Global Outlook

Indian Government focus on infrastructure development

Contributed by Nirmal Bang

By Nirmal Bang

When it comes to investment, infrastructure sector companies are among the first few names which come to mind. This has more to do with the fact that there are huge opportunities in this sector which can be capitalized over the next several years. The present state of India's infrastructure is considered to be very poor compared to some of the developed and developing countries in the world. Whether it is roads, bridges, ports, power, railways, airports, urban infrastructure, water, irrigation or gas transport, each of these segments is in desperate need of higher investments. The government has also increased the allocation for infrastructure development in the Union Budget 2010-11.

LARGE OPPORTUNITY

India's spending on infrastructure has been in the region of about 3% to 4% of the GDP, which the government now plans to take to 9% by the year 2012. This is possible as the government is hoping to spend about $500 billion on this sector in the Eleventh Five Year Plan as compared to $220 billion in the Tenth Five Year Plan. Even though this is a significant jump compared to the past several years, it is still low.

As India’s economy grows over the next 10 to 15 years, the nation will have to invest more and more for the development of its infrastructure as well as other supporting industries.

No doubt the beneficiary of this humongous growth is going to be infrastructure companies. We have already seen that due to increased spending on various infrastructure projects, most companies today have an order book which is almost three times to four times more than the previous years.

Conditions are such that despite the rise in the number of projects, most companies are not able to bid as they already have huge work on their hands. This has therefore tempted several investors and fund managers to invest in infrastructure companies.

However, there is another aspect that not many have been able to visualize so far. It is quite logical that if infrastructure and construction companies are going to grow, the infrastructure ancillary companies will also grow in tandem. Infrastructure ancillary companies provide key or critical services required by the infrastructure companies to execute their work.

For instance, without funding, consultancy, equipment, welders, drilling machines, cranes and other goods and services it would be almost impossible for these infrastructure companies to execute their projects. If these services are so critical, ancillaries or the companies which operate in this value chain are bound to benefit in the long run.

CONSULTANTS AND FUNDING

Every project is first scanned and analyzed to ascertain if it is viable in terms of execution, funding and overall returns on investments. But there are certain companies who not only have the expertise and domain knowledge but also the ability to arrange funds, thus making this task rather easy.

Of late the role played by these companies is gaining paramount importance considering the fact that these projects require huge long-term funds along with the understanding of the technicality and future estimates, which are based on many external factors like growth in traffic in case of a road project.

In this space, IDFC, SREI Infrastructure Finance and IL&FS are the dominant players with domain expertise in infrastructure financing and advisory.

Considering the critical role played by these companies, the RBI recently created a separate category of NBFC as Infrastructure Finance Companies (IFCs). These companies will now be able to have access to more funds.

For instance, IDFC, which is well diversified and an established player in this segment with a presence in project financing, debt syndication, advisory, private equity and other services, could have a direct impact on the infrastructure story.

The company provides these services across segments such as roads, highways, oil and gas, ports, airports and telecom. Good asset quality and experienced management are the other key highlights of this company.

On the same lines, SREI Infra too will stand to gain given its presence in the project financing as well as equipment financing sphere. The company has leadership and expertise with about 30% market share in providing finance for construction equipment. Only recently it added value to its business model by amalgamating with the Quippo Infrastructure, which is into equipment used in construction, mining, oil and gas as well as telecom.

EQUIPMENT

Different equipment are used in different construction activities. The market for equipment is growing on the back of higher spending in the infrastructure sector as well as the availability of easy finance for companies. A company may be a manufacturer of equipment or it could be providing them on rent.

Heavy equipment or capital-intensive equipment, which are deployed for particular projects are generally taken on rent. Most infrastructure companies have their own equipment, which helps them in faster execution as well as higher margins.

In equipment manufacturing segment, Action Construction Equipment is among the leading companies, with nearly 50% market share and vast network distribution. The company provides equipment that is used in an array of construction activities like roads, ports, bridges, buildings, coal mines, power and so on.

TRF, a Tata group company also provides equipment and commissions them at sites which particularly find their application in mining, steel and power plants. ABG Infralogistics mainly has expertise in providing equipment used in ports for loading and unloading, cranes and other port activities.

EQUIPMENT FOR RENT

There are other companies too, which provide equipment on rent. Sanghvi Movers Ltd is one such company, which is a leader in this segment with over 50% market share and the highest number of cranes. these cranes are hired for low as well as heavy activities at construction and industrial sites.

It has many heavy and capital-intensive cranes, which are built especially for certain projects and deployed at the site for several months. This earns the company very good rentals. In the rental space, there are several other companies such as Gremach Infrastructure Equipments that offer services.

Within the rental space there is another lucrative segment for providing machines required for ground piling work needed mostly for construction of buildings, bridges, ports, stadiums, stations, etc. These machines are deployed at sites for several months and the rents could run into several lakhs per month.

Among the listed companies, Simplex Infrastructures Ltd and Valecha Engineering Ltd are two big companies that have a large and expanding fleet of machines with latest technologies. However, both these companies are also into the construction space, but large revenue comes from this segment and should benefit the companies in the future.

ANCILLARY EQUIPMENT

There are certain other segments doing well in this sector. Drilling equipment are relatively small but used extensively in construction activities such as roads, bridges, buildings and so on. Importantly, as the transport ministry is planning to build about 20 kilometers of roads per day, there would be a significant demand for equipment for roads alone.

The thumb rule is that for every Rs 100 crore invested in the construction of roads, about Rs 5 crore to 6 crore is required to be invested in equipment. Going by this, the demand for equipment could be huge in the coming years. There are many players in this segment having different product profiles.

Atlas Copco, which is the global player, is among the major companies in India and has several good clients. The company is a leader in three core business areas such as air and gas compressors, construction as well as mining equipment.

Revathi Equipment is another such company providing drilling equipment. Other prominent names include Gujarat Apollo Industries, Elgi Equipments, Ingersoll Rand, Kirloskar Pneumatic.

There is one more company which has a slightly different business but caters to this segment. Cummins India is a leading player in making diesel engines. Engines are critical devices and used in different construction activities. The company's customers are from the construction and infrastructure industry. Its engines are used in earthmoving equipment and other machineries used in road construction.

The story of Voltas and Blue Star is equally compelling, which earns large revenue from electro mechanical projects and services business. This business offers services and products for large projects related to air-conditioning of buildings, airports, hotels, hospitals, stations, cold storages and many other infrastructurerelated projects.

WELDING COMPANIES

Welding companies have benefited immensely in recent times from the boom in the construction and infrastructure sector. These companies undertake work related to fabrication required for almost all construction and infrastructure projects.

Prominent names include the Esab India and Ador Welding. Spending in the power sector and industrial segments in particular will lead to higher growth for these companies in this segment in the coming years.

Esab India is a leading supplier of welding and cutting products in India. Its products are used in industries like shipbuilding, petrochemical, construction, transport, oil and gas as well as repair and maintenance.

The company is expanding its capacity to tap the demand in the user industry, which should mean higher growth in the coming years. Ador Welding is in the similar business and has been a fast-growing company. The company also caters to international markets, particularly Middle East countries.

CAUTIOUS APPROACH

The names mentioned here are indicative of some segments and companies whose growth is directly linked with the rise in India's expenditure on infrastructure and construction activities. Most of these companies are small but many have promising prospects and a solid business model which will help them to participate in India's infrastructure-led growth story.

However, these could be just a few names operating in the entire value chain. Also information about individual companies is not provided in detail but the list has been compiled to only give an idea about their respective businesses. The investors will have to dig more to reap benefits of investing in this arenA.