• The huge infrastructure spending provides immense opportunities for the infrastructure companies in India.
Global Investment House – Kuwait – India Infrastructure Sector –
Over the past several years, Indian economy grew faster than average growth rate of the world. The strong economic growth in India was largely due to factors such as increasing level of domestic demand, solid economic growth in all spheres of economic activity, emergence of India as a low cost manufacturing destination, etc. India’s real GDP growth rate for the last five years averaged 8.7%. However, Indian economy has witnessed some moderation in growth in 2007-08. During FY2008, India’s real GDP grew by 9% compared to 9.6% in FY2007 and is expected to grow at around 8% in FY2009. In the recent time, India is facing problem of high inflation, which is around 11.62% currently. However, inflation is expected to come down by the third quarter of FY2009 due to higher base and preemptive measures taken by the government.
With a view to accelerate infrastructure development in the country, Government of India has planned huge capital spending on infrastructure development. The government has planned estimated capital outlay of Rs.23,849.1bn over the 11th five year plan. The resources will be mobilised partly from public sector funding and partly from private investment through Public Private Partnership (PPP). It is estimated that out of the total outlay on infrastructure sector during 11th five year plan, government expects 29.7% of total outlay to come from private participation and balance through public funding. The spending is planned across the segments, with power likely to see the maximum spending of 30.4% of total outlay during 11th five year plan. Other sectors to see major outlay of total infrastructure spending are roads, railways, telecom and irrigation with total infrastructure outlay of 15.4%, 12.7%, 13.2% and 11% respectively.
Sectoral allocation of planned capital outlay on infrastructure development during 11th plan period
Source: Planning Commission, Global Research
As of March 2007, India has 12 major ports and 187 minor ports. Around 95% of international trade of India by volume and 70% in value terms are handled through ports. The increase in India’s international trade in goods during the recent years has resulted in blistering growth in traffic handled by Indian ports. Total traffic handled by all Indian ports put together grew at CAGR of 11.1% in the last five years and stood at 649mn tones in 2006-07. As per the study of by Department of Shipping, port traffic is expected to grow at a CAGR of 11.6% over the next five years compared to 10% in the tenth plan period and expected to reach up to 1,009mn tones by 2011-12. Since the last few years’, Indian ports are running at their full capacity and with a view to handle expected growth in cargo traffic in the next five to six years government of India have allocated total capital outlay of Rs. 869.9bn (at 2006-07 price level) for ports development during 11th plan period, with Rs.552.5bn being invested in major ports and Rs.317.4bn in minor ports. Of the total investment, about Rs.640.9bn is expected to come from private investment and Rs.229bn from public investment.
Indian civil aviation industry witnessed growth of more than 20% in the past three years and it is one of the fastest growing in the world. The same growth pace expected to maintain over the next five to six years. Solid growth in air traffic requires augmentation in the airport capacity. India’s current aviation infrastructure is inadequate and needs to be augmented significantly, given the growth projections for both passenger and cargo traffic in the next five to six years. Under the 11th five year plan, huge impetus is being given to investment in airports in view of its key contribution to economic growth and the urgent need to address capacity constraints. With a view to address the capacity constraints, total investment of Rs.408.8bn is projected to be spend in airport infrastructures during the eleventh plan. Out of total investments in airport sector during eleventh plan about 60% is expected to come from private participation and the rest will be through public financing.
With an aim to improve and widen the reach of national highways, National Highways Development Project (NHDP), the largest highway project was undertaken by the country in a phased manner. Government has lined up massive investments plan for the road sector during 11th five years plan. The total investments to be made on road sector is Rs.3,668.4bn over the period of next five years and this investments accounts for 15% of total infrastructure outlay during the 11th five year plan.
A growing Indian economy needs more power for domestic as well as industrial use. Currently, India is facing huge problem of demand supply mismatch of power. Sustainable economic growth would not possible without availability of sufficient electricity at reasonable cost. The Indian government has understood the importance of energy for sustainable economic growth for long period and planned huge capacity augmentation in 11th and 12th five year plans. The government has envisaged the capacity addition of about 78,577MW during 11th five year plan and earmarked highest spending on power during the 11th plan.
Indian railways with 63,332 kms of network, 1.5mn employees, 440 BTKms and 615 BPKms of traffic is one of the largest rail networks in the world. Despite its huge network, Indian railway is not sufficient to meet the growing requirements of Indian economy. Robust industrial activities across the nation and rising population demands more services from railway. With a view to handle solid growth in rail traffic in the coming years, Indian Railways has lined massive investment plan and submitted a Rs.3,035.33bn investment roadmap for the 11th Five Year Plan period (2007-2012) for the development of world class railway infrastructure in India.
The Planning Commission has recommended that the federal and state governments spend US$60bn on water resources including irrigation, flood control, restoration of water bodies and US$32bn on urban water supply and wastewater management during 2007-2012 period. The outlay under the Accelerated Irrigation Benefit Programme for the year FY07 was Rs.71.2bn, an increase of 58% over FY06 with target of 600,000 hectares for irrigation in this scheme.
Companies under coverage
We have covered five companies in this report namely Larsen & Toubro Ltd. (L&T), Punj Lloyd Ltd. (PLL), Mundra Port and SEZ Ltd. (MPSEZ), JMC Projects Ltd. (JMC) and GVK Power and Infrastructure Ltd. (GVKPIL).
L&T: L&T is one of the largest engineering and infrastructure companies in India having presence in almost all verticals of infrastructure. Huge infrastructure spending planned by government during the 11th plan period puts L&T in to default beneficiary as it has presence and good execution track record of all verticals of infrastructure sector. The strong business momentum of L&T is expected to be driven by an order backlog of Rs.526.8bn which is 2.1times of FY2008 sales. Infrastructure projects occupy largest space in current order book as it accounted for 36% of the total order book. Other major contributors included oil & gas sector which contributed 23% while power and process accounted for 16% and 14% of the total order book respectively. Since the past few years, L&T is performing exceptionally well. During the last five years its total income grew at a CAGR of 26.1% while EBITDA and PAT grew at a CAGR of 35.9% and 42.8% respectively. The company’s strategy over the past few years to move towards higher margin projects has rewarded it in terms of improvement in margins, which reflects in improvement in profitability. Even in FY2008, L&T recorded blistering growth of 40.6% in total revenue and 54.9% in profit after tax over previous year. Beside strong standalone performance, its subsidiary and associates portfolio is also performing well particularly IT, finance and infrastructure subsidiaries. Value unlocking through listing of key subsidiaries is expected in next one year. We initiate our coverage of L&T with a Buy rating and value L&T’s share at an intrinsic value of Rs.2,969.4 based on Sum of the Parts valuation method. The intrinsic value is higher than the current market price of Rs.2,381.5 (as on July 4, 2008) by 24.7%.
PLL: PLL provides integrated design, engineering, procurement, construction and project management services for largely to hydrocarbon and infrastructure sector. PLL’s operations spread across the Middle East, Africa, Caspian, Asia Pacific and South Asia region. The company has presence in more than 60 countries in the world. As of March 2008, the company has consolidated order backlog of Rs.196bn and expected to cross Rs.250bn mark by FY2009. A present order backlog gives order book to sales ratio of approximately 2.5 times of FY2008’s total income. A present order backlog gives order book to sales ratio of approximately 2.5 times of FY2008’s total income. Out of total spending on infrastructure planned during 11th plan, about 37% is addressable market for PLL, which provides opportunity of around Rs.8,500bn to PLL over the next few years. PLL, being one of the leading players in the aforesaid addressable market, will benefit immensely. Strong standalone performance and acquisition of Sembawang Engineers and Contractors (SEC) has helped PLL in rapid growth in past few years. Over the past four years, its total income grew at a CAGR of 59.8%. However, profit after tax and EBIDTA were unable to match the robust growth in revenue due to lower margin projects of SEC compared to PLL. Profit after tax grew at a CAGR of 52.7% over the period of FY2005-08. On the other hand, EBIDTA grew at a CAGR of 28.9% over the same period. For the year ended 31st March 2008, PLL recorded revenue growth of 50.5% and PAT growth of 62.9% over previous year. PLL derives majority of its revenue from process plants and during FY2008, it derived about 36.3% of total revenue from process plants. We initiate our coverage of PLL with a Buy rating with a price target of Rs.280.9 based on SOTP valuation. The intrinsic value is higher than the current market price of Rs.227.9 (as on July 4, 2008) by 23.2%.
MPSEZ: MPSEZ is developer and operator of one of the major non-captive and minor ports in India. MPSEZ developed and operates Mundra port, located at western coast of India. Beside this MPSEZ is also developing India’s first port based port based SEZ near Mundra port and surrounding areas. Mundra Port and Mundra SEZ is a unique story as it offers world class port and other infrastructures to the companies setting up operation in Mundra SEZ along with excellent connectivity to the hinterland and other facilities like transportation, storage facilities etc. On the other hand, Mundra SEZ would provide business opportunities to Mundra Port through companies having establishment in SEZ. We believe such synergies gives strong competitive edge over other SEZ and ports. Beside this it’s natural location advantage; near proximity to hinterland and deep water draft provide edge over other ports situated on western coast of India. Currently, MPSEZ derives majority of its revenue from bulk cargo handling operations. During FY2008, MPSEZ expected to derive about 56.5% of total revenue from bulk cargo handling operations. Going forward, change in revenue mix is expected with increasing capacity of container cargo facilities and revenue generation from SEZ operation from FY2010. Over the past five years, MPSEZ is performing extremely well and recorded blistering growth. MPSEZ’s total income grew at a CAGR of 48.6% over FY2004-08 and PAT grew at a CAGR of 144.4% over the same period. We initiate our coverage on MPSEZ with a Buy rating and value MPSEZ’s share at an intrinsic value of Rs.559.8 based on the SOTP valuation method. The intrinsic value is higher than the current market price of Rs.450 (as on July 4, 2008) by 24.4%.
JMC: JMC is one of the leading players in construction of factories and industrial infrastructures in India. JMC is pure domestic infrastructure player having entire operation in India. JMC is a Kalpataru group company. Kalpataru Power and Transmission Ltd. (Kalpataru) is corporate promoter of the company. From losses in 2005, JMC has made solid recovery in just two years. The company has returned to profitability in 2006 on the back of restructuring measures. The key factors which made this turnaround possible were many. Firstly, JMC reduced the exposure in fixed price contracts and concentrated more on projects with escalation clause. Secondly, JMC received infusion of equity through issue of warrants and rights offer. The last was, as Kalpataru became a corporate promoter, the company received cash infusion and full support from the former, which helped it capitalize on the opportunities in the infrastructure space. As of March 2008, JMC has an order backlog of Rs.21bn, which is 2.3x FY08 sales. The average execution period of current order backlog is 20months. Industrial projects occupy the biggest space in current total order back log as it account for 50% of total order backlog followed by the infrastructure projects for about 40% and power projects for the rest. Over the period, JMC has reduced number of fixed price projects. Currently, about 25% of the order backlog is fixed priced projects which have reduced drastically from around 50-60% few years ago and expected to further go down to 10-15% by FY2010. Lower fixed price contracts protect margins of the company in case of steep rise in raw materials like in present inflationary scenario where the prices of raw materials like steel surged manifold. During FY2008, JMC recorded robust performance and recoded revenue growth of 83.4% and PAT growth 95.6% over previous year. We initiate our coverage of JMC with a Buy rating and value JMC’s share at an intrinsic value of Rs.240.43 based on the DCF method. The intrinsic value is higher than the current market price of Rs.192.8 (as on July 4, 2008) by 24.7%.
GVKPIL: GVKPIL is one of the leading infrastructure developers in India. GVKPIL is pure infrastructure player having interest in airports, roads, energy, mining and SEZ. GVKPIL is holding company of all infrastructure business of GVK group. As part of internal restructuring process during FY2007 various infrastructure subsidiaries and associates came under GVKPIL viz. all transportation and energy companies. GVKPIL led consortium won the project of operation, maintenance and development of India’s busiest airport Mumbai international airport in February 2006 with agreement to share 38.7% revenue with AAI. Consortium led by GVK holds 74% in Mumbai airport projects and 26% by Airport Authority of India. In consortium, GVKPIL holds 36.7% in Mumbai International Airports Ltd (MIAL) and balance 37.3% is held by South African Airport Authority (SA). Mumbai airport project also includes city side development and development of land near Mumbai airport. MIAL has been allotted 1,976 acres of land for development of airport and as per concession agreement out of this around 10% i.e. 197 acres of land to be used for commercial developments. GVKPIL’s energy portfolio includes six power projects and one coal mine. The gross capacity of all six power projects put together is over 2,141MW. Out of these six power projects three (Jegurupadu phase I & II and Gautami) are already constructed while rest three are under construction, JP I is only operational plant. About two other plants are shut down due unavailability of fuel but management has guided that by mid FY2008 both plants will get gas fuel from Reliance Industries Ltd. Out of other three projects which are under construction/development phase, two are hydro based and one is thermal based. GVKPIL also own and operate Jaipur-Kishangarrh expressway project, which is one of the most success full BOT road projects in India. The company is also developing 3,018 acres of multi product SEZ in Peramablur, TamilNadu. GVKPIL would be prime beneficiary in government’s massive infrastructure investment planned during 11th five year plan as it has present in almost every verticals of infrastructure space. Further, government is planning to develop 35 non metro airports and GVKPIL has first mover advantage in airport development sector. Since restructuring, GVKPIL is growing at a robust rate. During the last three years, revenue of GVKPIL grew at a CAGR of 85.5% with solid growth in energy portfolio and its PAT grew at a CAGR of 252.9% over the same period. We initiate our coverage of GVKPIL with a Buy rating and value GVKPIL’s share at an intrinsic value of Rs.40.1 based on the SOTP valuation method. The intrinsic value is higher than the current market price of Rs.31.9 (as on July 4, 2008) by 25.6%.
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