Infra: Promise needs to be delivered; time to reverse

The Indian infrastructure space holds substantial promise, due to significant demand and a supply mismatch. The Government's focus on the sector has sharpened, if we go by its intent since last few months. Compared to previous 5-year plans, there is an immense opportunity for the XIIth Plan (2012-17) with overall investment in infrastructure to be at Rs 51,464 bn. However, the investment realised will be the key thing to observe as the Government has often over-promised and under-delivered. We think it is the opportune time to reverse the trend.

During the last two years, stocks of infrastructure and construction companies have corrected sharply. The underlying reason cited for the abysmal performances were execution delays and rising debt burden to fund the working capital needs or equity commitments. Initiatives taken by the government in the last few years indicate that alternate source of longterm funds for the infrastructure sector is being worked out. Moves like increasing the FII limit in corporate bonds, IIFCL takeout financing and taxfree infrastructure bonds for individuals are some of the steps taken to enable sufficient funding for the sector.

Hence, sentiments are likely to change for the better with improvement in the environment and growth outlook. We believe the below mentioned key factors can bring life to the sector.

• Decline in interest rates: Given that the policy rates had increased by ~350 bps since last 2 years, infrastructure companies are feeling the heat of increased cost of borrowing. Though current inflation rate do not provide enough cushion but a possible cut by RBI may help in easing the pressure.
• Revival in order inflow: Last 2-3 years were disappointing in terms of order inflows. Also, orders announced by various companies in 1HFY13 do not indicate good pickup in the order inflows. Though roads sector promise visibility, pickup in other segments can be a huge positive.
• Alternate long-term funds arrangement: Infrastructure projects have long gestation periods of ~25-30 years. It has been observed that infrastructure projects require long-term funding and currently the banks are reluctant to lend for such a long duration.