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Infra expert meeting: Robust outlook but segmental focus may change
We hosted an infrastructure consultant for investor meetings in Mumbai. Discussions suggest that infrastructure spend will continue to remain robust but certain sub-segments such as railways, water, metro, thermal power may witness higher spend as against roads, power T&D that can relatively slow down. Payment issues and contract enforcements are the key worries for contractors. We remain OW on L&T and Cummins, EW on BHEL and UW on ABB and Siemens India in our sector EAP.
* Infrastructure ordering should continue to drive order inflows in FY20/21, albeit with a slow pick-up after the general elections-induced disruption. Railways, water, metro and thermal power are promising opportunities in the future.
* On the other hand, power T&D and roads are close to the peak of capex currently and could witness a slower growth or even a decline. The roads sector is likely to witness an acceleration in M&A activity as almost all BOT/HAM assets (non-PE funds owned) are on sale and about 50 are likely to complete transaction in CY19.
* Among the key industry concerns are continued payment issues from the government, working capital challenges and a potential loss of confidence if old orders are reneged.
* Railways continues to look like a good opportunity for construction companies as well as equipment suppliers in light of the continued rise in capex. The government considers railways as high priority, and it has the potential to completely transform in the next 10 years. Most organized players, however, have struggled to work with the railways due to a restricted approved vendor list that commands own payment and pricing norms. Moreover, working capital cycle is excruciatingly long as payment deadlines are often not met on time due to delays at the railways’ end. L&T, KEC, Kalpataru and Tata Projects (unlisted) are well-positioned to benefit from this opportunity.
* Road orders could witness a relative slowdown on a high base from the past few years and also comparatively lower allocation as the focus is on BOT, TOT and other selffinancing options in the segment. According to the consultant, while the NHAI wants to award a higher proportion of BOT projects this year, industry is not yet ready for it financially. However, there are at least 50 BOT/HAM assets which are actively being discussed for sale (at 10-12% IRR) and transaction completion will help release capital that can be further deployed for future projects.
* Metro opportunity is likely to continue with line extension projects and execution pick-up in key cities. However, smaller city metro projects may witness a rethink in light of Kochi metro experience. Importantly, payment cycle in the metro projects is good.
* T&D sector feedback: The state capex is stepping up even as PGCIL capex is falling. However, competition in this segment remains elevated, resulting in lower margins. Moreover, post the upcoming Green Energy Corridor tender, there will likely a lull in ordering in the T&D space for 2-3 years. State projects are in the lower kVA range where most organized players do not participate. Distributed power generation could drive up spend on micro grids but reduce long-distance transmission capex.
Key challenges: Working capital remains a huge concern, while reneging/renegotiating of old projects could shake industry confidence at a time when states were just starting to ramp up infra capex.
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