What infrastructure will look like in 2016
2016 holds promise for infrastructure as the centre pushes reforms aimed at faster approvals to stalled projects, easy access to funds and attracting overseas investors
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The year ahead holds promise for infrastructure as the centre pushes reforms aimed at giving faster approvals to stalled projects, providing easy access to funds and attracting overseas investors. 2016 will also see a spurt in deals across roads and power sectors as India regains favour for investments and firms look to consolidate businesses.
TRENDS TO WATCH
Back to basics
Companies that started off as contractors and shifted to an asset-heavy model of doing business are going back to the basics. Large infrastructure conglomerates, looking to clean up their balance sheets, are likely to focus on engineering, procurement and construction (EPC) orders from the government instead of build, operate and transfer (BOT) projects that require heavy investment. Smaller companies with lower debt will grow faster and win more projects.
More financial buyers, especially global pension funds, will try to partner with large infra-focused companies in India to create their own asset portfolios. Canadian pension funds such as the Canada Pension Plan Investment Board, CPDQ and Ontario Teachers’ Pension Plan Board will invest in the Indian infrastructure sector across roads, power and renewable energy over the next two years, according to investment bankers.
Surge in project awards
Road project awards will rise in 2016 as the government puts infrastructure creation at the top of its agenda. The transport ministry already has a target of awarding 10,000km of projects in FY16 as against 8,000km in FY15. The National Highways Authority of India plans to award 20,000km of projects over the next two years, involving an investment of Rs.2.3 trillion.
Strong focus on the railways
There will be more focus on the railways, especially since the announcement of Japan’s bullet train project in India, which will be a 505km corridor linking Mumbai with Ahmedabad. Japan will provide $12 billion of soft funding to build India’s first bullet train. If the concept is replicated in major metros of India, it could transform the country’s public transportation and cut down travel time by a third. The government plans to attract more investments in railways.
Easing of FDI rules
The government in November eased foreign direct investment (FDI) norms across 15 sectors, including defence, to attract overseas funds and boost economic growth. It has allowed FDI up to 49% under the automatic route and beyond that to be approved by the Foreign Investment Promotion Board. Foreign investors include Boeing, Raytheon, Lockheed Martin, BAE Systems, while a number of Indian conglomerates such as Larsen and Toubro Ltd, Reliance Infrastructure Ltd, Reliance Industries Ltd, Mahindra and Mahindra Ltd, Tata Group and Bharat Forge Ltd are looking to grow their business in the sector.
Privatization of distribution
Some action is likely in the privatization of distribution in the power sector in 2016. Private companies could take over distribution in certain cities to reduce leakage. A number of projects in distribution are likely to be awarded in 2016.
COMPANIES AND PEOPLE TO WATCH
Companies such as Agra-based PNC Infratech and Hyderabad’s KNR Constructions are likely to try and win projects in roads and transportation, helped by their track record of timely completion of projects, asset-light model and leaner balance sheets.
The company decided to transform itself into a defence company and hopes to sell its cement assets and 11 operational road projects in the first half of 2016, in addition to plans of selling telecom towers and stake in financial services businesses. These could bring in Rs.50,000 crore and cut debt by 40%.
The Sajjan Jindal-led power producer is one of the few firms looking to snap up stressed power assets and grow inorganically, helped by its strong balance sheet. It has acquired two hydropower projects from the Jaypee Group and is conducting due diligence on two other projects for potential acquisitions, which could materialize in 2016.
Jaypee Group companies
The debt-laden infrastructure conglomerate’s companies Jaiprakash Associates Ltd and Jaiprakash Power Ventures Ltd have been working hard to sell assets, including power and wind projects and the 165km Yamuna Expressway. The group, about 75% of whose debt was under default rating, has managed to sell two hydropower projects and is likely to seal more deals in 2016.
Larsen and Toubro
The country’s largest engineering and construction company aims to shed non-core businesses and follow an asset-light model in order to reduce its debt burden and revive financial performance. It has several plans to monetize assets and some of this could take place in 2016.
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