Infra: A growth propeller; enabling thrust needed

Motilal Oswal has come out with its report on infrastructure space. L&T is a top pick in infra space.

Infrastructure investment key to growth, PMO reviews FY13 targets: Infrastructure investment is a crucial growth propeller for India. The Planning Commission had earlier estimated infrastructure investment at USD1t under the 12th plan (2x the 11th plan target of USD514m). On Wednesday, 6 June 2012, the Prime Minister's Office (PMO) called for a review of key infrastructure segments - Roads, Power/Coal, Railways, Aviation, and Ports, with specific targets for FY13. Key highlights: (1) Ports sector project award for 360mtpa v/s existing port capacity (including minor ports) of 1,160mtpa, (2) Road project award of 9,500km v/s 7,957km in FY12, (3) Aviation sector project award for 3 greenfield projects and declaration of 3-4 new international airports, (4) Power sector capacity addition of 18GW in FY13 v/s an average of ~11GW per year under the 11th plan, (5) Coal India dispatches of 470m tons, up 8% (v/s 1% increase in FY12). Challenges persist on several fronts: In the past, the actual performance v/s targets has not been very encouraging, particularly in sectors like Ports and Railways. While investments in sectors like Power and Aviation led to project commissioning, the returns have been impacted due to regulatory/other issues. Lack of consistency in regulatory framework, impending issues on environment/security clearances, land acquisition challenges and lack of center-state coordination for large projects are the key hindrances. Attention from the highest authority, the PMO, had helped to ease the logjam in Power/Coal but only in a limited way. Direct monitoring/push for the infrastructure sector by the center is a positive. Timely implementation, however, holds the key. In the current scenario, the Roads segment offers much comfort, given clarity on PPP framework, proactive steps by NHAI in project awards, land acquisition, etc. Higher share of PPP projects calls for "enabling environment": Share of the private sector in the 12th plan is pegged at 50% or USD500b, up from USD186b in the 11th plan (36% of total). Investment of this scale from the private sector would necessitate an "enabling environment" in the form of proper regulatory/PPP framework for each segment, "single window" clearances, a body to liaison on inter-ministerial agendas, etc. Also, reforms on long-term infrastructure financing are a must for higher private sector participation. Infrastructure lending as a percentage of bank credit has already crossed 15%; hence, LT funding could be constrained. Efforts on these lines, in our view, would enhance the visibility on returns for longgestation infrastructure projects. Opportunity canvas huge for incumbents: Given large scale infrastructure building targets, the opportunity canvas for incumbents is huge. Thus, in our view, the right balance between growth and returns would be the key differentiating factor amongst the players, which in turn would also ensure/demand financial bandwidth. LNT (Buy) is our top pick to play the theme, while we are positive on IRB Infrastructure (Not rated). In Utilities sector, we believe NTPC (Buy) and Coal India (Buy) are beneficiaries of improved domestic coal supply. FIIs holding more than 30% in Indian cos Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

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