Special Feature on Infrastructure : Big Leap In Infrastructure Sector In India
The infrastructure sector is important for any country’s progress and development. However, the importance of this sector is even more magnified in times such as now when the global economy has been hit by the current pandemic. Shreya Chaware discusses at length the outlook for the infrastructure sector while also highlighting the investing opportunities for investors
When you have stocks such as Adani Enterprises up by more than 100 per cent on YTD basis, Grasim up by more than 55 per cent, Container Corporation by 48 per cent, Adani Ports by more than 46 per cent and Tata Power up by more than 35 per cent on YTD basis one can sense that something lucrative, constructive and profitable is happening in the infrastructure space in India. The infrastructure sector is huge in India but has been performing poorly in terms of wealth creation for all those shareholders who betted on infrastructure players over the past decade. But that’s history.
Enter 2021 and you have the Nifty Infrastructure index generating more than double the returns generated by Nifty. Indeed, the infrastructure sector is in the limelight in 2021 and the momentum could just have begun for the sector that starved for investors’ money and confidence for years together. The table below highlights the infrastructure sector’s underperformance over the years and its outperformance in the recent month. The question is: Why are the infrastructure companies outperforming and what has changed in this space to the extent that the stocks are being re-rated and are trading with positive price momentum?
Broader Picture
To understand the positivity in this sector, one will have to look at the broader picture and understand the infrastructure spend that is expected to shape the fortunes of the sector, not just in India but across the globe. Infrastructure in India is expected to grow at a CAGR of nearly 7 per cent going forward. The Indian government plans to invest nearly Rs 102 lakh crore on infrastructure projects by 2024-25. The country will enter the second year of the five-year long National Infrastructure Pipeline (NIP). As per the plan it is expected that an impressive Rs 1,950,397 crore will be spent in 2021 on various infrastructure projects. Urban infrastructure, energy, railways and road transport accounted for about 70 per cent of allocation in 2020.
About NIIFL National Investment and Infrastructure Fund Limited (NIIFL) is a collaborative investment platform for international and Indian investors, anchored by the Government of India.
In the coming years maximum infrastructure spend is expected to happen in the energy sector within the infrastructure space followed by roads, urban infrastructure and railways. Within the infrastructure sector it is expected that the Indian construction sector will be the third-largest construction market globally by 2022. India is already witnessing the construction of some world-class facilities across various parts of the country. Rapid urbanisation is proving to be a catalyst for growth in the infrastructure sector in India.
Under the National Infrastructure Pipeline (NIP) project, Rs 111.3 lakh crore is estimated to be spent on infrastructure. NIP is a first-of-its-kind government initiative which aims to provide world-class infrastructure across the country and also aims to improve the quality of life for all citizens while also improving the ease of living which will allow the government to provide equitable access to infrastructure to all. The NIP will help improve project preparations and attract investments in infrastructure.
Road Infrastructure
The government has allocated Rs 1,963,943 crore for road infrastructure. The development of highways will be crucial in the coming years for the Indian infrastructure sector. Planned highway development includes the development of 2,500 km access control highways, 9,000 km of economic corridors and 2,000 km of strategic highways. With the advent of the FASTag mechanism it is expected that NHAI will be able to raise more resources due to increased commercialisation of highways.
FDI Investments in Infrastructure Space
The infrastructure sector is important to India not only because it creates jobs and improves the standard of living of its populace but also because the infrastructure sector that includes ports, airports and highways attracts maximum foreign direct investments (FDI). Impressed with the government-promoted National Investment and Infrastructure Fund Limited (NIIFL), multilateral institution Asian Development Bank (ADB) has already announced USD 100 million funding for the Indian infrastructure sector.
Over a period of 19 years ending FY19, India has seen inflows worth USD 25.5 billion in verticals such as townships, construction development projects and housing. ‘Housing for All’ and ‘Smart City’ guidelines and initiatives have got several investors excited about investing opportunities in the Indian infrastructure space. Saudi Arabia is touted to be one of the biggest investors in the Indian infrastructure space with investments close to USD 100 billion earmarked for India’s energy, petrochemicals, minerals and mining sector.
Global Infrastructure Investment Globally, the need for infrastructure investment is forecast to reach USD 94 trillion by 2040 and a further USD 3.5 trillion will be required to meet the United Nations’ Sustainable Development Goals for electricity and water.
Conclusion
The infrastructure sector has always been crucial for the holistic development of India. Today, more than ever, the focus on infrastructure sector has enthused confidence among various stakeholders. India is the world’s sixth-largest economy as far the absolute GDP goes and undoubtedly it is one of the fastest growing economies in the world if not the fastest. With visible recovery on the economy front and the earnings expected to be upgraded for corporate India including those of some of the large infrastructure companies there is a definite positive momentum going on in favour of infrastructure companies listed on the bourses.
The large infrastructure companies are getting re-rated and it is time investors take a positive note of the development in the space. The renewed focus by the government on the sector has introduced myriad potential opportunities for the discerning investors. On ground there is a clear revival of key projects and the bold reforms in the infrastructure space and allied industries augur well for the equity investors. India has moved up some notches in ease of doing business as is evident from the rankings by the World Bank. All these developments leave Indian investors with tremendous potential to gain from India’s infrastructure growth story.
The size of the investment outlay and the gap between required investments in the sector and the actual spend implies opportunity in the sector. Within the infrastructure sector there is tremendous growth potential in road construction and renewable energy. While choosing stocks in the infrastructure space, investors can hunt for opportunities in the cement sector as the demand-supply dynamics are in favour of cement manufacturers. Plus, any economic recovery leads to inflationary pressure which pushes the commodity prices higher. Cement companies are already in a sweet spot. Apart from the cement space there are ample opportunities in the energy stocks.
While analysing opportunities in the infrastructure space, it is important that investors focus on the strength of the balancesheet and the leverage. There are numerous examples, historically speaking, where several quality companies while chasing growth could not manage to survive as there was a cash flow mismatch and the companies became overleveraged. Investors can also focus on those companies in the infrastructure space where the leverage is low and the RoE is high.