>INDIAN INFRASTRUCTURE: Accelerating investments... ....…unprecedented opportunities

12th plan spend of Rs 27tn driven by power, roads, railways

We expect India to see an investment of Rs 27tn in infrastructure development
over the 12th plan period (FY13-FY17); 65% of this investment is estimated to
be in sectors like power, roads, and railways. This development will offer
~Rs 12tn of EPC opportunity to construction companies. The Private sector is
likely to account for 39% of the total spend. Overall debt funding of Rs 14tn
may not be a constraint if the proportion of infrastructure credit to total bank
credit continues to rise moderately each year. Key risks include delays in coal
availability (power capex) and road project award activity by NHAI, and slow
execution of railway projects. Within our coverage universe, we prefer L&T,
IVRCL, NCC, Patel Engineering and Ahluwalia Contracts and recommend
buying these stocks for long-term value creation.

Expect infrastructure investments of Rs 27tn over 12th plan period: We estimate
an infrastructure investment of Rs 27tn, up 32% over government’s revised
estimate of Rs 20tn spend for the 11th plan. We expect the government (centre
and state) to account for Rs 16.5tn of the spend (61% of total). We are factoring
in Rs 7.1tn of budgetary support, which is ~1.6% of GDP in that period. In terms
of debt funding, we estimate requirement of Rs 14tn across the private sector,
centre, and state (54:34:12).

Debt funding may not be a constraint: Bank credit to infrastructure, as a
percentage of total bank credit (non-food), has increased from 8% in FY07 to
12.7% in FY10. Even if the share of credit to infrastructure increases by 50bps
every year over FY10-FY17, bank credit itself can meet 47% of the total debt
funding requirement. The remaining requirement will be met through other debt
sources like NBFCs, pension funds, and ECBs.

Private sector share to rise to 39% in 12th plan from 36% in 11th plan: Private
sector share will rise in roads (to 44% in 12th plan from 17% in 11th plan), power
(to 51% from 44%) and railways (to 14% from 4%). However, lower spend in
telecom (large private sector share but capex peaked out) and lower private
sector share in airports will limit the rise in overall share to 39% in the 12th plan.
65% of total spend in power, roads, railways: Power sector will continue to
account for highest share in the 12th plan spend at 32%. The road segment is
likely to see an investment of Rs 4.5tn, 17% of total. Rise in project award
activity by NHAI will lead to higher investment in national highways. Railways
will see an investment of Rs 4.5tn over the 12th plan period.

EPC opportunity of ~Rs 12tn: We estimate an EPC opportunity of ~Rs 12tn from
12th plan, primarily in sectors such as roads, railways, power, irrigation, and
water supply. This will necessitate ramping up of business by existing players.
Key risks: a) Delay in coal availability for power plants; b) delay in road project
awards by NHAI (due to land acquisition, environmental clearances); c) slow
execution by the railway ministry.

Prefer L&T, IVRCL, NCC, Patel Engineering and Ahluwalia Contracts: We expect
companies within our coverage universe to deliver revenue/earnings CAGR of
20%/25% over FY10-FY12E. These companies are set to tap the upcoming EPC
and asset development opportunities. We prefer companies with strong cash
generation, a good execution track record, and reasonable valuations.

To read the full report: INDIAN INFRASTRUCTURE