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Smart Cities......Smart Opportunities

At last another dream project of Prime Minister Narendra Modi has seen the light of the day. In a bid to transform the face of India’s urban infrastructure and make it more resident-friendly, PM Modi had announced the ‘Smart City Mission’ along with the ‘Atal Mission for Rejuvenation and Urban Transformation (AMRUT) named after former prime minister Atal Bihari Vajpayee. Alongside, an ambitious project to provide housing for all has also been launched to provide around 2 crore houses till 2022. While these announcements had been made in July 2014, they have now finally taken off the ground after proper planning and deliberations with all the concerned stakeholders.

In particular, the Smart City Mission is perhaps the most sought after project in recent times in which both corporate India and the common man are equally interested as it is mooted to change the face of Indian cities and the way common citizens live in the infrastructure provided to them. According to PM Modi, “A smart city will be one or two steps ahead of the aspirations of the people.” Though it seems quite subjective, the guidelines that the government has proposed for the mission, including AMRUT and Housing for All, clearly defines a well-thought strategy of the government to bring in more transparency and faster execution of projects, away from subjectivity and discretion.

One of the most interesting aspects of all these projects is that the Union Government has abstained itself from the process of choosing the cities and the states have been given all the rights and freedom in the ‘formulation, appraisal and approval of projects’. Also, objective guidelines have been formulated to select the cities. The Smart City Mission and AMRUT will call upon the government to pump in around Rs 1 lakh crore, out of which Rs 50,000 crore would go into developing 100 smart cities across the country while the budget for AMRUT would be around Rs 48,000 crore in a bid to improve the urban infrastructure of 500 cities.

Jackpot for Private Sector

With Rs 50,000 crore as the initial budget to transform and rejuvenate 100 cities into smart cities across the country, the Smart City Mission touches upon one of the most crucial links in urban planning in recent times. The Union Government has earmarked Rs 100 crore annually for the development of each smart city for a period of five years. This can be for a brownfield or greenfield city. As these cities would be developed under the PPP model, planners expect that around 50 per cent funding would come from the private sector. It is estimated that it will take around 15-20 years to create a smart city.

Experts are of the view that during the first five years companies working in the areas of creating trunk infrastructure like master planning, laying of water pipelines, electricity, sever lines and building other basic skeletal necessities of the cities would be benefited. “If the funding and execution takes place at a brisk pace, trunk infrastructure can be built within five years,” says Pratap Padode, President, Smart City Council India. After the first five years the focus will shift to companies that provide smart solutions, both hardware and software, that would be necessary to make these cities really smart. “These companies will include manufacturers of LED lights, censors, electrical cables and equipment, Wi-Fi equipment, routers and instruments, CCTV cameras and monitors as well as those providing professional services for water pipeline solutions, waste management, cleaning, storm water drainage and conversion of waste into energy,” Padode says.
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The Funding Route

One of the biggest challenges while conceiving a smart city project is the source of funding that would be necessary for planning and creating world-class infrastructure. Going by global standards, the creation of a smart city with a population of 1 million would require roughly around Rs 6-7 lakh crore to be invested within a span of 15-20 years. Considering this scale, the funding of the Smart City Mission seems too little to make any impact as the government has planned to provide a mere Rs 100 crore per city for the next five years, which implies only Rs 500 crore. Even if we assume that an equal amount of funding would come from the states in a 50:50 funding pattern, it would work out to just Rs 200 crore per city per year.

On the other hand, going by international standards, 50 per cent of the total funding must come from the government. “This clearly means that around Rs 3 lakh crore should come as government’s share for the next 15 years for establishing a smart city i.e. Rs 20,000 crore per year. Given this, the initial budget seems miniscule but then at least it’s a positive beginning,” Padode points out. Given such funding ground realities, the project would seem to be a non-starter. However, that is not the case. Experts are of the view that Rs 100 crore will work as seed capital and the other schemes of the government would also contribute towards the project.  Some of these schemes include AMRUT, Housing for All, Digital India, Swach Bharat Mission, Roads & Highway Projects, DMIC, DFCC, etc.

Ultimately, it would be an integration of all these missions and schemes that will ramp up the urban infrastructure. As the prime minister put it, “With clear vision and effective planning, all possible hurdles could be overcome and even resource mobilization would not be an issue.” The government machinery is also quite bullish about global funding for the mission as around 18 countries, including Japan, France, US and Singapore, have also shown their interest in developing these smart cities. “Global funding would be one of the most crucial ingredients for the success of this mission once initial planning and infrastructure gets going through government funding,” opines a senior official of the Ministry of Urban Development.

First 20 Cities

Going by the model that the government is adhering to while establishing smart cities across the country, a smart city by definition would be “a city having basic infrastructure that uses smart solutions to make infrastructure and services better and relies on area-based development.” As per the government’s planning, the mission will work on developing such areas in a ‘step by step’ mode and three models of retrofitting, redevelopment and greenfield would be followed. Based on these three models, 20 cities would be selected in the first phase and the government has conceived a transparent and competitive mechanism to choose the aspirants. “New urban schemes have been so designed and formulated as to completely do away with any subjectivity or discretion in selection of cities and in allocation of funds with the states being given full liberty and flexibility in formulation, appraisal and approval of projects,” informed Venkaiah Naidu, Urban Development Minister, while launching the project.

As per the guidelines, every state has to conceive an idea and vision for each city that would be unique to it. There are two stages in the selection process. In the first stage cities would be selected on an intra-state level on the basis of objective criteria and in the second stage a pan-India competition would help select smart cities. The Government of India will allot a designated number of potential cities in each state (100 cities on a pan-India basis) via an ‘equitable and objective-based formula and inter-state competitions would happen among these cities in the first stage. For example, the number of potential smart cities in Maharashtra totals 10 whereas it is 13 in the case of Uttar Pradesh. The process is expected to be completed by January 2016.

Checks and Balances

Given the fact that earlier government schemes JNNURM, MNREGA, Mid-Day Meals, and NRHM, among others, have been infested with issues of corruption and pilferage at the state level, the government has therefore put in quite a lot of stringent checks and balances in the Smart City Mission and AMRUT. As soon as a city’s proposal will be selected for the project, states and urban local bodies will qualify for Rs 100 crore funding. But this release fund will be subject to timely submission of score card, satisfactory physical and financial progress, and achievement of milestones as laid down in the proposal.

“This is quite important as the private sector and overseas investors would be equally concerned about their investments and the entire play could go haywire if the desired progress doesn’t take place within the given time frames,” Padode states, adding, “Therefore, there are adequate checks and balances as far as safeguarding and management of funds is concerned.” In fact, if any city or state government has defaulted in schemes like JNNURM in the past, its chances of selection for the Smart City Mission would be impacted. Also, to avoid delays of projects due to any funding crunch, the states are now required to firmly indicate resource tie-ups under state level action plans. Meanwhile, incentives would be given to well-performing states, up to 10 per cent of the annual allocated amount.

Smart City Models

There are three models that have been outlined for the development of smart cities. These include:

Retrofitting: Development of an existing built area greater than 500 acres so as to achieve the objective of making it more efficient and livable e.g. local area development in Ahmedabad.

Redevelopment: Replace existing built environment in an area of more than 50 acres and enable co-creation of a new layout, especially with enhanced infrastructure, mixed land use and increased density e.g. Bhendi Bazar, Mumbai.

Greenfield: Develop a previously vacant area of more than 250 acres using innovative planning, planned financing and planned implementation tools with provision for affordable housing, especially for the poor e.g. Net Town, Kolkata.
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‘We Need To Have A Smart City Model That Is Economically Sustainable’

In this exclusive interview, Pratap Padode, President, Smart City Council of India, outlines what the project entails and the measures that will need to be adapted to make it a long-term success story

How feasible is the government’s plan to establish 100 smart cities across the country with a funding of Rs 100 crore per city? 

Though the Smart City Mission announced by the government has a budget of Rs 50,000 crore, funding by the state government would be done on a 50:50 basis. Taking that into consideration, another Rs 50,000 crore would come from the states and thereby every city would get Rs 200 crore per year. This investment would principally be spent on building trunk infrastructure, especially in greenfield cities. When that trunk infrastructure will be created, these cities are bound to attract lots of private investment. We have seen that in India the track record of private investment in projects has risen to 40 per cent and this would be possible in this project too provided that the government shows credibility in terms of execution of the plan.

Also, there are multiple schemes in place which are also going to contribute in their own way for establishing smart cities. These include AMRUT, Road-Railway Infrastructure Plan, Swach Bharat Mission, Digital India, etc. All these schemes will be integrated to build better urban infrastructure as well help the Smart City mission. So looking at this investment of Rs 1 lakh crore in isolation is not correct because the contribution will come from different sources.

The PM has defined smart city as a city that would be one or two steps ahead of the aspirations of people. What does this actually mean?

First of all we must understand that a smart city is not any other normal city involving basic amenities like water, electricity, roads, sewage system, etc. These are the basic amenities that are bound to be there in a city and if city is already providing them, then there is nothing smart about it. When a basic city is already in place, then technology is deployed for measuring, analysing and improvising the lives of people. This interface of technology will change a basic city into a smart city. In that city we will use intelligence to manage the city in a manner that would give common residents greater facilities. We must understand that technology is not for the elitist but it is for the common man and technology will be used in the city for the better utilisation of resources.

Across the globe there are various examples where smart cities that were created proved to be non-starters due to various reasons. How can that risk be neutralized in India?

We have to understand that there is lot of risk attached to the creation of smart cities as we need to have a model that is economically sustainable. When you a create city then there has to be some unique reason for creation of that city, be it a tourist destination, business hub, religious destination, industrial cluster, etc. You can’t play with the core fabric of the city. As for the Smart City Mission, this thought process must definitely have been applied so as to give each such city a unique character. This is a grey area and planners should be cautious about this. But the best part is that with this project the government has brought planning back to the centre-stage so that the new India will be built on a planned basis.

Do you think the planning of the government in the selection of smart city aspirants through a process of competition and getting the state governments is practical enough?

If you see the guidelines, each smart city would get Rs 100 crore only if that city qualifies for the Smart City Mission. So if Maharashtra has 10 cities that can qualify, it will straightway get Rs 1,000 crore and this is true for any other state as well. Since the Ministry of Urban Development will select cities out of the proposals sent by various states through a competitive process, all the states are already putting in serious efforts to qualify for this scheme as nobody wants to lose this lucrative opportunity. So this seems to be a time-bound process that will see fruition.

Private sector investment has got a beating in the real estate and infrastructure sector in recent times due to slowdown in the economy. In such a scenario how can the PPP model be successful for the outlined urban development projects?

It is true that due to economic slowdown the real estate sector has taken a beating and therefore for the Smart City Mission to be successful, economic activity has to pick up so that the private sector will take interest. Also, the government has to introduce measures that will promote ease of doing business and single window clearance. Alongside, each city’s unique characteristics should be developed and marketed so as to appeal to both people and investors. The government machinery has to market these cities well to the investors just as private sector developers do to sell their projects. The entire mindset needs to be changed for the Smart City Mission to successfully fulfill its aspired objective.
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Essential Features of a Smart City

  • Adequate water supply including waste water recycling and storm water reuse
  • Assured electricity supply with at least 10 per cent of the energy requirement coming from solar power
  • Sanitation, including solid waste management
  • Efficient urban mobility and public transport
  • Affordable housing, especially for the poor
  • Robust IT connectivity and digitalization
  • Good governance, especially e-governance and citizen participation
  • Sustainable environment
  • Ensuring safety of citizens, especially women and elderly
  • Health and education. 

Applicable to greenfield areas:

  • 80 per cent buildings would be energy-efficient
  • 15 per cent of the building in the affordable housing category.

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D-link India | BSE CODE: 533146 | Face Value: Rs 2 | CMP: Rs 226.00

D-Link India is an Indian networking company. The Company is engaged in marketing and distribution of networking products in India and SAARC (South Asian Association for Regional Cooperation) Countries. It primarily offers digital home, easy portal, home servers, security box, Internet protocol (IP) device integration, and wireless routers, as well as carrier switches, broadband digital subscriber lines (DSL) and DSL access multiplexers and many more.

Smart cities will require internet connectivity which will be an integral part of the development. The   demand for products like wireless routers, carrier switches will increase in future. The next generation technologies like 'Municipal Wi-Fi' will provide unique connectivity experiences to citizens of smart cities. Now a days public places like airports, railway stations and bus stops are becoming wifi zones. Wi-Fi driven connected Smart Cities can provide an ideal platform, on which unique and innovative business level service can be served to multiple set of customers. Therefore D-Link India product demand may increase in future.

On financial front, D-Link India has reported a total income from operations of Rs 624 crore with 28.38 per cent increment in FY15 compared previous fiscal. The net sales are increasing year on year from 2011 to 2015. The net profit increased by 57 per cent to Rs 21.33 crore in FY15 on yearly basis. The net profit of the company is continuously increasing since five years. However, EBIT  margin contracted by 85 basis points to 4.34 per cent in FY15 on yearly basis. The PAT margin also contracted by 69 basis points to 2.79 per cent in FY15. The company's return on equity stood at 14.46 per cent, adjusted PE multiple of 6.42x in FY15. Its debt equity ratio stood at 0.04 and earning per share of the company was at 6.16 during the year.

Ion Exchange (India) | BSE CODE: 500214 | Face Value: Rs 10 | CMP: Rs 235.00

Ion Exchange India providing total water management solutions. Purifying water to ensure safe drinking water for homes and communities. The company also service myriad industries as diverse as power, refinery, fertilizer, food & beverage, automotive, pulp & paper, textile, pharmaceutical and electronics. The company expanded range to offer total water care for homes, under the Zero B umbrella which enjoys countrywide brand equity. The company operating business segments consist of engineering, chemicals, consumer products and others.

There will be requirement of water treatment plants to build up smart cities. There will be specified standards for water treatment. Intelligent water system will provide enough capacity of water to citizzens of smart cities. Ion Exchange products may require for water treatment plants and services may increase on the upcoming smart cities. Waste treatment and recycle services also should pick up in  the smart cities. There will be requiremnt of environment friendly smart cities so that raw water treatment products and services may arise in future.     
 
On financial front, Ion Exchange India reported marginal revenue growth in FY15 but high profit growth in the same year. The sales revenue stood at Rs 730 crore in FY15 than Rs 711 crore in FY14, increased by 2.69 per cent. The net profit of the company increased by 27.39 per cent to Rs 26.14 crore in FY15 on yearly basis. The PAT margin increased by 9 basis points to 2.79 per cent in FY15 compared to previous fiscal. The return on equity ratio stood at 10.81 per cent, the return on capital employed ratio remained at 16.49 per cent in FY15. The adjusted PE multiple of the company was at 5.75x, debt equity ratio stood at 0.37 and earning per share of the company was at  Rs 17.61 in FY15.
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ITD Cementation India | BSE CODE: 509496 | Face Value: Rs 10 | CMP: Rs 684.00

ITD Cementation India is an infrastructure company. The company's operations are in the area of maritime structures, mass rapid transit systems, hydro power, tunnels, dam & irrigation, airports, highways, bridges & flyovers and tube heading & box pushing. The company contributed significantly in the growth of Infrastructure in the country over the last eight decades and continues to provide solutions in the field of Civil Engineering. Searching for new and innovative methods of solving present day construction challenges. The Company is credited with pioneering the art of integrating engineering and innovation with construction practices to maximize benefits to society.

Smart cities will be need of standardise transportation system. There will be requirement of highways, bridges and flyovers and these will be integral part of the city. Smart cities will have good infrastructure to support business activities in territories, such as science or technology parks, industrial parks and business incubators. ITD cementation's product and services demand may arise in future.

On financial front, the company is showing robust growth, the sales revenue stood up at Rs 1352 crore in FY15 than Rs 1225 crore in FY14, the growth is 10.42 per cent. The net profit stood up at Rs 19 crore in FY15 than Rs 9 crore in FY14 rose by 108.55 per cent. The net profit growth is huge comapred to previous years.Th EBITDA margin expanded by 88 basis points to 10.8 per cent in FY15 on yearly basis. The PAT margin boosted by 67 basis points to 1.42 per cent in FY15 compared to previous fiscal. The return on equity remained at 3.98 per cent in FY15. The return on capital employed stood at 12.63 per cent. The company's Adjusted PE multiple at 39.41x, debt to equity ratio remained at 1.18 and earning per share was at Rs 15.14 in FY15.

Shilpi Cable Technologies | BSE CODE: 533389 | Face Value: Rs 10 | CMP: Rs 41.00

Shilpi Cable Technologies (SCTL) has presence in Telecom, Automobiles and Consumer Durables segment. The Company specializes in providing tailor-made and solutions with a focus on Turnkey Services and Project Management in the field of telecommunications. SCTL's product range includes Cables, Copper wires, Wiring Harnesses and Cable Accessories. The Company’s products include RF Cables, RF Accessories, RF Connectors, RF Jumpers, Automotive Cable, Polyvinyl chloride (PVC) Insulated Battery Cables, Photo Volta Cables Solar, Power Cord, Power Energy Cables, Control Cables, Telephone Cables, Local Area Network (LAN) Cable, Coaxial Cables and Wiring Harness, among others. It offers a range of solutions including, Telecom Services, Project Management and Tracking System, Telecom Implementation Services and Turnkey Services for Engineering, Procurement and Cellular Site Constructions, among others and IBS solutions.

Smart cities will require various products ranging from cables in various forms. The varieties of cables widely used in telecom, automotive and energy segment. SCTL products demand may increase as soon as smart cities start developing.

On financial front, net sales of SCTL boosted by 42.76 per cent to Rs 1408 crore in FY15 compared to previous financial year. But, company's EBIT margin contracted by 134 basis points to 9.36 per cent in FY15 on yearly basis. Its net profit increased by 24.81 per cent to Rs 35 crore in FY15 compared to previous fiscal. However, SCTL's net profit margin contracted by 115 basis points to 2.84 per cent in FY15 on yearly basis. ROE and ROCE of the company stood at 14.55 per cent and 28.12 per cent in FY15. It managed total debt to equity ratio at 0.66 lower in past five years. SCTL's adjusted PE multiple remain at 3.93x in FY15. The company's book value stood at 22.54 larger in past five years.
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Sterlite Technologies | BSE CODE: 532374 | Face Value: Rs 2 | CMP: Rs 91.00

Sterlite Technologies (STL) is an power transmission company. The company offerings enable high bandwidth data transmission and high voltage power transmission. It is primarily engaged in the manufacture and sale of products and solutions for the power and telecom industries. STL has two segments like Telecom Product & Solutions Business and Power Product & Solutions Business. Telecom products and solutions mainly include integrated optical fiber, other telecom products such as fiber optical cables, copper telecom cables, structured data cables, access equipment, fiber connectivity and system integration solution offerings for telecom networks and other service providers. Power products and solutions mainly include power transmission conductors and cables.

STL joins hand with telecom gear maker Ericsson to work together for countries smart cities initiative. The alliance will design, deploy, integrate and manage solutions in areas like communications, public safety, smart grid solutions and intelligent transport. The technology can help people access, in real time, infrastructure services like traffic, parking, lighting, and water. These technology solutions will also help city operators to improve infrastructure operations by sharing information in real time across agencies and systems. STL announced an annual seed fund of USD 1 lakh to strengthen India’s investments in broadband technology research, by investing in Indian start-ups, working on innovative broadband deployment technologies. The company delivered over 40 per cent of India’s fibre network, playing an integral role in national broadband projects as well as the back-hauling of all data on 3G,4G and fixed networks.

On Financial front, STL's net sales increased by 11.14 per cent to Rs 2960 crore in FY15 on yearly basis. The company's EBIT margin expanded by 210 basis points to 7.91 per cent in FY15 compared to previous fiscal. Its net profit boosted by 67.81 per cent to Rs 84 crore in FY15 on yearly basis. STL net profit margin expanded by 39 basis points to 1.76 per cent in FY15 compared to previous financial year. The company's ROE and ROCE were at 4.19 per cent and 9.46 per cent respectively in FY15. However, its total debt to equity ratio just increased remained at 1.08 in FY15.

Va Tech Wabag | BSE CODE: 533269 | Face Value: Rs 2 | CMP: Rs 769.00

VA Tech Wabag (VTWL) is one of the world’s leading companies in the water treatment field. VTWL has its operations spread across Europe, Far East Asia, Middle East, and African regions apart from India. VTWL operates in three business units namely Municipal Business Group (MBG), Industrial Water Group (IWG) and Operation Business Group (OBG). MBG caters to the water and waste water treatment solutions of municipalities, which also operates and maintains plants built by sectoral peers. IWG provides water management solutions for demineralization plants, reverse osmosis plants and CPU plants, which are used by various industries, which include steel, petrochemical, fertilizers and power. OBG is responsible for operating and maintaining water treatment plants within India and abroad.

VTWL products are demanding on various action plans of government such as Swachh Bharat initiative and smart cities. Recently the company got orders like sewage treatment plant at Dinpur in Varanasi under 'Ganga Action Plan Project'. It also bagged order of Rs 580 crore in Baharin in water and waste water treatment space. To construct any smart city, there will be need of water treatment solutions, demineralization plants, reverse osmosis plants. Therefore, there may be demand for VTWL products in future.

On financial front, VTWL's net sales rose by 7.03 per cent to Rs 1220 crore in FY15 compared to previous financial year. However, EBIT margin of the company contracted by 31 basis points to 12.24 per cent in FY15 on yearly basis. Its net profit increased just 2.07 per cent to Rs 90 crore in FY15 compared to previous fiscal year. Net profit margin of VTWL contracted by 36 basis points to 7.33 per cent in FY15 on yearly basis. The company's total debt to equity ratio stood at 0.09 in FY15. Its ROE and ROCE for FY15 were 14.05 per cent and 20.95 per cent respectively. VTWL's book value is increased over past five years and stood at Rs 126.22 in FY15.

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