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Opportunities in Infrastructure-III - Views on News from Equitymaster
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  • May 23, 2008

    Opportunities in Infrastructure-III

    In the previous article, we looked at the broader opportunities available to India Inc. from the power sector. In this article, we shall take a look at the opportunities available in the road sector.

  • Opportunities in Infrastructure-II

    The Planning Commission of India (PCI) has allotted Rs 3,118 bn (assuming a 15% spillover into the next five-year plan) for development and re-development of road infrastructure throughout the nation. What is encouraging, however, is the initiation of the PPP (public-private partnership) in this segment, which has opened it up for private players. In the previous five-year plan, i.e. the Xth plan, the public-private break up was 95:5. However, in the XIth five-year plan, the share has widened to 64:36. Further, the PCI has increased expenditure allocated to this segment by 115% over the Xth plan.

    Estimates for the XIth plan
    The road network in our country is broadly divided into four segments - national highways, state roads, rural roads and the northeastern roads. The following table depicts the expenditure spread over the five-year period in each of the segments.

    (Rs bn) 2007-08 2008-09 2009-10 2010-11 2011-12 Total % of total
    National Highways 249 264 288 342 399 1,542 49%
    State Roads 193 202 216 248 300 1,160 37%
    Rural Roads 64 69 73 78 84 368 12%
    NE Roads 7 8 10 11 12 48 2%
    Total 514 543 587 679 795 3,118 100%
    % of annual total 16% 17% 19% 22% 26% 100%

    Source: PCI

    As seen from the above table, the expenditure is estimated to increase at a compounded annual rate of 12% during the next four years. Further, emphasis has been laid on the development of national highways by allocating nearly 50% of the total expenditure to this segment. The National Highway Authority of India (NHAI), through its initiative, National Highways Development Project (NHDP) has chalked out major projects such as the Golden Quadrilateral (GQ), North-East-West-South Phase I & II, NHDP Phase III and NHDP Phase V. As mentioned on the NHAI website, the GQ project is nearing its completion, with the phases I and II of the project scheduled to be complete by the end of this year. The phase III project is likely to be completed by the end of 2009.

    Detailed Projections
    (Rs bn) National Highways State Roads* Rural Roads North East Total by Year
    Year NHDP Public NHDP Private Non-NHDP# Total Public Private Total Bharat Nirman SARDP
    2007-08 108 126 16 249 148 45 193 64 7 514
    2008-09 112 135 17 264 154 49 202 69 8 543
    2009-10 118 153 17 288 161 55 216 73 10 587
    2010-11 130 193 18 342 179 70 248 78 11 679
    2011-12 160 220 19 399 221 80 300 84 12 795
    Total 628 827 87 1,542 862 298 1,160 368 48 3,118
    Segment wise Share 41% 54% 5% 100% 74% 26% 100% - - -
    % of Total 20% 27% 3% 49% 28% 10% 37% 12% 2% 100%
    * - Includes highways, major district roads, and other roads. # - Public. Source: PCI

    In the detailed projections of the estimated expenditure for the XIth plan period, a major 54% share of national highways belongs to the private players. However, under the state roads segments it is quite the opposite, wherein the public players are estimated to invest nearly three-fourth of the expenditure.

    Rural development has become a vital aspect for the economic development of the nation especially with initiatives such as the Prime Minister's Grameen Sadak Yojana (PMGSY) under the Bharat Nirman. The PCI has estimated that nearly 12% of the total expenditure in the roads segments will go towards developing a transportation network connecting the rural areas all over the nation.

    Speed - breakers and potholes along the route
    The first major concern that comes to our mind with regard to this sector is the delay the projects faced by the civil contractors, both in awarding and executing the contracts, not to mention the red-tapism. A famous example is the Bandra-Worli sea link, which is still under construction after being awarded to Hindustan Construction Company (HCC) way back in 2001. Another example is the government's delay in awarding the ongoing Golden Quadrilateral and Phase I projects, which were finalised around the year 2000.

    Another issue that companies are facing (particularly with the BOT projects) is the existing parallel roads in India. To save on toll expenditure, the commuters do opt for the cheaper (uncomfortable and longer) routes. This to a certain extent does dent the profitability of companies present in the BOT space.

    Many of the construction companies have diversified their business models over the years and entered different segments in the engineering and construction space mainly due to lower margins that are attained on pure road projects. A few companies have even opted out or lost focus towards the road construction segment mainly due to the above-mentioned reasons.

    The compact car era
    With the domestic auto majors announcing plans to launch smaller and more affordable cars, which should be hitting the markets very soon, some of the questions we must be asking ourselves are - Where are the roads to handle them? How will traffic situations improve in crowded metros like Mumbai and Bangalore?

  • Indian roads: Claustrophobic!

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