Infrastructure Boom to drive GDP growth

Construction boom to drive GDP growth

India's 8-9% GDP growth over the last few years has made its infrastructure deficit even more visible. Growth in infrastructure such as airports, ports, roads, power, and highways has not kept pace with the economy and the growth in demand. Expected high GDP growth rate of 9-10% in the 11th Plan period (2007-2012) will not materialize if infrastructure spending is not pumped up, and rapidly.

In FY07, infrastructure spending stood at 5% of GDP. The Planning Commission estimates that this figure has to increase to 9% of GDP by 2011 to sustain the target GDP growth rate during the 11th Plan period. The Planning Commission targets infrastructure spending of USD 500 billion during 2007-2012, of which 30% or USD 150 billion will come from the private sector.

Also, real estate investments and capacity expansion by industries to the tune of USD 12 billion and USD 174 billion respectively in the 11th Plan period will add to the construction boom. The construction industry is hence expected to grow at a CAGR of 25% over the next 5 years.
Source: CRISIL

Performance of Infrastructure Funds

Peer Comparison of stocks
We have compared a few leading infrastructure companies - Gammon India, Larsen and Toubro (L&T), Nagarjuna Construction and IVRCL.


EBITDA margins and ROCE are expected to dip marginally in FY08 while PAT margins will remain more or less stable.
Gammon India
· Its subsidiary Gammon Infrastructure Projects Limited (GIPL) will add to the order book of Gammon India
· Has stake in ATSL that is in the lucrative power transmission business
L&T
· Strong order flow in existing business
· Forayed into new businesses - Defense, thermal power equipments, nuclear power, railways and shipbuilding
· Its subsidiaries - L&T IDPL (infrastructure) and L&T Infotech (IT) are expected to bring considerable upside
Nagarjuna
· Robust and diversified order book
· Awarded hydro-power contracts
· Strong presence in housing
IVRCL
· Strong order book - could be affected by delays in development of land bank
· Raised funds through IVR Prime
· Hindustan Dorr Olivier, an EPC company, is its subsidiary
· Diversified into oil & gas exploration - exposed to risk in this capital intensive business, upside could also be high in case of finds
We believe the above companies will ride the wave of construction and growth will definitely be strong over the next decade. This will bring satisfactory returns to patient long-term investors. However, valuations do look stretched and are contingent on actual performance - and much of this depends on government action. Given that this is a pre-election year, risk of delays and cost escalations cannot be ruled out. Medium term uncertainties remain - as valuations across the market look stretched.