
of years saw a substantial improvement in acquiring land due to setting up of land acquisition units
across India and giving them power.
Company
Management
Key Takeaway
Engineers
India
Mr Sudhir Jain,
Investor
Relations
1. Middle East Picking up; India Sluggish: F2012 has been a sluggish year for EIL. EIL sees this
as a cyclical problem though macro factors have aggravated the situation more. On the other hand
Middle East countries like Saudi Arabia, Qatar, UAE have planned major expansions.
2. Emerging areas of opportunities: EIL provides end-to-end concept to commissioning solutions
for projects and has Rs 63 bn of order book; 68% comprises LSTK contracts and 32% in the
consulting business. EIL sees water (especially affluent water treatment & desalination plants) and
nuclear/solar energy as emerging areas of opportunities.
Larsen &
Toubro
Mr Arnob
Mondal, GM
Investor
Relations
1. Power remains an Area of Concern: Coal availability remains a serious issue that is deterring
IPPs from giving out BTG orders. L&T continues to see big opportunities in the T&D space with
Power Grid Corporation of India expected to invite tenders worth $20 bn over next 5 yrs.
2. Competitive Intensity in Middle East: L&T believes the Middle East continues to be a huge
opportunity especially in Infrastructure Sector with Qatar alone expected to spend $70 bn for FIFA
2020. L&T, being a Tier 2 player after the Koreans, is more focused on $1-2 bn order size in Middle
East. Given the fixed price contracts, managing costs and time overruns are key challenges.
3. Key Focus Areas - Margins & Capital Allocation: L&T will not compromise on margins at the
cost of winning more orders. With current orderbook of $30 bn, L&T is confident of maintaining
steady growth for the next couple of years. Capital Allocation is another area of focus for
management as the company’s investments in Nuclear Forging, Shipyard, Road Concessions
business will likely act as a drag on its ROEs for a few years as these businesses have back ended
returns.
4. L&T Infotech sale: L&T believes that there is no compelling reason to divest at this time given the
market conditions and the fact that L&T is a cash-flow generating company. However, it may
evaluate various options of divesting its stake once L&T Infotech reaches $1 bn in revenues.
5. Future Growth Areas for Future: L&T believes that Railways, Water, Nuclear Power and
Defense will be key growth areas in the future.
Reliance Infra,
Mr Amit Jain,
Head Investor
Relations
1. Update on Metro business: With daily ridership of 19,000 passengers which has been above its
expectations, Delhi metro is clocking good revenues from advertising, passenger collections and
rentals from real estate (30,000 sqft already leased @ Rs-550-600/sq ft.) Mumbai metro Phase I is
expected to partially commission by Mar 12. Due to delays caused in Phase I, Rinfra will not start
work on Phase II unless it has received full land needed and all approvals from various agencies.
2. Power Distribution: In the Mumbai sector, the company has created a regulatory asset (a result
of the cost incurred being greater than the tariff charged) worth Rs 23 bn, which is to be recovered
from the customers on RInfra Network over a period of six years. Further, the Govt. has also
introduced a cross subsidization surcharge on all customers on the RInfra network, which ensures
that there is no increase in burden from customers exiting to Tata Power. In the Delhi Sector, the
company has created a regulatory asset worth Rs 67 bn. Further, the tariff has been hiked by 22%
recently, and the company expects another hike in April 2012.
3. Cement Foray: RInfra is setting up a 5 MT integrated cement plant near Nagpur and it is expected
to be fully operational by F14 onwards. It plans to procure fly ash and power from Reliance Power
Unit and it has its own limestone mine for clinker and will launch the brand in March 12.
Company
Management
Key Takeaway
Adani
Enterprises
Mr Kaushal
Shah, Investor
Relations
1. No risk on coal trading business: Referring to the media article about coal piling up at ports in
India (Economic Times, 15 Nov, 2011) AEL management clarified that smaller, inexperienced
traders facing losses as power producers were refusing to take delivery of costly coal. Of the 40 MT
of coal AEL expects to trade in F2012e, its current inventory is only 1 MT (out of which 50% is for
SEBs), where the sale / purchase was back to back. Hence, there is no risk to AEL.
2. Massive leverage at AEL consol: The debt increase mainly stemmed from the commissioning of
projects in Adani Power and the Abbott Point acquisition, plus commissioning of the new coal
terminal at Mundra. On concerns of the impact of INR depreciation, management clarified that the
debt’s denomination is in the same currency as revenues and hence forms a natural hedge.
3. No plans to buy stake in Gujarat Gas: Contrary to media articles (Economic Times, 22-11-2011)
AEL management denied any such appointment of M&A bankers and said that it has no plans to
acquire stake in Gujarat Gas.
4. Australia Mining Tax: While the mining tax has indeed been passed in Australia, the set off of
royalties and value addition leads to the tax incidence at 22.5%, rather than 30%.
Pipavav
Shipyard
Mr Nikhil
Gandhi ,
Chairman
1. Update on JV with Mazagon Dock Ltd: Though a few competitors like L&T have complained to
the Ministry of Defence (MoD) over the transparency process appointing Pipavav as JV partner for
Mazagon Dock), Mr. Gandhi believes they have no legal stand. All procedures and due diligence
were duly followed by the MoD over a 8 month period before Pipavav was selected as the JV
partner. Mazagon Dock has $23 bn of orderbook, to be executed over next 5 yrs.
2. Defence is a Huge opportunity – Pipavav has current order book of $1.5 bn. With PSUs being
overbooked, new Defense Procurement Policy of 2011, encouraging Indigenization and self
dependency and a significant increase in defence expenditure in recent times, private shipyards
such as Pipapav should have a huge opportunity of $50 bn in the next five years.
3. On track to benefit from the opportunity: Pipavav’s current shipyard is 662 mts X 65 mt and
after expansion it would be 740 mt X 90 mts. This would make it the 2nd biggest dry dock in the
world after Hyundai’s facility in Korea. It has no major investment planned for next 5 years.
IRB
Mr Virendra
Mhaiskar,
Chairman &
MD
1. Competition Cooling Off: There has been a steady pick-up in road awards from NHAI and given
challenges faced by various developers due to macro conditions, management is seeing signs of
cooling off of the competition. There are lots of distressed assets available for sale in the market;
but IRB will look only at the appropriate time.
2. IRB comfortable on Debt Position: IRB expects to financially close Ahmedabad-Vadodara
within the stipulated time limit of Jan-12. 60% of the company’s net debt has fixed interest rate
(avg cost @11%) for the next 2 years or more. The remaining 40% has an average cost of 12%.
The company has also resorted to ECB loans to reduce its cost of debt.
3. Not Excited about the OMT Opportunity: IRB will continue to focus on adding $1 bn worth of
BOT toll roads to its portfolio. Given there is low capex involved in Operation, Management &
Transfer (OMT), the company expects intense competition in the OMT contracts planned to be
awarded by the NHAI and is unlikely to bid for them
4. Projects in Hand are on Track: IRB’s 4 projects under construction are on track and the
company expects to commission them ahead of schedule. Ahmedabad project will start
construction from F13 onwards, thus driving strong construction revenues for next 2 years.
Company
Management
Key Takeaway
Essar Ports
Mr Rajiv
Agarwal, MD
& CEO
1. Capacity expansion to 130 MT by F2015: Essar’s current capacity of 88 MT is spread across 3
ports on the west coast and 2 berths on the east coast of India. Its current capacity utilization is
55% with F11 traffic of 40 MT (~98% from group cargo). The company is expanding its capacity to
130MT by F15 across its various ports and aims to have 25% cargo from external clients.
2. Natural draft helps handling large size vessels: Vadinar port has a 20 mt draft with the other
ports having 13-17 mt drafts, which helps the company handle large size vessels. Hazira is the
only port which requires maintenance dredging after which it can handle vessels up to 125,000
tons.
3. Take or pay contracts assure visibility: Of the 130 MT by F2015, 90 MT has been tied up with
clients, of which 70 MT is from group companies (steel, oil, power) and hence visibility on this cargo
is very high. Key external customers include L&T at Hazira and Bhatia coal traders. Essar charges
its group companies on an arm’s length basis.
Grasim
Mr Adesh
Gupta, CFO
1. Demand Slowdown because of Infrastructure, but Prices Bouncing Back: According to the
company, while the rural segment continues to do well, the urban segment and more importantly
the infrastructure segment (due to the policy paralysis) have led to the demand slowdown. In the
medium term, management expects demand growth to move back to trend (long-term average is
around 8%). Also pricing has strengthened back to Q1 levels and the management expects a
return to the Rs 800 – 1,000 / ton EBITDA.
2. Setting up New Capacities More Challenging: Grasim believes that the economic size capacity
has moved up from one mn ton to around two mn tons. Also while setting up capacity used to take
around 2.5-3 years, given the lengthening of the time taken to do preparatory work (Environment
Clearance, land acquisition, etc.), capacity creation is likely to take around 5 years, with costs also
likely to go up significantly after the enactment of the Land Acquisition Bill. While the group
continues to grow (from 52 mt to 632 mt over the next 3 years), the increased difficulty bodes well
for consolidation in the sector, as it is likely to keep the small / new players away.
GMR Infra
Mr Jitendra
Jain, CFO
Treasury
1. Coal Plan in Place for Power: GMR expects approximately 5 GW of thermal power capacity to be
operational by F15e, with coal supply in place for the next two years. By F13e, approximately 2 GW
of thermal power capacity will be operational, which would require around 9 mn tons of coal. The co
plans to procure partially through Coal India linkages, partially through e-auction, and the balance
via imports from Indonesia mines (South African mines’ coal will also act as a natural hedge).
Further, GMR expects that prices of PPA contracts will increase going forward.
2. Captive Coal Block to Start by F15e: GMR has taken the initiative to develop its shared (with 5
other parties) coal block near Odissa. It has appointed a CEO to start the development of the mine.
The mine is in the “Go-Area” and has received Ist level of environmental clearance from the centre.
It is awaiting the second level of clearance from the State. The co expects to start production from
F15e onwards and estimates 112 mn tons of coal as its share from the mine.
3. Airport – As Good as It Gets: On the Delhi Airport, the company is awaiting the tariff order from
Airport Economic Regulatory Authority (AERA) on the ROE to be earned. It expects the order to be
out by January 2012. To determine the ROE, AERA has recognized Rs 25 bn as GMR’s Equity
and Rs 15 bn as Quasi-Equity, which would pretty much be in line with GMR’s demands.
Company
Management
Key Takeaway
IDFC
Mr Bimal Giri,
Director-
Corporate
planning,
strategy &
Investor
Relations
1. Challenge to Grow Loan Book: The co. believes that it will be challenging to grow its loan book
beyond 15% in FY12 and FY13 due to the issues in thermal power. It believes that it is difficult to
substitute the large size thermal projects with roads or ports which are smaller in size.
2. Power Exposure a Concern but will have to be Resolved: Management believes that a
‘restructuring’ of the power assets (43% of balance sheet), if any, would not be too challenging, as
there are no demand issues of power, so once the project is operational, off take is certain. In
addition, their calculations show that there would be no NPV loss if the tenure of the loan were
extended, while keeping the other terms of the debt deal constant. Further, the coal pass-through
issue has to be resolved eventually, given that the Government expects private sector to meet 50%
of the capacity addition in the 12th Plan and that it’s a systemic issue cutting across sponsors.
3. Equity – Key Challenge – IDFC believes that raising equity for infrastructure developers will be
challenging in the current time. The stock markets are in yoyo mode and there is a valuation
disconnect between the Private Equity investors and promoters. However, with 70% of the assets
on its balance sheet being operational, IDFC is well placed on this front.
4. Waiting for tide to turn: IDFC will be targeting the refinancing market in a big way when the rate
cycle turns, as being an NBFC, its cost of funding will come down faster than the banks with sticky
deposits.
Leighton
India
Mr Russell
Waugh,
Managing
Director
1. Orders dry up leading to intense competition: Leighton has a presence in oil & gas, mining, real
estate and infrastructure segments. It aims to clock revenues of Rs 100 bn from Rs 20 bn in F11.
However, for the last six months, Leighton has seen a considerable slowdown in the ordering
environment in India along with intense competition across segments.
2. Plenty of Coal Available; Inaction accounts for deficit situation: In management’s opinion,
India has enough coal to meet its demand. Better mine plans, improving labour productivity and
efficient use of equipment will lead to enough coal for the country.
3. Better Management of Labor; Clean Balance Sheet: Leighton has an in-house labour training
institute in Gurgaon, India which train 3,000 labourers each year who are deployed across their
various projects across India. Better working environment and benefits to laborers ensure low
attrition and high morale. It is also able to manage its working capital cycle better than peers and
has no debt on its books.
VA Tech
Wabag
Mr
Varadhrajan,
CFO
1. Water Centric Company: VA Tech provides Treatment and Distribution solution in Water Utilities
and Industrial Water Segment. It is engaged in the end-to-end process from Design & Engineering
to Operation & Maintenance, except civil construction.
2. High Growth on the Anvil: The co aims to grow 5X over the next five years to Euro 1 bn size. The
company believes that 75-80% of this growth will be organic in nature and 25-20% will be inorganic
in nature. Along with this, it also plans to grow the share of the high margin O&M segment from the
current 15% to 18-20% over the same period.
3. Decentralization Strategy: Management plans to replicate the Indian model of “localizing” the
foreign subsidiaries to reap better returns and to keep costs of operation down. Further, the
company plans to provide its overseas subsidiaries engineering assistance from its Indian
Engineering Centre in Pune and Baroda.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Construction &
Infrastructure
A Mixed Message – Challenging
Present but Hopeful Future
Our key takeaway from the week-long infrastructure
trip we organized is that companies are extremely
cautious given the macro environment, while the
Government is optimistic that they will find
solutions to the various problems at hand.
Given the state of flux in the infrastructure sector, we
hosted a series of meetings with Ministries / Govt
agencies to get a macro viewpoint and met with a variety
of companies to assess the situation from a micro
viewpoint. Our key takeaways are:
Companies are Worried: Companies in the space are
facing a situation where it seems that everything that
could go wrong has gone wrong. Coal shortages, land
hassles, labor availability, high interest rates, adverse
currency movement, low ordering environment and
intense competition for the few projects that are
available are several problems that companies in the
India construction & infrastructure space are facing.
Government remains Optimistic: On the other hand
our interaction with the ministries indicates that the glass
is half full, and given India’s size and momentum, growth
should continue to be robust (especially vs rest of the
world), though slower than the last few years. They
indicated that there are solutions (though not
necessarily perfect ones) in the pipeline to some key
issues such as the T&D Losses and renegotiation of
PPAs for power plants (especially to account for
non-delivery by Coal India on its commitments).
Our Conclusion: Our view is that the private sector’s
confidence to invest in capacity creation remains low &
that both public and private capex are likely to take
longer to recover this time. While the big-ticket reforms
by the government have the potential to boost corporate
confidence, the nearness to elections (F2014e) is likely
to keep the corporate sector on the sidelines.
Key Takeaways from the Govt Agencies/Ministry Meetings
Company
Management
Key Takeaway
Jaiprakash
Associates
Mr Suren Jain,
MD & CEO of
JPVL
1. Restructuring Underway in Cement: The company is in discussions with a foreign player to divest
part of its cement stake in the West & Southern region plants (9.8 mn tons operational capacity, with
another 10 mtpa in various stages of development) in order to reduce the debt at the parent level.
2. Yamuna Expressway: Expect the project to be ready by Dec-11 and should open to the public by
Apr-11. Real estate sales in the Jaypee Infratech are seeing good momentum with realization
moving up to Rs4,300/ sq ft. in H1F12 vs. average realization of around Rs 3,200/sq ft overall.
3. Funding Gap of US$300 mn at Power: JPA has 1.7 GW of operational hydropower capacity and expects to
commission 5,500 MW over the next three years. The management expects 50% of the capex requirement of
$600 mn for this commissioning schedule to be funded from internal accruals, while the rest would come from
extermal sources (equity raising, FCCBs, securitization of existing plants, etc.).
Ministry of
Environment
Dr Nalini
Bhat, Advisor
to the Ministry
1. Stringent Regulatory Environment Here to Stay: Since 2009, the Environment Ministry has
streamlined the process and introduced new regulations to ensure that forest reserves and natural
resources are utilized in an optimum manner.
2. No Concessions on Complying with the Law: Dr. Bhat believes Indian promoters have taken the
law for granted and taken business risks by investing in projects that don’t have the necessary
environment clearances. While concessions can be given on the pollution loads etc, there cannot
be concessions on complying with the law, he said. The ministry is working with Ministry of
Corporate Affairs to hold directors responsible for ensuring compliance with environmental laws.
3. Risk to Future Projects Reducing: Following the success of the oil block bidding, the
Environment Ministry is now working with the Coal Ministry to ensure that the blocks that come up
for bidding for the private sector in F2012 have the necessary clearance before they are bid out. The
government’s plan is to conduct a detailed forestry survey and a geological survey across India to
demarcate inviolate areas, and create clarity for the future.
Dongfang
Electric
Mr Li Qi, India
representativ
e of DEC
1. Orders in India: DEC has received orders of 40 GW from Indian IPPs & State Govts. Of this, 9GW
(28 units) are operational; DEC expects to deliver 31 GW in the next 3-5 years. Majority of the
orders are from private IPPs like Lanco, Adani, Abhijeet.
2. Plans for India: India is a very important market for DEC. It is evaluating a strategy to set up
facilities for BTG manufacturing and stores & spares there. Currently, DEC has a stores & spares
warehouse facility in Kolkata, which provides technical support, supplies spare parts and after-sales
services to clients in India.
3. Wind power equipment plans: DEC has received international quality certification from the
German testing agency TUV Sud for its 1.5MW wind turbine. Last year it signed a $203m contract
with KSK Energy Ventures to supply 166 of its 1.5MW turbines.
4. Indian experience thus far: For its initial couple of plants apart from BTG, DEC also undertook the
engineering procurement construction (EPC) portion of the orders. However, due to time and cost
overruns faced in these projects, it has been sub-contracting the EPC portion to third-party
contractors and will limit itself to supplying the BTG equipment.
Company
Management
Key Takeaway
Planning
Commission
Mr Gajendra
Haldea,
Member
Planning
commission
1. Undue Pessimism Around: Though India is plagued with problems of high inflation & interest
rates, coal deficit situation etc, there is undue pessimism currently. Government will come up with a
solution on the coal pass through issue, whereby both private parties and the government will have
to compromise.
2. Progress on DFC: Land acquisition for the Dedicated Freight Corridor (DFC) has been moving at
a steady pace and contracts may be awarded in the next 2 years. DFC should be operational by
the end of the 12th plan.
3. Investments for 12th plan: Infrastructure investments have risen to 6.7% of GDP as the 11th plan
with the private sector is contributing 36% and should go up to 50% in the 12th plan. Roads have
already seen a steady pick-up in investments and Railways & Power will have to drive the next leg
of growth.
4. Financing: Since banks are reaching their sectoral limits for granting new loans to power sector,
the government has proposed an infrastructure debt fund to help refinance the projects that are
operational and free up the limits for lending to new projects.
PFC
Mr Satnam
Singh,
Chairman &
MD
1. Concerns on SEB’s Financial Health Exaggerated: PFC has been lending to State discoms for
25 years and over that time frame had seen only one NPA (from the Bihar SEB), which has also
been collected in F1Q12.
2. Restructured APDRP Implementation to Reduce T&D Losses: PFC is the nodal agency for the
restructured APDRP, which plans to use IT to reduce losses in 1,400 towns in India (which account
for 40% of power consumption in the country). By March 2012, the company expects 500 of the
1,400 towns to be connected. The new structure is creating accountability for the states, with UP,
Rajasthan, and MP already having come back with time bound plans for loss reduction.
3. Fuel Pass-through Issue Needs to be Resolved: While the government has not made any
commitments on Case 1 bids, on the rest, pass-through for change in coal prices, mix (import vs.
linkage) will need to be given..
Tecpro
Systems
Mr
Khulbhushan
Arora, CFO
1. Slow Order Inflows but Execution on Track: Due to a delay in commissioning plants, Tecpro
has seen a slowdown in order inflows for Balance-of plant. In H1F12 the company received Rs 14
bn of orders vs its target of Rs 45 bn for F12. However, with an order book of Rs 42 bn at 2.1x F11
revenues, the company is confident of achieving 35% revenue growth.
2. Though private player orders have slowed down, state owned companies like NTPC, NMDC &
SAIL are calling for tenders for the BoP portion, which is seeing bidding interest from Tecpro, L&T,
TRF, Tata projects to name a few.
3. Labour Shortages: The National Rural Employment Guarantee Scheme (NREGA) has led to a
shortage of labour force in isolated cases in the system.
Company
Management
Key Takeaway
Lanco Infra
Mr Suresh
Kumar, CFO
1. Update on Griffin coal: Griffin is currently mining 4 MTPA of coal, of which 3 MT is being supplied
to the local Australian clients as per agreement and 0.7-1 MT is being exported. Lanco expects
production to ramp up to 20 MTPA.
2. Focusing on 9.3 GW of power: Lanco currently has 4 GW of capacity. Given the uncertainties on
fuel availability, both coal and gas, the company is focused on getting 9.3 GW of capacity
operational first.
3. Equity requirements can be internally financed: Including the equity required for the Griffin coal
block & 9.3 GW of power, Lanco has a total equity commitment of $1.1 bn to be infused over the
next 3 years. With $6 bn worth of order book, Lanco is confident of generating $600 mn from it
along with $450 mn from its existing power plants. This, along with $350 mn of cash available on
hand, should fund its equity requirement for all its projects.
4. Expects Transmission to be a key challenge ahead: Apart from coal availability, Lanco
believes that availability of transmission capacity will be the key challenge due to delays by PGCIL
in setting up transmission lines. Lanco is already facing this issue with their Udupi plant.
Punj Lloyd
Mr Anil Jain,
Head Investor
relations
1. Competitive Intensity very high in India: Punj highlighted that the industry is facing the perfect
storm – high competitive intensity in an environment of low orders, high interest costs, expanding
working capital cycles, and high commodity prices. Hence it has become very difficult to win orders
in India.
2. Update on Simon Carves (SC): An administrator has been appointed to dispose of assets &
liabilities and has ring fenced the liabilities of SC. Excluding the loans to SC which have been
written off over a period of time, Punj has a maximum liability of Rs 1.3 bn as regards SC.
3. Exposure to Libya: Punj has 15% of its order book from Libya. Given the social unrest in the
region, Punj expects any new government to focus on creating infrastructure. All the contracts
entered into are insured and valid, which it expects to execute when the situation improves on
ground.
4. Rupee Depreciation will benefit the company as a lot of revenues are in foreign currency.
National
Highway
Authority of
India (NHAI)
Mr Nihar
Ranjan Dash,
Chief GM
Finance
1. Awards will be in spurts: In F12 NHAI has awarded ~3,300 kms of projects and will award 4,200
kms by Dec-11. However, given the bureaucratic process involved, iincluding engineer’s feasibility
report, approval from the PPAC etc, road awards will come in spurts and cannot be evened out.
2. Cannot control the bids of private developers: The premium received by NHAI has been way
above their own expectations in a lot of projects. Developers have their own view on inflation,
traffic growth and their cost of funds and banks also undertake due diligence while lending to a
project, and hence NHAI cannot control the price at which developers bid.
3. ‘Substitution’ clause invoked if developers default: NHAI assumes 5% traffic growth for all
projects while bidding out. In the event of developers defaulting to lenders, NHAI will invoke the
‘substitution clause’ whereby the original developer is substituted with a new developer or else it
has to repay the lenders as per the concession agreement.
4. Land acquisition status much better: Apart from a few states like Goa & Kerala, the last couple
of years saw a substantial improvement in acquiring land due to setting up of land acquisition units
across India and giving them power.
Company
Management
Key Takeaway
Engineers
India
Mr Sudhir Jain,
Investor
Relations
1. Middle East Picking up; India Sluggish: F2012 has been a sluggish year for EIL. EIL sees this
as a cyclical problem though macro factors have aggravated the situation more. On the other hand
Middle East countries like Saudi Arabia, Qatar, UAE have planned major expansions.
2. Emerging areas of opportunities: EIL provides end-to-end concept to commissioning solutions
for projects and has Rs 63 bn of order book; 68% comprises LSTK contracts and 32% in the
consulting business. EIL sees water (especially affluent water treatment & desalination plants) and
nuclear/solar energy as emerging areas of opportunities.
Larsen &
Toubro
Mr Arnob
Mondal, GM
Investor
Relations
1. Power remains an Area of Concern: Coal availability remains a serious issue that is deterring
IPPs from giving out BTG orders. L&T continues to see big opportunities in the T&D space with
Power Grid Corporation of India expected to invite tenders worth $20 bn over next 5 yrs.
2. Competitive Intensity in Middle East: L&T believes the Middle East continues to be a huge
opportunity especially in Infrastructure Sector with Qatar alone expected to spend $70 bn for FIFA
2020. L&T, being a Tier 2 player after the Koreans, is more focused on $1-2 bn order size in Middle
East. Given the fixed price contracts, managing costs and time overruns are key challenges.
3. Key Focus Areas - Margins & Capital Allocation: L&T will not compromise on margins at the
cost of winning more orders. With current orderbook of $30 bn, L&T is confident of maintaining
steady growth for the next couple of years. Capital Allocation is another area of focus for
management as the company’s investments in Nuclear Forging, Shipyard, Road Concessions
business will likely act as a drag on its ROEs for a few years as these businesses have back ended
returns.
4. L&T Infotech sale: L&T believes that there is no compelling reason to divest at this time given the
market conditions and the fact that L&T is a cash-flow generating company. However, it may
evaluate various options of divesting its stake once L&T Infotech reaches $1 bn in revenues.
5. Future Growth Areas for Future: L&T believes that Railways, Water, Nuclear Power and
Defense will be key growth areas in the future.
Reliance Infra,
Mr Amit Jain,
Head Investor
Relations
1. Update on Metro business: With daily ridership of 19,000 passengers which has been above its
expectations, Delhi metro is clocking good revenues from advertising, passenger collections and
rentals from real estate (30,000 sqft already leased @ Rs-550-600/sq ft.) Mumbai metro Phase I is
expected to partially commission by Mar 12. Due to delays caused in Phase I, Rinfra will not start
work on Phase II unless it has received full land needed and all approvals from various agencies.
2. Power Distribution: In the Mumbai sector, the company has created a regulatory asset (a result
of the cost incurred being greater than the tariff charged) worth Rs 23 bn, which is to be recovered
from the customers on RInfra Network over a period of six years. Further, the Govt. has also
introduced a cross subsidization surcharge on all customers on the RInfra network, which ensures
that there is no increase in burden from customers exiting to Tata Power. In the Delhi Sector, the
company has created a regulatory asset worth Rs 67 bn. Further, the tariff has been hiked by 22%
recently, and the company expects another hike in April 2012.
3. Cement Foray: RInfra is setting up a 5 MT integrated cement plant near Nagpur and it is expected
to be fully operational by F14 onwards. It plans to procure fly ash and power from Reliance Power
Unit and it has its own limestone mine for clinker and will launch the brand in March 12.
Company
Management
Key Takeaway
Adani
Enterprises
Mr Kaushal
Shah, Investor
Relations
1. No risk on coal trading business: Referring to the media article about coal piling up at ports in
India (Economic Times, 15 Nov, 2011) AEL management clarified that smaller, inexperienced
traders facing losses as power producers were refusing to take delivery of costly coal. Of the 40 MT
of coal AEL expects to trade in F2012e, its current inventory is only 1 MT (out of which 50% is for
SEBs), where the sale / purchase was back to back. Hence, there is no risk to AEL.
2. Massive leverage at AEL consol: The debt increase mainly stemmed from the commissioning of
projects in Adani Power and the Abbott Point acquisition, plus commissioning of the new coal
terminal at Mundra. On concerns of the impact of INR depreciation, management clarified that the
debt’s denomination is in the same currency as revenues and hence forms a natural hedge.
3. No plans to buy stake in Gujarat Gas: Contrary to media articles (Economic Times, 22-11-2011)
AEL management denied any such appointment of M&A bankers and said that it has no plans to
acquire stake in Gujarat Gas.
4. Australia Mining Tax: While the mining tax has indeed been passed in Australia, the set off of
royalties and value addition leads to the tax incidence at 22.5%, rather than 30%.
Pipavav
Shipyard
Mr Nikhil
Gandhi ,
Chairman
1. Update on JV with Mazagon Dock Ltd: Though a few competitors like L&T have complained to
the Ministry of Defence (MoD) over the transparency process appointing Pipavav as JV partner for
Mazagon Dock), Mr. Gandhi believes they have no legal stand. All procedures and due diligence
were duly followed by the MoD over a 8 month period before Pipavav was selected as the JV
partner. Mazagon Dock has $23 bn of orderbook, to be executed over next 5 yrs.
2. Defence is a Huge opportunity – Pipavav has current order book of $1.5 bn. With PSUs being
overbooked, new Defense Procurement Policy of 2011, encouraging Indigenization and self
dependency and a significant increase in defence expenditure in recent times, private shipyards
such as Pipapav should have a huge opportunity of $50 bn in the next five years.
3. On track to benefit from the opportunity: Pipavav’s current shipyard is 662 mts X 65 mt and
after expansion it would be 740 mt X 90 mts. This would make it the 2nd biggest dry dock in the
world after Hyundai’s facility in Korea. It has no major investment planned for next 5 years.
IRB
Mr Virendra
Mhaiskar,
Chairman &
MD
1. Competition Cooling Off: There has been a steady pick-up in road awards from NHAI and given
challenges faced by various developers due to macro conditions, management is seeing signs of
cooling off of the competition. There are lots of distressed assets available for sale in the market;
but IRB will look only at the appropriate time.
2. IRB comfortable on Debt Position: IRB expects to financially close Ahmedabad-Vadodara
within the stipulated time limit of Jan-12. 60% of the company’s net debt has fixed interest rate
(avg cost @11%) for the next 2 years or more. The remaining 40% has an average cost of 12%.
The company has also resorted to ECB loans to reduce its cost of debt.
3. Not Excited about the OMT Opportunity: IRB will continue to focus on adding $1 bn worth of
BOT toll roads to its portfolio. Given there is low capex involved in Operation, Management &
Transfer (OMT), the company expects intense competition in the OMT contracts planned to be
awarded by the NHAI and is unlikely to bid for them
4. Projects in Hand are on Track: IRB’s 4 projects under construction are on track and the
company expects to commission them ahead of schedule. Ahmedabad project will start
construction from F13 onwards, thus driving strong construction revenues for next 2 years.
Company
Management
Key Takeaway
Essar Ports
Mr Rajiv
Agarwal, MD
& CEO
1. Capacity expansion to 130 MT by F2015: Essar’s current capacity of 88 MT is spread across 3
ports on the west coast and 2 berths on the east coast of India. Its current capacity utilization is
55% with F11 traffic of 40 MT (~98% from group cargo). The company is expanding its capacity to
130MT by F15 across its various ports and aims to have 25% cargo from external clients.
2. Natural draft helps handling large size vessels: Vadinar port has a 20 mt draft with the other
ports having 13-17 mt drafts, which helps the company handle large size vessels. Hazira is the
only port which requires maintenance dredging after which it can handle vessels up to 125,000
tons.
3. Take or pay contracts assure visibility: Of the 130 MT by F2015, 90 MT has been tied up with
clients, of which 70 MT is from group companies (steel, oil, power) and hence visibility on this cargo
is very high. Key external customers include L&T at Hazira and Bhatia coal traders. Essar charges
its group companies on an arm’s length basis.
Grasim
Mr Adesh
Gupta, CFO
1. Demand Slowdown because of Infrastructure, but Prices Bouncing Back: According to the
company, while the rural segment continues to do well, the urban segment and more importantly
the infrastructure segment (due to the policy paralysis) have led to the demand slowdown. In the
medium term, management expects demand growth to move back to trend (long-term average is
around 8%). Also pricing has strengthened back to Q1 levels and the management expects a
return to the Rs 800 – 1,000 / ton EBITDA.
2. Setting up New Capacities More Challenging: Grasim believes that the economic size capacity
has moved up from one mn ton to around two mn tons. Also while setting up capacity used to take
around 2.5-3 years, given the lengthening of the time taken to do preparatory work (Environment
Clearance, land acquisition, etc.), capacity creation is likely to take around 5 years, with costs also
likely to go up significantly after the enactment of the Land Acquisition Bill. While the group
continues to grow (from 52 mt to 632 mt over the next 3 years), the increased difficulty bodes well
for consolidation in the sector, as it is likely to keep the small / new players away.
GMR Infra
Mr Jitendra
Jain, CFO
Treasury
1. Coal Plan in Place for Power: GMR expects approximately 5 GW of thermal power capacity to be
operational by F15e, with coal supply in place for the next two years. By F13e, approximately 2 GW
of thermal power capacity will be operational, which would require around 9 mn tons of coal. The co
plans to procure partially through Coal India linkages, partially through e-auction, and the balance
via imports from Indonesia mines (South African mines’ coal will also act as a natural hedge).
Further, GMR expects that prices of PPA contracts will increase going forward.
2. Captive Coal Block to Start by F15e: GMR has taken the initiative to develop its shared (with 5
other parties) coal block near Odissa. It has appointed a CEO to start the development of the mine.
The mine is in the “Go-Area” and has received Ist level of environmental clearance from the centre.
It is awaiting the second level of clearance from the State. The co expects to start production from
F15e onwards and estimates 112 mn tons of coal as its share from the mine.
3. Airport – As Good as It Gets: On the Delhi Airport, the company is awaiting the tariff order from
Airport Economic Regulatory Authority (AERA) on the ROE to be earned. It expects the order to be
out by January 2012. To determine the ROE, AERA has recognized Rs 25 bn as GMR’s Equity
and Rs 15 bn as Quasi-Equity, which would pretty much be in line with GMR’s demands.
Company
Management
Key Takeaway
IDFC
Mr Bimal Giri,
Director-
Corporate
planning,
strategy &
Investor
Relations
1. Challenge to Grow Loan Book: The co. believes that it will be challenging to grow its loan book
beyond 15% in FY12 and FY13 due to the issues in thermal power. It believes that it is difficult to
substitute the large size thermal projects with roads or ports which are smaller in size.
2. Power Exposure a Concern but will have to be Resolved: Management believes that a
‘restructuring’ of the power assets (43% of balance sheet), if any, would not be too challenging, as
there are no demand issues of power, so once the project is operational, off take is certain. In
addition, their calculations show that there would be no NPV loss if the tenure of the loan were
extended, while keeping the other terms of the debt deal constant. Further, the coal pass-through
issue has to be resolved eventually, given that the Government expects private sector to meet 50%
of the capacity addition in the 12th Plan and that it’s a systemic issue cutting across sponsors.
3. Equity – Key Challenge – IDFC believes that raising equity for infrastructure developers will be
challenging in the current time. The stock markets are in yoyo mode and there is a valuation
disconnect between the Private Equity investors and promoters. However, with 70% of the assets
on its balance sheet being operational, IDFC is well placed on this front.
4. Waiting for tide to turn: IDFC will be targeting the refinancing market in a big way when the rate
cycle turns, as being an NBFC, its cost of funding will come down faster than the banks with sticky
deposits.
Leighton
India
Mr Russell
Waugh,
Managing
Director
1. Orders dry up leading to intense competition: Leighton has a presence in oil & gas, mining, real
estate and infrastructure segments. It aims to clock revenues of Rs 100 bn from Rs 20 bn in F11.
However, for the last six months, Leighton has seen a considerable slowdown in the ordering
environment in India along with intense competition across segments.
2. Plenty of Coal Available; Inaction accounts for deficit situation: In management’s opinion,
India has enough coal to meet its demand. Better mine plans, improving labour productivity and
efficient use of equipment will lead to enough coal for the country.
3. Better Management of Labor; Clean Balance Sheet: Leighton has an in-house labour training
institute in Gurgaon, India which train 3,000 labourers each year who are deployed across their
various projects across India. Better working environment and benefits to laborers ensure low
attrition and high morale. It is also able to manage its working capital cycle better than peers and
has no debt on its books.
VA Tech
Wabag
Mr
Varadhrajan,
CFO
1. Water Centric Company: VA Tech provides Treatment and Distribution solution in Water Utilities
and Industrial Water Segment. It is engaged in the end-to-end process from Design & Engineering
to Operation & Maintenance, except civil construction.
2. High Growth on the Anvil: The co aims to grow 5X over the next five years to Euro 1 bn size. The
company believes that 75-80% of this growth will be organic in nature and 25-20% will be inorganic
in nature. Along with this, it also plans to grow the share of the high margin O&M segment from the
current 15% to 18-20% over the same period.
3. Decentralization Strategy: Management plans to replicate the Indian model of “localizing” the
foreign subsidiaries to reap better returns and to keep costs of operation down. Further, the
company plans to provide its overseas subsidiaries engineering assistance from its Indian
Engineering Centre in Pune and Baroda.
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