INSTITUTIONAL EQUITY RESEARCH Infr ?· INSTITUTIONAL EQUITY RESEARCH ... UP State Highway Authority…

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  • INSTITUTIONALEQUITYRESEARCH

    Page|1|PHILLIPCAPITALINDIARESEARCH

    InfrastructureAtaleoftwostatesINDIA|INFRASTRUCTURE|SectorUpdate

    12January2016

    Readthisreportfor: DetailsofpotentialorderawardsinUttarPradesh(UP)andMaharashtra CompaniesthatprovideadirectplayontheinfrastructureactivityintheseregionsAs themarket grappleswith globaluncertainties (USDINR, crude,China),we find solaceback home with strongmomentum continuing in core infrastructure order awards andexecutionactivity.WhileNHAIseemstobewellontrackforawarding5,500kmofprojectsinFY16(additional2,500kmbyMoRTHalsoseemtobeontrack),ithasalsounveiledaseriesof reforms to revive stuck projects. However, what is more heartening is escalatedinfrastructureactivitybystategovernmentsespeciallyUPandMaharashtra.UttarPradesh(UP)thestateisbuzzingwithactivityWithstateassemblyelectionsalmost round thecorner in2017, theUPstategovernmenthasuppedtheante.Largenumberofprojectsarebeingexecuted,deadlinesformanyhavebeenpreponedtobeforetheelections,andaslewofprojectsareexpectedtobeannouncedinthenextsixeightmonths(beforeaacharsanhita(modelcodeofconduct)kicksin).WhileUP State Highway Authority and UP Expressway Industrial Development Authority areexpediting upgradation and construction of state highways and expressways across thestate,LucknowMetroRailCorporationismakingrapidprogressinLucknowmetroandfourothermetro projects in the state (Kanpur, Varanasi, Agra,Meerut). We expect over Rs800bnof roadandmetroprojects tobeawarded inUP (bystateandcentralgovernmentbodies)amammothopportunityforlocalplayerssuchasPNCInfratech.Maharashtrasteppingitup,finallyThe impetus provided to infrastructure activity by the general assembly elections (May2014) and the subsequent state assembly elections (Oct2014) gave rise to sustainablemomentum,which thenewstategovernmenthas taken forwardwell.While theMMRDArecentlyawardedthemuchawaitedMumbaiMetro3EPCpackages,significantprogresshashappenedonMumbaicoastalroad,TransHarbourLink,andothermetroprojects(Mumbai,Nagpur,Pune).WeexpectprojectsworthRs1trninMahrashtra(Rs900bninMumbaialone)to be awarded over the next three years, culminating into a huge opportunity for localplayerssuchasJKumarInfraprojects.Telaganaand/orAndhraPradesh(AP)inanascentstageTelanganaandAPpresentahugeinfrastructureopportunityintermsofirrigationandroadprojects in Telangana and building of a new state capital in AP. However,most of theprojectsarestillonthedrawingboardandwilltakeatleast1218months,inouropinion,tocrystalliseintoconcreteorders.ComparablevaluationsAlmost all of our preferred picks in the EPC space (NCC, JKIL, KNR, PNC) are trading atcomparablevaluations,whichperhapsreflectsthatthemarketrealisestheirsimilarstatureand upside potential. In this scenario,we recommend that investors choose stocks thatprovide them exposure to certain segments (roads, metros, ports) or geographies (UP,Maharashtra,panIndia).Inlinewiththisthinking,werecommendPNCInfratechasapureplayontheopportunityinUP,andJKumarInfraprojectsasadirectbeneficiaryoftheopportunityinMaharashtra.NCCandKNR,withtheirpanIndiapresence,wouldalsobenefitfromorderawardactivityinboththeseregions.

    CompaniesPNCInfratechCMP,Rs Rs534Reco BUYTargetPrice,Rs Rs610Upside 14%JKumarInfraprojectsCMP,Rs Rs374Reco BUYTargetPrice,Rs Rs450Upside 20%EPCcompaniesRelativePositioning

    Source:PhillipCapitalIndiaResearch VibhorSinghal(+912266679949)vsinghal@phillipcapital.inDeepakAgarwal(+912266679944)dagarwal@phillipcapital.in

    NCC

    JKumar

    KNR

    ITDC

    PNC

    MBL

    8.0

    10.0

    12.0

    14.0

    16.0

    18.0

    0.0 0.3 0.5 0.8 1.0 1.3 1.5

    P/E(FY17E)

    Debt:Equity(FY17E)

    mailto:dagarwal@phillipcapital.in

  • Page|2|PHILLIPCAPITALINDIARESEARCH

    INFRASTRUCTURE SECTORUPDATE

    PocketsofinfrastructureopportunitiesLookingatthepipelineofinfrastructureprojectsacrossthecountry(announcedandconsideredby the centreand stategovernments),webelieveUPandMaharashtraarelikelytoseemaximumaction.UttarPradesh(UP)thestateofbuzzingactivityWithstateassemblyelectionsalmostroundthecornerin2017,thestategovernmenthasuppedtheante.Largenumberofprojectsarebeingexecuted,deadlinesformanyhavebeenpreponedtobeforetheelections,andaslewofprojectsareexpectedtobeannouncedinthenextsixmonths(beforeaacharsanhita(modelcodeofconduct)kicks in).WhileUPStateHighwayAuthority (UPSHA)andUPExpressway IndustrialDevelopment Authority (UPEIDA) are expediting upgradation and construction ofstatehighwaysandexpresswaysacross the state, LucknowMetroRailCorporation(LMRC) ismakingrapidprogress inLucknowmetroandfourothermetroprojects inthestate(Kanpur,Varanasi,Agra,Meerut).A largeshareofprojectsthattheNHAI is likelytoawardare inUPandBihar. Ithasalready awarded major road projects in Rajasthan, Gujarat, Maharashtra andKarnataka over the last five years.We expect over Rs 800bn of road andmetroprojects inUP (awardedby stateand centralgovtbodies),which shouldpresentamammothopportunity for localplayers (PNC Infratech) andplayerswithpanIndiapresence(L&T,NCC,KNR).Maharashtrasteppingitup,finallyDriven by years of neglect by various state governments, infrastructure inMaharashtra, especiallyMumbai, is in shambles.While central bodies (NHAI, AAI,IPA)havedonetheirbit,stategovernmentprojectshaveseentepidprocessoverthelastdecade.However,the impetusprovidedtothe infrastructureactivitybygeneralassemblyelections(May2014)andsubsequentstateassemblyelections(Oct2014),has given rise to a sustainablemomentum,which the new state government hastakenforwardwell.MMRDA recently awarded the muchawaited Mumbai Metro 3 EPC packages.SignificantprogresshasalsobeenmadeonMumbaicoastalroad,transharbourlinkandothermetroprojects(Mumbai,Nagpur,Pune).WeexpectprojectsworthRs1trninMahrashtra(Rs900bninMumbaialone)tobeawardedoverthenextthreeyears,culminating intohugeopportunity for localplayers (JKumar)andplayerswithpanIndiapresence(L&T,NCC,KNR).Telaganaand/orAndhraPradesh(AP)innascentstageTelangana and AP also present a huge infrastructure opportunity in terms ofirrigationand roadprojects inTelanganaandbuildingofanew statecapital inAP.While theopportunitypromises tobemammoth,mostof it is stillon thedrawingboardandwill takeat least1218months, inouropinion, toconvert intoconcreteorders.Hence,benefitsfromthesestatesarelikelytobemorebackended,withlittledetailsaboutsegmentsandsize.LikelybeneficiariesinthesestateswillbeNCC,KNRConstruction,andL&T.Withclarityyettoemergeonthesizeandbreakupofthepotentialopportunity inAP/Telangana,we see the two states ofUP andMaharashtra offering the largestpotential in terms of order award opportunity.We recommend investors positionthemselvesaccordinglyandinvestinstocksthatprovideexposuretothesestates.WerecommendPNCInfratechasapureplayontheopportunityinUPandJKumarasadirectbeneficiaryof theopportunity inMaharashtra.NCCandKNR,with theirpanIndiapresencewillalsobenefitfromorderactivityinboththeseregions.

    Hugeopportunityalreadyontheanvil

    Opportunitystillonthedrawingboard

  • Page|3|PHILLIPCAPITALINDIARESEARCH

    INFRASTRUCTURE SECTORUPDATE

    UttarPradeshthestateofbuzzingactivityUttar Pradesh seems to be poised formammoth infrastructure spending over thenexttwoyears.Withthenextstateassemblyelections(March2017)inUP,thestategovernment (headedbyChiefMinisterAkhileshYadavof theSamajwadiParty)hasexpediteditseffortsinshowcasingitsdevelopmentefforts.Demonstrativeornot,alotofactivityisalreadyhappeningontheground.

    LucknowLucknow is the core of infrastructure activity inUP.Whilemany roads have beenupgraded,itwasstillashocktoseeanextensivenetworkofcyclinglanesacrossthecity.Someofthekeyprojectscurrentlybeingexecutedinthecityare:

    LucknowMetroThedevelopmentplanofLucknowmetroconsistsoftwophases:MetroplanPhase Length Stations Route Cost(Rsmn) TargetCODPhaseIA 8 8 TransportNagarCharbagh

    68,800Dec16

    PhaseIB 15 13 CharbaghMunshipuia NAPhaseII 12 12 CharbaghVasantKunj 48,900 NA

    Source:LMRC,PhillipCapitalIndiaResearchWorkonPhase1A isalready in full swingand isexpected tobe completebeforeDecember2016(wellintimeforthestateassemblyelections).TendersforPhase1Bareexpected tobeawardedbyMarch2016andexecution isscheduled tostartbyJune2016.LucknowMetroMapAlsoanotherimageofconstructionactivity

    MetroorderawardsPhase EPC Transmission Rakes&SignallingPhaseIA L&T L&T AlstomIndiaPhaseIB TBA L&T AlstomIndiaPhaseII TBA TBA TBA

    Source:LMRC,PhillipCapitalIndiaResearch

  • Page|4|PHILLIPCAPITALINDIARESEARCH

    INFRASTRUCTURE SECTORUPDATE

    ThefundingforPhase1(A&B)hasallbeentiedup52%hasbeenarrangedfromEuro Bank, and the remaining as equity from the Government of India and theGovernment of Uttar Pradesh. The state government expects healthy passengertrafficfromthebeginningandsignificantdecongestion inroadtrafficaftermetro iscommissioned.FundingplanSource RsmnGoIEquity 10,030GolSubordinateDebt 2,970

    GolTotal 13,000GoUPEquity 10,030GoUPSubordinateDebt 4,490GrantfromLocalBodies 2,450

    GoUPTotal 16,970Bilateral/MultilateralLoan 35,020Total 64,990GoUPSubDebtforland 3,810AdditionalPTAforIDC 480GrandTotal 69,280

    Source:LMRC,PhillipCapitalIndiaResearch

    GomtiRiverWaterfrontThe LucknowDevelopmentAuthority (LDA) isdevelopinga12km riverfronton theriver Gomti. The Rs 30bn project, forwhich Gammon India has secured the civilcontract, is in fullswing.The riverbed isbeingcleansedandconstructionactivity isongoing on the banks on either side. The project is expected to be complete byMarch2017.Activityonriverfront

    Statehighways/ExpresswaysinUPTheUPStateHighwayAuthority(UPSHA)andUPExpresswayIndustrialDevelopmentAuthority (UPEIDA) are implementing multiple projects to build greenfieldexpresswaysandupgradetheexistingstatehighways.Keyprojectsunderexecution/tobeawardedare:1) AgraLucknowexpressway:The302kmexpressway,tobebuiltatacostof~Rs

    105bn,was awarded to five EPC players (PNC Infratech, AFCONS Infra twopackages,NC

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