Tag: infrastructure

Categories
Editorial

Union Budget 2022-23: Stocks Likely to Benefit

Finance Minister Smt. Nirmala Sitharaman presented the Union Budget 2022-23 in Parliament on February 1, 2022. The budget has included a set of important schemes that target different sectors of our economy. Let us take a look at some of the key highlights from the Budget presentation and the stocks that could benefit in the long term.

Boost for Infrastructure Sector

The Budget has given utmost importance to the development of core infrastructure across the country. Under PM Gati Shakti, the National Highway network will be expanded by 25,000 km in 2022-23. The PM Gati Shakti— National Master Plan for Multi-modal Connectivity is a digital platform that brings 16 Ministries (including Railways and Roadways) together for integrated planning and implementation of infrastructure connectivity projects. It aims to pull forward the economy and lead to more job creation.

As part of the project, 400 new-generation Vande Bharat trains will be manufactured in the next three years. Also, 100 cargo terminals will be established within the same period. The “One Station-One Product” concept will be popularised to help local businesses and supply chains.

Under PM Awas Yojana, 80 lakh affordable houses will be completed in 2022-23. An amount of Rs 48,000 crore will be allocated for this scheme. This initiative will give a significant boost to the steel, cement, paints, and other allied sectors.

The FM has announced an allocation of Rs 60,000 crore under the Har Ghar, Nal Se Jal project. It aims to provide clean drinking water to over 3.8 crore households in FY23.

Stocks That May Benefit:

Prominent highway-infra construction firms such as Larsen & Toubro (L&T), KNR Construction, Ashoka Buildcon, GR Infra are likely to benefit. IRCTC and the Indian Railway Finance Corp (IRFC) may benefit from the developments in the Indian Railways. Other stocks to be watched in this space include Tata Steel, SAIL, DLF, Godrej Properties, UltraTech Cement, etc. You can read marketfeed’s analysis of the paint and real estate industries. 

Stocks related to pipe manufacturing and water treatment can be watched. This includes Astral Ltd, Prince Pipes & Fittings Ltd, Supreme Industries, Finolex Industries, Va Tech Wabag, etc.

Boost for Energy Transition

The Indian government aims to facilitate domestic manufacturing of 280 gigawatts (GW) of installed solar capacity by 2030. The Finance Minister has announced an additional allocation of Rs 19,500 crore towards a Production Linked Incentive (PLI) scheme for manufacturing high-efficiency solar modules.

The govt’s EV30@30 campaign aims to speed up deployment and achieve 30% sales share for electric vehicles (EVs) by 2030. It will also help reduce the import of expensive crude oil. The Centre will introduce an extensive battery swapping policy to promote the sale of EVs. Moreover, special mobility zones for EVs will be established in urban areas.

Sovereign Green Bonds (SGBs) will be issued to mobilize resources for green infrastructure. The proceeds from the issue of these bonds will be deployed in public sector projects that will help reduce carbon emissions in the economy. It will also support the wider adoption of solar and other renewable energy sources across India. SGBs will be part of the government’s borrowing program in FY23.

Stocks That May Benefit:

Stocks in the EV and green energy space will benefit the most from these policies. Tata Motors, Tata Power, Adani Green Energy, Borosil Renewables, Tata Chemicals, Motherson Sumi, etc can be watched. Battery manufacturers such as Exide Industries and Amara Raja Batteries could also benefit.

You can also go through our detailed analysis of power distribution and transmission companies here. 

Boost for Telecom Sector

Telecom spectrum auction will be conducted in 2022 for the rollout of 5G mobile services by private telecom providers. The Centre will also launch a PLI scheme for design-led manufacturing for the 5G ecosystem to enable affordable broadband and mobile communication in rural and remote areas. 

The govt will offer contracts for laying optical fibre cables in villages under the BharatNet project under the public-private partnership (PPP) model in FY23. The project aims to bring rural access to e-services, communication facilities, and digital resources.

Bharti Airtel, HFCL, RailTel Corporation of India, Tejas Networks, Dixon Technologies, GTL Infra, Sterlite Technologies are likely to benefit.

Boost for the Defence Sector

  • The Finance Minister has stated that ~25% of the total defense R&D budget will be earmarked for opening up defence research & development (R&D) for private industry, startups, and academia. 
  • Private industries will be encouraged to take up the design and development of military platforms and equipment. They can now collaborate with DRDO and other organizations through special purpose vehicle (SPV) model. 
  • 68% of the capital procurement budget in defence will be allocated for domestic industry in 2022-23. This will give a boost to the Make in India initiative.

Stocks related to the defence sector include Hindustan Aeronautics Ltd, Bharat Dynamics, Zen Technologies, Bharat Electronics, and Paras Defence & Space.

Boost for Banking and NBFC Sectors

As per reports, HDFC Bank, ICICI Bank, and State Bank of India could be the biggest beneficiaries of the government’s push to convert more than 1.5 lakh post offices into banking outlets. These lenders could tap into nearly Rs 15 lakh crores of savings in the post offices to sell other financial products like mutual funds and insurance. 

The extension of the Emergency Credit Line Guarantee Scheme (ECLGS) to March 2023 will be beneficial for banks and non-banking financial companies (NBFCS) that focus on micro, small, and medium enterprises (MSMEs).

The Way Ahead

The Indian government continues to focus on getting the economy back on track and speeding up growth. The Budget will provide a boost to the ‘Make-in-India’ initiative by focusing on infrastructure, housing, power, railways, and agriculture. The Centre’s extended focus on digitisation through new-age technologies and electric vehicles is highly commendable. Let us look forward to seeing how these strategic plans are implemented. 

Disclaimer: The stocks mentioned in the article are solely for educational purposes. Please do your own research before investing.

Categories
Editorial

Global Steel Prices Volatility, China-Australia Trade War and Indian Metal Market: Analysis

India’s metal stocks and the NIFTY METAL index have been rallying. Steel prices are soaring and iron ore prices have started to slump. Iron ore is the key raw material used to manufacture steel, yet both are following opposite trends. In December 2020, we at marketfeed discussed the soaring steel prices and how it was impacting the Indian economy. While there have been some shortfalls that are globally driving down steel prices, one crucial factor is at play, China. This piece gives an overview of the steel market and how it could impact Indian metal stocks. 

China’s Economic Turbulence Impacts Global Steel Prices

The last few weeks have been tough for the Chinese economy. It first faced the Evergrande Crisis and is now facing a severe power crunch. Even though we are amidst a global energy crisis, it seems to have impacted China more than other countries. Nevertheless, there is a weird trend that exists right now in the metal market. Iron ore, a key ingredient for making steel, has its prices falling while steel prices are soaring. 

The story starts with China’s trade war with Australia. China produces ~51% of the world’s steel. To make this steel, it imports 60% of the iron ore from Australia, which controls ~38% of iron ore production. The trade war started in May 2020, when China restricted barley imports from Australia, accusing it of breaching WTO rules by subsidizing barley production in China below the domestic production cost. 

Australia further angered China by asking for an independent inquiry into the origin of the coronavirus. Essentially, Australia was accusing China of deliberately creating the COVID-19 pandemic. China retaliated by disrupting the imports of seafood, wood, beef, wine, and coal from Australia. Eventually, Australia restricted the supply of iron ore to China. This meant that China wouldn’t be able to produce as much steel as before. This sent steel prices on a rollercoaster globally. 

To correct the supply-demand mismatch of metals in China, it has decided to release metal reserves of copper, aluminium and zinc. It shall release 170,000 tonnes of this metal into the market and more depending on how the market reacts.

The iron ore that Australia would sell to China would go to other steel manufacturing economies like India, Brazil, the US, etc. Steel, aluminium, copper, and iron ore prices have slumped in India due to fears of weak demand from China amidst an economic crisis. Nevertheless, steel demand in India is healthy, since it has managed to revamp domestic production. India is boosting its economy with multiple infrastructure projects, which ultimately require a significant amount of steel. 

In Q1 FY22, India turned net exporter of finished and semi-finished steel to China for the first time in years. This could mean soaring profits for domestic steel companies in India and for their shareholders. China is currently focussing on reducing carbon emissions and is therefore importing semi-finished and finished steel from India. This would mean better profit margins for Indian steel players. 

India’s Metal Markets

International steel prices are much higher than domestic prices in India. This could mean a bumper export season for domestic steel and iron companies, eventually making good profits. For the past few days, the winds in the metal markets blew in favour of Indian companies. This caused a rally in the Indian metal stocks, followed by a major correction. Between September 1, 2021, and September 16, 2021, the NIFTY Metal Index rallied by 4% or 247 points before going down amidst uncertainties surrounding the US Interest rate hike and the Evergrande crisis.

Tala Steel, SAIL, NMDC, JSW Steel, APL Apollo Tubes are some big players that can benefit from the current situation in the global markets. These companies are players in the core steel industry. They have a replenished inventory of steel products and a large consumer base, both domestic and international

The government has advised SAIL and NMDC to sell off its ‘residual iron ore fines’ from all its mines. This will not only generate supply in the market but also add to revenue (even though a small amount) of the two companies. India’s domestic steel demand is likely to remain healthy as the government has announced many infrastructure projects and some incentive schemes for them. 

Currently, Indian steel companies have two marketplaces to benefit from. First, there is the global market where there is a shortage of steel supply. Second is the Indian market which is seeing fast growth in the number of infrastructure projects.

In a December 2020 issue, we discussed how India’s steel production shortage caused domestic prices to cross the international prices. India could neither export steel because of the price gap nor import it because of the import duties imposed in the country. The situation is now much better as India has plenty of steel and iron ore reserves that can be exported and meet domestic demand at the same time. Price fluctuations in the international market are not likely to impact the domestic metal market. An investor should watch out for core steel companies with high export numbers and no production bottlenecks. 

Categories
Editorial

Highway Infra Construction Firms: An Analysis

As we know, the infrastructure sector has received a significant boost through the provisions of the Union Budget 2021-22. The Finance Ministry has allocated a whopping Rs 1.18 lakh crore towards the Ministry of Road Transport and Highways. This fund would be utilised for the launch of mega national highway projects across the states of Tamil Nadu, West Bengal, Assam, and Kerala. This would strengthen the existing transportation networks in India and ensure more connectivity.

This is clearly great news for large infrastructure companies that constantly receive contracts from the National Highways Authority of India (NHAI). Over the years, these firms have built and maintained some of the best roads and highways in our country. Let us take a closer look at some of the prominent companies that excel in the construction of highways in India. 

Larsen & Toubro

Larsen & Toubro (L&T) Limited is engaged in engineering, construction, and manufacturing operations worldwide. The company’s infrastructure segment constructs buildings and factories, transportation infrastructure, heavy civil infrastructure, power transmission and distribution, etc. L&T Infrastructure Development Projects Limited (L&T IDPL) is a pioneer of the Public-Private-Partnership (PPP) model of development in India. IDPL’s portfolio of road projects includes some of the most economically significant and high-traffic corridors connecting key industrial cities and ports. The company’s total portfolio consists of 17 projects, comprising 7,800 lane kilometers of roads and highways. 

L&T has invested heavily in research and development (R&D) activities to improve efficiency and accuracy. Thus, they have been able to complete and deliver projects within the stipulated time.

Financial Performance:

L&T’s revenues and profits have shown consistent growth over the years. This is primarily due to the large number of contracts they receive from Central and state government agencies. The company reported a 4.8% year-on-year (YoY) increase in net profit to Rs 2,446.7 crore for the quarter ended December (Q3). L&T’s revenue from operations declined 1.78% YoY to Rs 35,596 crore during the same period. The company’s order inflow in Q3 was the highest-ever in any quarter. It received fresh orders worth a new record of Rs 73,233 crore. 

Over the last 5 years, L&T’s revenue has grown at a yearly rate of 9.71%, whereas the industry average stood at 5.44%. The company has continued to show its dominance in the infrastructure sector by securing a large number of “significant contracts” over the past year. It has been able to obtain a market share of 50.04%. L&T offers very attractive dividends as well.

The share price of L&T has surged by more than 82% since April 2020.

Dilip Buildcon

Dilip Buildcon Limited (DBL) is one of the leading infrastructure companies that is engaged in the construction of roads, bridges, dams, and commercial & residential buildings. It operates in two segments- EPC Projects and Toll Operations. The company undertakes state and national highway projects, city road projects, and bridge operation and maintenance projects. The company also develops irrigation projects, urban development projects, dams, canals, metro rail viaducts, and much more. It is involved in the maintenance of road infrastructure facilities and toll operations. DBL has established its presence in more than 19 states.

Dilip Buildcon’s revenue has grown at a yearly rate of 28.85% over the past 5 years, whereas the industry average stood at 5.44%.  The company posted a 107% YoY jump in consolidated net profit to Rs 181.91 crore for the quarter ended December (Q3). Revenue had increased by 7.1% YoY to  Rs 2,746.19 crore in Q3. These are strong figures indeed. It has been able to secure a market share of 3.31%.

Since April 2020, the shares of Dilip Buildcon have rallied by more than 187%.

IRB Infrastructure Developers

IRB Infrastructure Developers Limited is engaged in the construction, development, and maintenance of roads and highways on a build-operate-transfer (BOT) basis. The company operates in two segments- Toll Operate & Transfer Projects and Construction. IRB is also involved in real estate development, generation and sale of electricity through windmills, and airport infrastructure activities. The company has 21 projects with 12,317 lane kilometers of roads and highways. 

Recently, the company emerged as the successful bidder for the construction of eight lanes of the Gandeva-Ena stretch of the upcoming Vadodara-Mumbai Expressway in Gujarat. The length of the stretch is 27.5 kilometers. The cost of the project is Rs.1,755 crore.

Financial Performance:

IRB Infra Developers have shown a consistent increase in profits and revenues over the years. The company reported a 56% YoY decline in net profit to Rs 69.48 crore for the quarter ended December (Q3). Its total revenue fell to Rs 1,594.80 crore in Q3, compared to Rs 1,790 crore during the July-September quarter (Q2). However, the company said its construction segment has seen a robust recovery and continues to strengthen further.

Over the past 5 years, the revenue of IRB Infrastructure Developers has grown at a yearly rate of 12.39%, whereas the industry average stood at 5.44%. The company has been able to obtain a market share of 2.39%. 

The stock price of IRB Infrastructure Developers has surged by 116% since April 2020.

PNC Infratech

PNC Infratech Limited is a construction, development, and management company based in Agra. The company undertakes various infrastructure projects, including highways, bridges, flyovers, power transmission lines, airport runways and pavements, and track construction. It also provides end-to-end infrastructure implementation solutions such as engineering, procurement, and construction services (EPC) on a fixed-sum turnkey basis. 

Recently, the company’s subsidiary -PNC Unnao Highways- received an order worth Rs 1,602 crore from the NHAI. The project consists of four-laning of the Unnao-Lalganj section of NH 232-A in Uttar Pradesh. Two of its other subsidiaries have won orders aggregating to ~Rs 3,500 crore in Uttar Pradesh.

Financial Performance:

The revenues and profits of PNC Infratech have seen a sharp uptrend over the years. The company reported a 163% YoY jump in consolidated net profit to Rs 176.14 crore for the quarter ended December (Q3). Its revenue from operations increased by 13.78% YoY to Rs 1,582.02 crore during the same period. The company recorded substantial growth in both bottom-line and top-line segments in Q3.

Over the last 5 years, PNC Infratech’s revenue has grown at a yearly rate of 25.3%, whereas the industry average stood at 5.44%. The company has been able to secure a market share of 1.95%.

The shares of PNC Infratech have surged by 154% since April 2020.

KNR Constructions Limited

KNR Constructions Limited operates as an infrastructure development company in India. It provides engineering, procurement, and construction (EPC) services for roads and highways, irrigation, and urban water infrastructure management sectors. It undertakes various infrastructure projects, such as expressways, national highways, flyovers, bridges and viaducts, irrigation projects, and much more.

Several financial analysts suggest that KNR Constructions’ strong balance sheet gives it a key competitive advantage over its peers in bidding for newer projects. It has time and again completed and executed projects ahead of schedule. Over the last 5 years, KNR Constructions’ revenue has grown at a yearly rate of 21.76%, whereas the industry average stood at 5.44%. However, the company has been only able to obtain a market share of 0.85%. 

The share price of KNR Constructions has surged by 109% since April 2020.

Conclusion

We have only mentioned five major companies that could benefit from the new highway projects announced by the Finance Minister. Other listed firms involved in the construction and maintenance of highways include HG Infra Engineering, Bharat Road Network, Ashoka Buildcon, Sadbhav Engineering, MEP Infrastructure, etc. 

The development of a strong transportation network plays an important role in the overall economic growth of our country. These companies have time and again contributed their expertise and resources to the construction of our national highways and city roads. They are likely to receive more orders from the NHAI in the months to come. The National Bank for Financing Infrastructure and a Development Finance Institution (DFI) will be set up in our country to provide an extra and essential boost to the sector. Due to positive sentiments surrounding their financial results, fresh orders from NHAI, and provisions of the Budget, we could see a further rally in the shares of these infrastructure firms.

Categories
Editorial

What are Infrastructure Investment Trusts (InvITs)?

An Infrastructure Investment Trust (InvIT) is an investment scheme (similar to a mutual fund) that enables individual and institutional investors to directly invest funds in infrastructure projects. These investors, who collectively invest small amounts of money in income-generating assets, receive a small portion of the income in return. These ‘assets’ could include road projects, power transmission lines, gas pipelines and much more.

We know that infrastructure firms require a steady cash flow to complete their projects. In most cases, they borrow large amounts of money from financial institutions. Thus, companies monetise their income-generating assets (through InvITs) to repay their debt obligations quickly and effectively. The funds raised through InvITs are used to pay off interest on loans and other substantial expenses. The primary objective of InvITs is to promote the infrastructure sector of a country by encouraging more individuals to invest in it. 

An InvIT is established as a trust and must be registered with the Securities and Exchange Board of India (SEBI). The SEBI (Infrastructure Investment Trusts) Regulations, 2014 provides specific details regarding the registration and regulation of InvITs. Once registered, InvITs can raise funds through public or private placement and issue units to investors. In return, investors obtain a share of the annual distribution of dividends and interests. The units of such trusts are listed on the stock exchanges as a combination of both equity and debt instruments. 

The minimum amount required to invest in an InvIT IPO is Rs 10 lakh. Thus, large financial institutions or high net worth individuals (HNIs) find InvITs as a profitable investment opportunity. Small retail investors would struggle to apply for such IPOs.  

Types of InvITs

  1. The first type of InvIT allows investment in revenue-generating completed projects. Firms invite investors to invest in finished projects through an InvIT IPO.
  1. The second type of InvIT allows investors to invest in projects that are both completed or under construction. 

Structure of InvITs in India

  1. Trustee – A trustee inspects the performance of an InvIT and is certified by market regulator SEBI. They are required to invest at least 80% into infrastructure assets that generate steady revenue.
  1. Sponsor(s) – This refers to promoters, institutions, or companies— that have a net worth of at least Rs 100 crore— which establishes an InvIT. They must hold a minimum of 25% in the InvIT with a minimum lock-in period of 3 years or as notified by any regulatory requirement. When it comes to public-private partnership (PPP) projects, sponsors serve as a Special Purpose Vehicle (SPV). [An SPV is a subsidiary company that facilitate the parent company’s financial arrangements, including leverage and speculative investments, without compromising the entire group]
  1. Investment Manager – This refers to a limited liability partnership (LLP) or an organisation that manages investments and supervises all the operational activities surrounding the InvIT.
  1. Project Manager – They are responsible for the execution and completion of infrastructure projects.

Prominent InvITs in India

As of February 2021, there are 13 Infrastructure Investment Trusts registered with SEBI. Let us take a look at some of the most prominent ones:

India Grid Trust

India Grid Trust (IndiGrid) is India’s first listed power sector infrastructure investment trust. It is sponsored by American global investment firm KKR & Co. and Sterlite Power Grid Ventures Ltd (SPGVL). The InvIT owns 12 operating assets, spanning over 30 transmission lines, spread across 6,740 circuit kilometers. IndiGrid also owns 9 substations with 12,290 mega-volt ampere (MVA) transformation capacity across 15 states and one Union Territory, The entity’s assets under management (AUM) are currently worth ~Rs 15,000 crore.

IRB InvIT Fund

IRB InvIT Fund is the first listed InvIT focused on toll-road assets in India. The sponsor of the trust is IRB Infrastructure Developers Ltd, one of the largest infrastructure development and construction companies in India. IRB InvIT Fund owns, operates, and maintains a portfolio of six toll-road assets in the states of Maharashtra, Gujarat, Rajasthan, Karnataka, and Tamil Nadu. These toll roads are operated and maintained through concession agreements granted by the NHAI.

National Highways Infra Trust

It has been reported that the National Highways Authority of India (NHAI) will come out with an InvIT by March 2021. It will be the first InvIT sponsored by a government entity in our country. Around six road assets worth Rs 5,000 crore have been given in-principle approval for transfer to the InvIT. This will enable NHAI to monetise its completed National Highways that have a toll collection track record of at least 1 year.

Assets to be transferred to the InvIT include the 32.6 km Kotha-Kata Bypass to Kurnool (Telangana), the 75 km-long Palanpur-Abu Road in Gujarat, the 31 km-long Abu Road-Swaroopganj in Gujarat, the 160 km Chittorgarh Kota and Chittorgarh Bypass in Rajasthan, and the 77 km Maharashtra-Karnataka border to Belgaum. 

Power Grid Infrastructure Investment Trust

On January 28, 2021, Power Grid Corporation of India Ltd filed draft papers with SEBI for issuing an InvIT. The company seeks to raise more than Rs 5,000 crore to fund new and under-construction projects. This will be the first InVIT in the country to be floated by a public sector company. The offer includes a fresh issue as well as an offer-for-sale (OFS).

The trust’s initial portfolio will have transmission assets worth around Rs 7,000 crore. This includes PowerGrid Vizag Transmission Ltd, PowerGrid Kala Amb Transmission Ltd, PowerGrid Parli Transmission Ltd, PowerGrid Warora Transmission Ltd, and PowerGrid Jabalpur Transmission Ltd. The proceeds from the offer will be utilised for providing loans to the initial portfolio assets for repayment or pre-payment of debt and general expenses.

Other InvITs registered with SEBI include India Infrastructure Trust, Indian Highway Concessions Trust, IndInfravit Trust, MEP Infrastructure Investment Trust, Digital Fibre Infrastructure Trust, Oriental Infra Trust, Tower Infrastructure Trust, and Roadstar Infra Investment Trust.