Road sector: In the fast lane

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Jitendra Kumar Gupta / Mumbai September 9, 2010, 1:35 IST

http://www.business-standard.com/india/news/road-sector-infast-lane/407454/

Activity in the road sector is picking up after a slow start in 2008-09, when the National Highways Authority of India (NHAI) awarded only 643 km of new projects. While 2009-10 saw projects for 3,361 km of roads being awarded, the government is now looking at disbursing up to 18,000 km of new road projects in the current as well as the next financial year.

In fact, in the April-July 2010 period, the government has awarded projects for 2,873 km, which leaves a lot of room for awarding new projects and indicates that the pace should pick up going forward. The target for the current year is over 9,000 km.

“The government has an internal target of about 12,000 km for this year, which may look difficult, but we will see more projects getting announced in the next two-three months,” says Abhinav Bhandari, who tracks infrastructure at Elara Securties.

SMOOTH RIDE
In kmFY11PFY12P
BOT (toll)5,2864,192
BOT (annuity)4,6454,000
EPC1,1611,000
Total11,0929,192
NHAI road project targets; between FY10-FY14, total target is 37,050 kms
BOT- Build-operate-transfer; EPC- Engineering, procurement, construction
Source: B K Chaturvedi Committee report, IIFL Research

Rajkamal Bajaj, director of Bajaj Consultants, which advises companies on infrastructure projects in the country, says there was a slowdown in the awarding of road projects in the last two months due to certain issues relating to earlier projects. “But we expect this to gather pace, starting from September and October this year, as there will be a need to cover up the targets,” he points out.

On the flip side, there are some challenges. Analysts believe achieving a target of about 9,000-12,000 km seems difficult, considering that very few months are left. Additionally, there are issues relating to the funding of such projects, which will require huge money in terms of equity and debt, particularly as interest rates are rising.


SHIFTING INTO FAST LANE
In Rs croreSales% chgPBIDT% chgPAT% chgPE (x)P/BV (x)CMP (Rs)
Gammon India4,92826.345117.015032.618.61.7221
GMR Infra*4,6177.11,61737.5164-27.6-3.258
Hind.Construct.3,76413.4453-10.192-18.834.04.862
IL&FS Transport2,40396.0894200.03441212.017.03.4342
IRB Infra.Devl*1,80353.393174.7422107.5205.06.5281
IVRCL Infra.5,4206.154214.7208-5.124.02.7161
Nag. Construct*5,13818.659838.725152.423.82.2160
Reliance Infra*11,0660.42,0640.11,210-2.527.22.21,042
Financials and PE figures are for trailing 12 months ended June 2010, except for IL&FS Transport which is 2009-10
*Consolidated Source: Capitaline

Nevertheless, the medium- to long-term looks good with the current and next year expected to be far better than the previous two years (FY09 and FY10).

In the long-term
Barring short-term issues, the road sector is emerging as a good investment theme from the longer term perspective as companies will benefit on account of changing dynamics and huge emerging opportunities. Compared to the Tenth Five Year Plan, targeted investments in the road segment have been doubled to about Rs 3,14,000 crore in the Eleventh Five Year Plan ending in 2012.

Over the next ten years, investments to the tune of Rs 10,00,000 crore are being projected in the road sector. This will also mean that there is huge opportunity for all players, including the smaller companies, which have been finding it difficult to participate. “As a result of the large opportunity, especially as some of the players become selective due to the increase in their order books, we will see mid- and small-infrastructure companies benefiting, ” says Elara Securities’ Bhandari .

Companies with execution capability and good balance sheet size are particularly expected to be key beneficiaries. Only two companies – ITNL and IRB Infrastructure – are pure plays in the road segment. However, others like IVRCL Infra, Nagarjuna Construction, Reliance Infra, Gammon India and HCC, too, should also benefit as they derive part of their revenue from this segment.

IL&FS Transport Network (ITNL)
ITNL has been and will continue to be the key beneficiary of the strong backing of its promoters, industry understanding, superior execution capability and integrated business model. The company is a leading player in this space with about 24 projects covering 15,000 ‘lane’ km, which it intends to increase to 36,000 km by 2014. Most analysts have a ‘buy’ on the stock from the long-term perspective. Analysts value the stock at about Rs 400 a share, based on the sum-of-part valuations (SOTP).

IRB Infrastructure
IRB Infrastructure has scaled up its business at a very rapid pace and, currently, is the second-largest player in this space. This can be attributed to its integrated business model, execution capability, decent size of balance sheet and relatively better experience in the BOT road projects. More important, IRB has 16 road projects, out of which 10 are operational and most of them are at key areas (like Mumbai-Pune Expressway), where traffic growth is better. Investors can expect good revenue and earnings growth of about 25-30 per cent over the next two years. On an SOTP basis, analysts value the stock at about Rs 300-330 a share.

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