>ANDHRA PRADESH IRRIGATION: Conf Call Takeaways: Funding Constraints Delay Execution

■ Conference call on irrigation projects in Andhra Pradesh (AP) — We organized a conference call with Mr. S.K. Joshi, Principal Secretary (Projects) to the Government of Andhra Pradesh, Irrigation and Command Area Development, to discuss the current status of irrigation projects in AP. The following are key takeaways from the call.

■ The Jalayagnam project — Started in 2004 the Jalayagnam project consists of 86 projects including 44 major and 30 medium irrigation projects, eight modernization projects and four flood bank strengthening projects. The program targets to irrigate ~10.5mn acres of land. All of these projects have been awarded to contractors.

■ Funding structure of these projects — The initial total capital outlay was Rs1,797bn, of which Rs474bn has already been spent. Out of the remaining Rs1,323bn to be spent, ~Rs780bn is earmarked for four major projects, which leaves ~Rs543bn for "other" projects. According to current status, the funds of Rs543bn on "other" projects can be spent over the next five years. According to Mr Joshi, the execution of four major projects totaling ~Rs780bn will spill over beyond the next five year period.

■ Current funding status — 1) FY10E spend to be lower than initial budget and FY09 spend. AP irrigation spend in FY10E expected to be ~Rs120bn vs. a budget of Rs170bn and spend of Rs148bn in FY09. 2) Bills pending from June 2009 onwards. Irrigation bills totaling ~Rs48bn are outstanding with AP Govt. and the
payment period has increased from two months to six months now and is expected to stay at six months for some time. As a result, contractors have slowed execution.

■ Central Government funding — 1) If a project is declared a National project, then 90% of funding required will be provided by the Central Government. 2) In case a project comes under AIBP/Prime Minister's Special Project Scheme, 90% of project cost is reimbursed if it is in a drought prone/tribal area and 25% of project cost is reimbursed if it is in any other area. The Pollavaram project is expected to be announced as a national project shortly. On a steady state basis, one can expect ~Rs30-40bn/year from Central Government for AP irrigation projects.

■ Effect of the Telangana agitation — The division of AP, if and when it happens, is not expected to impact execution as there are clear cut state division procedures. However, the current agitation may have impacted State Government revenues which may increase funding shortfall acuteness, and slow down work.

■ Reinforces our view of rising near-term risks to execution of AP irrigation projects — 29% of IVRCL’s OB is from AP irrigation dept. We maintain our Hold/Medium Risk rating on IVRCL (IVRC.BO; Rs388.80; 2M) as, given impending negative newsflow on AP irrigation, the shares could weaken in the near-term.

To read the full report: ANDHRA PRADESH IRRIGATION