India’s infrastructure spend at 3.

5% of GDP is not only much lower than China’s spend at ~11% of GDP but needs to go up to at least 4% of GDP by FY12 if current growth rates are to be sustained. This would require an investment of over Rs12,265 bn across sectors over the next six years, even at a conservative estimate. But unlike in the past when most of the investment in infrastructure was made by the government, this time around the government has decided to act as a facilitator preferring to fund projects through public-private partnerships (BOT route). This has opened up several opportunities for private players and FDI investors with IRR as high as 25% even for low-margin infrastructure projects like roads. As for investors, with market capitalization of infrastructure companies set to increase by over US$100 bn over the next 3-5 years, returns would clearly outweigh risks in the medium to long term. Estimates on sector spends based on outlays (Rs bn) Sector Spend over FY07-12(11-five year plan) Roads 1,520 Power 4,812 Railways 1,100 Telecom 1,227 Aviation 370 Ports 800 O&G 2,201 Urban infrastructure 1,974 Total spend
Source: RBI, Edelweiss research


13,973($350 bn)

1. Government is planning to invest in urban infrastructure through the Jawaharlal Nehru Urban Renewal Mission. It is a Rs 1,00,000-crore (Rs 1,000 billion) programme covering 63 cities across India. 2. However as per the latest planning commission estimates, investments in infrastructure is set to go up by a whopping 130 per cent to $520 billion for the eleventh Five Year Plan (FY 2008-12) as against the $226 billion made during the tenth plan (FY 2003-2007). 3. The government is planning to invest around Rs246 bn in its Bharat Nirman scheme.This will see massive infrastructure boost primarily in the rural sector.Since government spending on infrastructure is the

most important growth driver for construction companies, the proposed increase in allocation will translate into awarding of more projects. Further, leveraging of foreign exchange reserves for infrastructure development will result in increased availability of funds with the government and thereby result in faster infrastructure growth for the country.The salient features of the scheme are:
• • • • Allocation towards Bharat Nirman increased by 32% to Rs 246 bn. Increase in provision for National Highway Development Programme (NHDP) by 7.2% to Rs 107 bn. Corpus of Rural Infrastructure Development Fund-XIII (RIDF) for FY08 raised to Rs 120bn Separate window for rural roads under RIDF-XIII to be continued in FY08 with a corpus of Rs 40 bn. Utilisation of foreign reserves towards infrastructure development

(Source:Planning commision)

Likely Beneficiaries: This investment will be positive for construction

companies like IVRCL, HCC and Gammon who are engaged in the development of roads, irrigation and water supply projects.Also will

benefit companies in manufacturing of pipes like Punj Lloyd Welspun Gujarat,PSL & Jindal Saw. All the companies who are into infrastructure development,turnkey project developement ,cement production and heavy engineering(capital) goods manufacturers.Until recently the capital goods companies were commanding a premium but the recent correction has made them attractive yet again. Most of these companies have an order book to sales ratio in the range of 2.5-4 times FY07 revenue. This implies that for the next two-to-three years, even if the companies do not get fresh orders, they can still maintain revenue growth of 30-40 per cent.

Major Capital Goods Players:
PE (x) PEG (x) Earnings EPS (Rs) CAGR* ROE CMP FY07 FY08E FY09E FY08E FY09E FY09E 07-09 (%) L&T BHEL 29.4 39.91 63.9 84 42.4 63 107 83 50.5 43.1 39.7 32.7 1.35 0.82 26.1 4244 28.8 2715 The company is a diversified engineering and construction company The company supplies electric equipment to core sectors of the Indian economy such as power generation & transmission, industry and transportation Crompton 40.35 6.6 9 13 45.6 31.5 0.78 32.6 410 The company offers products and services related to power generation, distribution, transmission and industrial electric products ABB 47.44 16.1 25 35 64 45.7 0.96 36.7 1600 The company provides automation products, switchgears and industrial lighting solutions to manufacturing companies Thermax Siemens Voltas 40.98 34.4 41.42 16.1 23 31 4 42 5.5 32 56 8 38.7 45.3 37.1 27.8 34 25.5 0.68 0.99 0.62 39.7 891 36 38 1904 204 The company is into cooling and heating solutions and supplies plant equipments The company produces electric products and services used by different industries The company is present in mining, machine tools, and construction equipment
(as of Nov’07-source BS)

Most of these investments in infrastructure are of a long-term nature and projects will be executed over the next four to five years. The ongoing capex will open up a plethora of opportunities for companies in the capital goods.

One can also emphasise on capital goods companies which have exposure to the growing power sector. The government has set aggressive targets to take current power generation capacity of 1,32,329 MW to 2,20,000 MW by 2011-12 and further to 3,05,623 MW by 2016-17. This will also require a huge investment in power generation and other related equipment Players like L&T, Siemens and Crompton Greaves will benefit from the booming industrial capex in the country. Even smaller players like Voltas and Thermax will stand to gain, Within power generation equipment, Bhel will be the key beneficiary. Bhel is the largest power equipment manufacturer. Besides, companies like L&T, ABB, Siemens and Crompton Greaves will benefit as suppliers of transformers, switchgears and EPC contracts. One needs to have a look at the capital goods counters in BSE Capital Goods Index
ABB AIA Engg Alstom Projects Areva T&D BHEL BEML Ltd Bharat Electron Crompton Greaves Elecon Engg.Co Havells India Jyoti Structures Kalpataru Power Kirl. Brothers Kirl. Oil Engine Lak. Mach. Works Larsen & Toubro Praj Inds. Punj Lloyd Siemens SKF India Suzlon Energy Thermax Voltas

PAT] ROG-PAT (%) Price Earning (P/E] Price to Book Value ( P/BV)
340.31 66.92 109.39 137.02 2414.7 204.93 718.16 192.38 54.9 102.15 55.02 159.5 336.49 178.41 206.2 1403 86.53 61.59 596.54 101.96 1061.1 187.8 186.08 55.62 79.51 136.16 277.88 43.8 9.63 23.18 17.99 96.92 61.6 98.84 139.71 95.19 -11.06 42.37 38.62 254.49 75.22 65.65 59.14 29.22 52.37 163.98 47.04 34.3 27.05 31.59 23.83 19.5 17.29 39.34 22.27 23.49 25.22 18.47 11.6 13.25 18.68 33.98 38.1 70.37 39.11 14.55 27.74 25.84 15.53 13.32 5.3 7.99 11.17 6.3 3.87 4.63 11.09 6.41 8.94 4.96 4.49 6.36 2.68 6.41 7.99 21.43 3.87 14.34 3.4 7.79 7.89 7.37

these investments and will deliver good and sustainable long-term growth. Since the investment plans for each of the sub-segments in infrastructure space varies, based on priorities, there is reason to believe that not all the segments or companies will grow at all times. For instance, regional players or less diversified ones may experience volatility in revenues. For companies, faster project execution capabilities and access to key construction equipment are equally critical, which in turn will determine the growth rates and profitability margins, respectively for any company. For example some companies are looking at purchasing their own equipment to tackle rising hiring costs and protect margins. Recent correction in stock markets provides an opportunity to buy good companies in the space at reasonable valuations. Among many stocks, we have picked some stocks which are likely to emerge as key beneficiaries of the ongoing investments in the infrastructure sector. Bigger companies are wellestablished, diversified and less risky. Investors with low risk appetite can consider them. The smaller ones are efficiently managed and are on the growth path with good earnings visibility. Notably, they may also grow faster, given the size of the opportunity and their individual strengths. But, small size also means that there is an element of risk and hence, investors need to review them on a quarterly basis and look at the flow of new business and financial performance.
SAL ES PAT P/E ORDER/SALES FY'08e FY'09e FY'08e FY'09e FY'08e FY'09e FY'08e IVRCL Infra 3400 4300 197 270 26.33 19.75 3.24 Punj Lloyd 8900 12150 355 580 27.58 17.42 2.08 Nagarjuna Cons 3600 4900 190 282 27.18 18.48 2.71 HCC 3145 4150 112 170 34.89 24.15 2.88 Era Infra Eng 1322 1985 132.8 165 11.77 13.16 3.03 Sadbhav Eng. 866.3 1332 52 83 27.98 16.7 3.35 Partibha Indu. 528.5 842 37.2 56 13.57 8.94 4.5 Ahluwalia Cont. 970 1427 53 85.5 26.24 15.93 3.24 Tantia Cons. 353 535 17.2 27 10.18 6.22 3.4 Gayatri Projects 690 1104 35.8 58 12.63 10.04 4.52 CMP 15 Feb 436 377 288 171 750 1162 329 247 131 522

Construction companies will also be among the primary beneficiaries of

Our picks are: 1) Punj lloyd: In the domestic market, it has forayed into onshore drilling, real estate and ship building business with 25.1 per cent stake in Pipavav Shipyard. Its consolidated order book of Rs 18,500 crore, provides reasonable comfort. Going forward, net profit is expected to grow faster on the back of turnaround of Sembawang; consolidated operating margins are expected to improve to 10 per cent by FY09 (8 per cent in FY07). After acquiring Singapore-based Sembawang in FY07, Punj Lloyd tapped the growing global energy market with extended services portfolio.

2) Tantia Construction: Company generates about 96 per cent of its revenue from the eastern and north eastern region by undertaking roads and railway projects.It will be the key beneficiary of slew of investments which have been proposed for the Eastern sector in coming days. North East and eastern India are considered to be underdeveloped. Investments are required towards construction of roads, ports, power and other infrastructure facilities. The Centre has already indicated that it intends to spend Rs 50,000 crore towards construction of roads and another Rs 2,000 crore for rail connectivity in the North-East over the next five years. To further capitalise on this, the company is foraying into other segments of infrastructure and BOT projects. Its relatively smaller size and limited presence is reflecting in the lower valuation it enjoys vis-à-vis its peers, which should hopefully correct as the market gains confidence in the company. What is currently playing in its favour are opportunities and relatively less competition in the North East. Considering the industry outlook and healthy order book to be executed over the next 30 months, the company may maintain revenue growth of over 50 per cent in the next two years.

---Vishwesh Chandra Shrivastav ---Gagan Sharma

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