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Infrastructure: The current scenario

Sep 13, 2010

Infrastructure is the absolute basic essential for any country or city. It is the road we walk on, the mobile network we communicate on and the power supply network that lights our path.

Infrastructure is a huge government priority, especially for India. After all, its development is the key to achieving GDP growth targets. According to the Planning Commission, GDP growth is held back by 1.5-2% every year due to bottlenecks in infra expansion. The sector needs massive funding. But there is usually a major shortfall between the commission's target and funds that are actually deployed. Retail investors are also now expected to get into the funding bandwagon, especially with tax-free infrastructure bonds to be issued by Infrastructure Financing Companies (IFCs).

Private push towards infrastructure
In the past few years, stock markets have seen major ups and downs. Investors started looking for opportunities beyond the stock markets. The government called for Public Private Partnerships (PPP) for infra development. And private players responded enthusiastically. Private investment is expected to increase to 36% during the 11th Five Year Plan (2007-2012), from 25% in the 10th Five Year Plan. The 12th Five Year Plan, which starts in 2013 looks set to include US$ 1 trillion for infra development, with around 50% of this likely to come from private funds.

Expansion of credit
Infra investing became the new mantra for banks. Loans to infrastructure segments like power, telecom, roads and ports led the growth in bank credit in FY10. According to an article in Business Standard, credit to these four sectors rose in the range of 23% to 66% in FY10.

According to an SBI presentation (March 2010), infra lending by banks grew 40 times from Rs 70 bn in 2000 to Rs 2.7 trillion in 2009. As seen in the chart below: domestic bank funding is nearly 2 times NBFC funding. Over 3 times funding from External Commercial Borrowings (ECBs) and over 7 times that provided by insurance companies or pension funds combined.

Source: Planning Commission,  Note: Bank credit is domestic

Underperforming the NIFTY
With expansion of credit, funds were available for the sector. However, infra projects need massive capital expenditure and have a long gestation period. The government estimates that it may face a shortfall of 30% in funding the infra requirement in the latest 5 year plan (12th plan). So even though there was an expansion of credit, it is still not enough for the massive needs for the sector.

During the euphoria of 2009 every second mutual fund was for investing in India's growth story. In a period of around 2 months, the NSE-Infrastructure index shot up 88%. But this mirrored the broad NIFTY's performance. The story now however is different. The NSE Index is up 85% since Jan 2009. However the Infra index is up just 33%. Seems like the euphoria for infra stocks has worn off.

Source: NSE

Conclusion
Due to asset-liability mismatch, caps on long term infra funding by banks has been established by the RBI. This ruling by the RBI, to prevent excessive borrowing will nip the formation of any asset bubble in the bud.

The price to earnings (P/E) valuations of the infra players are also on the lower side compared to the broad NSE-Nifty or BSE-Sensex. They have been facing execution delays on projects and currently have huge order backlogs. Completion which was expected in FY10, will only take place next year. Hopefully.

We need to see infrastructure groundwork taking place on a massive scale in India. And the government needs to take concrete efforts to mobilize more funds for the space. It has done so to some extent by initiating infrastructure funds, giving some NBFCs - the IFC status, so they can issue tax free bonds. Irrespective, with the kind of capital needed to transform Mumbai or Delhi into Hong Kong or Shanghai, we are still far away from achieving our true potential in infrastructure development.

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