Budget 2009: The Impact On Infrastucture

BUDGET 2009 THE IMPACT ON INFRASTUCTURE

Infrastructural facilities consist of:  Irrigation: flood control and command area development  Energy: coal, electricity, oil, and non-conventional sources  Transport: Railways, roads, shipping and civil aviation  Communications: Posts and telegraphs, telephones,

telecommunications  Banking, finance and insurance  Science and technology  Health, hygiene and education

EXPECTATIONS FROM THE BUDGET

ACTUAL ALLOCATIONS IN THE BUDGET

Rs.64.5k crores orders have been placed since Jan ‘09

Impact OF THE BUDGET Total outlay for infrastructure alone is approximately a whopping USD 22.14 billion. VRCL, HCC, NCC will be clear beneficiaries The ‘Aam Aadmi’ Budget focuses more on rural infrastructure Pradhan Mantri Gram Sadak Yojana has got an allocation of Rs 12,000 crore Accelerated Irrigation Benefit Programme has been sanctioned Rs 35,000 crore Aim to bring rural infrastructure development at par with urban development

INFRASTUCTURE Financing India Infrastructure Finance Company to provide refinance up to 60% of commercial loans for PPP projects over next 15-18 months Banks hesitant to lend to infra companies due to inevitable asset-liability mismatch Now, IIFCL will be able to enter into financing deals with banks for:  short term credit  taking the loan amount on its books

For example, the Pradhan Mantri Gram

Sadak Yojana (PMGSY) has got an allocation of Rs 12,000 crore and the Accelerated Irrigation Benefit Programme (AIBP) has been sanctioned a huge amount of Rs 35,000 crore. Thus the allocation clearly shows that the government is aiming at bringing rural infrastructure development at par with urban development.

India Infrastructure Finance Company

(IIFCL) to provide refinance up to 60% of commercial loans for PPP projects over next 15-18 months Banks hesitant to lend to infra companies due to inevitable asset-liability mismatch. Now, IIFCL will be able to enter into financing deals with banks for short term credit, taking the loan amount on its books.

HOUSING Real estate prices, in India's 10 major cities, declined by 18-20 per cent in March 2009 Aggregate sales of major real estate players declined by 30 per cent in 2008-09 compared to the previous year Operating profits fell more steeply by 41 per cent during the same period Residential real estate market sales to pick up marginally with more number of housing projects likely to be launched at attractive prices Liquidity pressure has been easing for major players as funds have been generated through various alternative sources like land sales, sale of non-strategic businesses and Qualified Institutional Placement (QIP) route Additionally, stability in economy accompanied by decline in home loan rates will support demand from end users Overall, before stabilizing in 2010, capital values are likely to fall further by 8-10 per cent in 2009

IMPACT OF THE BUDGET  Rs 39.7 billion have been allocated under the Jawaharlal

Nehru National Urban Renewal Mission to improve housing for poor and provide basic amenities.  These include provision for:  Rajiv Awas Yojana: a new scheme announced  Allocation under Indira Awaas Yojana: increased by 63

percent to Rs 88 billion  In addition, for boosting rural housing, Rs 20 billion has been provided for Rural Housing  Fund through National Housing Bank for refinancing to

scheduled commercial banks  No major impact on organised players and urban segments

ROADS In the past one year, National Highway Development Programme (NHDP) witnessed a delayed progress in awarding of road projects due to litigations, restructuring of projects and liquidity crunch.

Nearly, 33 per cent of the total length under NHDP was completed as on March 31, 2009. The Golden Quadrilateral, linking the four metro cities of India is almost complete. The focus of implementation has shifted to the North-South-EastWest (NSEW) Corridor (Phase II) and Phase III As on March 31, 2009, the total cost incurred for NHDP was Rs 744 billion CRISIL Research envisages investment of Rs 1.6 trillion in NHDP over the next 5 years

IMPACT OF THE BUDGET  Even though the allocation for NHDP has increased by 23 per

cent, the implementation of the projects is expected to remain slow on account of policy issues  Allocations under PMGSY have increased by 59 per cent in 2009-

10 to Rs 120 billion  Refinancing commercial bank loans for Public Private Partnership

projects through IIFCL will facilitate higher incremental loans towards the projects  Increase in Minimum Alternate Tax from 10 per cent to 15 per

cent of book profits will have a marginally negative impact on the financials of player  Neutral impact on road sector

POTENTIAL •

Road development is recognised as essential to sustain India’s economic growth

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The government is planning to increase expenditure on road development substantially with funding already in place based on a cess on fuel

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A large component of highways is to be developed through public-private partnerships

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Several high traffic stretches already awarded to private companies on a BOT basis. Two successful BOT models are in place – the annuity model and the upfront/lump sum payment model

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40% of India’s villages do not have access to All-Weather roads

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The government has identified rural roads as one of the 6 components of the US$40 billion Bharat Nirman Programme to improve rural India

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Investment opportunities exist in a range of projects being tendered by NHAI for implementing the remaining phases of the NHDP – contracts are for construction or BOT basis depending on the section being tendered

AIRPORTS Investments worth Rs 290 billion underway to upgrade airport infrastructure Total passenger traffic handled at Indian airports has declined by 6.9 per cent to Rs 108.8 million in 2008-09 from Rs 116.8 million in 2007-08 CRISIL Research expects domestic passenger traffic at airports to decline by 3 per cent in 2009-10 Some large Indian airports are heavily congested and are handling significantly higher traffic than their existing capacity CRISIL Research expects the sector to witness investments worth Rs 290 billion from 2009-10 to 2013-14 A large portion of these investments would be directed towards the metro airports, where the existing infrastructure is

IMPACT OF THE BUDGET  The increase in Minimum Alternate Tax (MAT) from 10 per

cent to 15 per cent will have minimal impact on financials of players  Indian Infrastructure Company Ltd's (IIFCL)

announcement of refinancing 60 percent of commercial bank loans, amounting to Rs 1 trillion for public private partnership (PPP) projects  IIFCL’s efforts will help attract private investments in the

sector  However, impact of the same will be neutral as the

announcement was already made in the Interim Budget

POTENTIAL Favourable demographics and rapid economic growth Continued boom in domestic passenger traffic and international outbound traffic International inbound traffic will also grow rapidly with increasing investment and trade activity India's rich heritage and natural beauty are marketed to international leisure travelers Major opportunities lie in :  Greenfield airport projects in resort destinations and emerging

metros such as Kannur, Goa, Pune, Navi Mumbai, Ludhiana, etc.

 Cityside development opportunities for upgradation of 35 non-metro

airports

About 25 regional greenfield/unutilised airports likely to be bid out

PORTS PAST SCENARIOIndian ports to continue its growth trajectory – •Total traffic in ports grew by 4.4 per cent from 722 million tonnes in 2007-08 to 754 million tonnes in 200809 (estimated), whereas capacity for the same period grew from 772 million tonnes to 885 million tonnes. •Capacity utilisation levels fell from 94 per cent in 2007-

08 to 85 per cent in 2008-09. Going forward, port traffic expected to increase at 7.9 per cent in 2009-10 and 7.2 per cent in 2010-11. •The share of traffic handled by non-major ports in

2007-08 was 28.6 per cent, which increased to 30 per cent in

Over the coming years, non-major ports are expected to grow at a faster pace vis-à-vis the major ones owing to increased private participation and investment in non-major ports and concerns such as operational inefficiency and congestion due to lack of mechanisation at major ports. Hence, non-major ports are expected to handle a larger chunk of the incremental traffic going forward. CRISIL Research expects investments to the tune of Rs 281 billion in the ports sector between 2009-10 and 2010-11.

IMPACT OF THE BUDGET Neutral impact on the sector Impact factors  A. The imposition of service tax on the transport of goods through the

coastal route and through inland waterways is not expected to have a major implication on the ports sector, considering the rates for coastal transport are very low vis-à-vis the railways and roadways.  B. The MAT rate increase (from 10 per cent to 15 per cent) is expected to

lead to a higher tax outflow in the initial years and marginally impact the returns of players  C. The refinancing scheme through IIFCL announced in the interim budget

of 2009-10 is not expected to have an incremental impact on the sector.

Potential Growth in merchandise exports projected at over 13% p.a. underlines the need for large investments in port infrastructure Identified Investment need of US$12.4 billion in the major ports under National Maritime Development Program (NMDP) to boost infrastructure at these ports in the next 9 years Under NMDP, 276 projects have been identified for the development of major ports Public–private partnership is seen by the government as the key to improve major and minor ports 67% of the proposed investment in major ports

Projects related to port development (construction of jetties, berths etc.) Procurement, replacement or upgradation of port equipment Projects related to port connectivity Expected investments of US$7.7 billion in minor Ports

Power

Power

Power

Impact Positive for generation, T&D companies, likely to commission substantial portion of product portfolio to FY11 to enjoy tax holidays Increased demand for T&D equipment to benefit transformers, switchgears, transmission towers and EPC companies. Additionally, the custom duty that has been reduced from 7.5 per cent to 5 per cent on permanent magnets which are used in wind power will marginally benefit wind power equipment manufacturing companies like Suzlon, Enercon India, etc.

Power Incensed allocation in APDRP expected to provide more funds in the hands of the state distribution utilities to up grade their infrastructure and improve their financial position. Enhanced budget allocation for RGGVY is expected to accelerate the rural electrification process, thereby expanding the power distribution network in rural areas. Overall the budget was more neutral and the effect of the relief measures would be reflected in the next 8-9 months.

Party poopers

Companies with operational BOT projects likely to be affected by the hike in MAT

Impact on infra stocks Diversified players like L&T, Simplex Infrastructure and Nagarjuna Constructions will be biggest beneficiaries Based on sectoral concentration of order book companies standing to benefit most are:  IVRCL Infrastructure (70% irrigation)  Hindustan Construction (31% irrigation and 17%

transport)  Patel Engineering ($40% irrigation and 15% transport)

Most benefits already factored into most stocks, which have gained over 100% since

Road ahead in FY10

Impact of infrastructure on other sectors