From roads and railways to ports and airports, and from power plants to hydrocarbon infrastructure, India ranks among the lowest in the world in terms of infrastructure availability. The catching up, which has just begun, will go on for years to come and is set to drive India Inc’s future growth. ETIGgives you a snapshot view of what’s in store for various infrastructure sectors…
INDIA IS set to emerge as one of the world’s largest economies. This is not achievable unless infrastructure improves, and the process has already begun. From power and oil & gas, to roads, ports and airports, huge investments are taking place in the infrastructure space. But how big is this opportunity for India Inc and its investors? ETIGhas benchmarked India’s infrastructure growth against other countries to highlight the gaps and identify the investment opportunities.
ELECTRICITY
A growing economy needs power, both for domestic and industrial use. India is highly energy-deficient. The power consumed by an average US citizen per day is equal to that consumed by an Indian in more than 20 days. This, coupled with the fact that the affluent Indian middle class is spending a lot on domestic appliances, and a growing manufacturing industry needs more power to meet its energy needs, provides tremendous growth potential for companies in the power sector. Even China has a per capita electricity usage rate of 1,684 KwH — almost thrice that of India. This means that if Indians aspire to achieve the same standard of living as that of an average Chinese, power generation in India should triple from its current level. Assuming an average capital cost of Rs 4 crore to generate one mw of power, the estimated investment works out to over $250 billion over the next few years. Around 30% of this will go to EPC contractors (such as L&T, HCC and IVRCL). The bulk of the balance $165 billion will be spent on buying equipment from suppliers (such as Bhel, Siemens and Alstom). This amount is over10 times the current turnover of the industry.
As metal (especially steel) is a major raw material for equipment manufacturers, 50% of the capital expenditure in the power sector is likely to be captured by metal producers such as SAIL, Tata Steel, Sterlite Industries and Hindalco. This translates into a revenue upside of $80 billion. This amount is more than one-and-a-half times the metal industry’s turnover last year. The additional generating capacity will translate into an equally huge upside for power generators like NTPC and Tata Power. Assuming a plant load factor of 80%, they are likely to generate additional annual revenues of over $75 billion, assuming an average sales realisation of Rs 2 per unit. In comparison, India’s largest power generator, NTPC, clocked revenues of $8 billion in FY07. More power will require additional transmission and distribution infrastructure. It will also lead to more power trading, as merchant power plants may become the norm. This will give greater upside to companies such as Power Grid Corp, which is building a national power grid, and PTC, the largest player in the power trading business.
OIL & GAS
An economy energy matrix is incomplete without hydrocarbons. Carbonbased fuels such as crude oil, natural gas and coal are the original sources of energy used to run power plants, transport networks and industries. In the past 10 years, India’s crude oil consumption has witnessed a CAGR of 4.9%, making it the world’s fifth-largest energy consumer. Despite this, the per capita consumption of petroleum products in India is among the lowest in the world. In ’06-07, an average Indian consumed 108 kg of crude oil — almost one-third that of an average Chinese and less than one-twentieth that of an average American.
So, even if we assume that India catches up with China in terms of per capita energy consumption, the domestic demand for petro-products will more than triple from its current level in a few years. Out of India’s current annual need of crude oil of 120 mt, a little under 30% is met through domestic production, while the remaining has to be imported. So, it has become imperative for India to invest in exploration projects, to boost production and reduce dependency on imports. Most of India’s oil & gas reserves remain untapped, mainly due to lack of E&P infrastructure. Billions of dollars of investment will be required to identify and monetise India’s oil reserves. An investment of $33 billion is expected over the next five years in this sector, according to the Planning Commission of India. Downstream refining and marketing infrastructure is also witnessing an investment boom. India is increasing its refining capacities, aiming to become an international petroleum refining hub. In the next three years, domestic refining capacity is slated to cross 190 mt with an investment of $15 billion. In the near future, the availability of natural gas is expected to grow faster than oil in India. As a result, a number of companies, including Gail, RIL and Gujarat State Petronet are investing in pipeline networks. Cross-country pipelines are being laid to connect the natural gas production centres with consumption centres. These initiatives will create a national gas grid and will also support a number of city gas distribution projects. Around $8 billion will be invested in creating the pipeline infrastructure during the 11th Plan period. Increasing spend on petroleum E&P will benefit companies which provide support to E&P majors. This includes Shiv-Vani Oil, Aban Offshore, Jindal Drilling, Maharashtra Seamless and Deep Industries. Creation of refinery infrastructure will boost the outputs of refining companies such as Reliance Petroleum and Essar Oil. Companies such as L&T and Punj Lloyd build and supply some of the equipment to refineries and hence, stand to benefit as well.
ROADS & RAILWAYS
Why should the industry use more energy if it finds it difficult to bring in raw materials and evacuate the finished goods to the market? India is deficient in land-based transport infrastructure, be it roads or railways. A global comparison reveals that the per capital availability of road and railway infrastructure in India is one-third that of a large developing country like Brazil. But the future looks bright. To improve road conditions, the government has launched an ambitious highway project in partnership with the private sector. The first phase of this project — Golden Quadrilateral — is nearly complete and its scope is getting bigger by the day. This has opened up new avenues of growth for construction majors, equipment suppliers and building material suppliers. So, how big is the opportunity for India Inc in the roads sector? Even if we catch up with China — which has built over 34,000 km of expressways, compared to less than 8,000 km in India — we will require an additional capital expenditure of nearly $40 billion. The bulk of the expenses will be captured by construction majors such as L&T, IVRCL and Gammon India in the form of topline. Indian roads are predominantly pitch roads, but the new concrete roads and flyovers will generate revenue for cement and steel companies. If 30% of the said investment amount is spent on concrete — of which, steel will have a share of 40% and cement 60% — it will create a demand potential of over Rs 18,734 crore for the steel sector and Rs 28,100 crore for the cement sector. This will benefit SAIL, Tata Steel and ACC. Similarly, the expansion of railways and modernisation plans like freight corridor and metro rail will boost India’s infrastructure. If India has to catch up with developed countries, its rail network will have to at least double in the next decade. This will require additional investment of $200 billion. Out of this, around 40% will go to EPC and equipment suppliers like Bhel, Kalindee Rail Nirman Engineers and BEML. The balance $120 billion will be used for rail tracks, which will benefit SAIL and Jindal Steel.
PORTS
Ports are required to carry out international trade, as 95% of the global trade by volume is conducted by sea. Development of ports and their cargo-handling capacities influence foreign trade. Thanks to its coastline of over 7,500 km, India has nearly 200 ports. But their capacities are way below global standards. The average per capita cargo handled at Chinese ports stood at 4,265 kg in ’06, while the average in the US was even higher at 7,953 kg. But the average per capita cargo handled at Indian ports was less than one-seventh that of China, at 572 kg. If India has to reach the half-way mark of China’s current level, heavy investments are required in this sector. According to the Planning Commission, the domestic port sector needs investments of $18 billion by ’12. Of these, $13.5 billion will be invested to boost the infrastructure at major ports under the National Maritime Development Programme (NMDP), while the remaining will be needed to improve minor ports. Mundra Port and SEZ, which is developing a port in Gujarat, has already tapped the capital market. More such beneficiaries will emerge over the next few years, as and when more port development projects are commissioned.
AIRPORTS
Air travel has made the world shorter, but it’s still beyond the reach of most Indians. As the economy grows, the number of people travelling by air will explode, which will require expansion of the existing airports and building new ones. Currently, India has 125 airports in total, of which, 12 are international ones. But there is huge scope for improvement in passenger traffic. Currently, only 71 persons out of every 1,000 individuals travel by air every year in India. This ratio is 151 in China and as high as 4,780 in the US. If India is to reach even China’s current standard in the next couple of years, the annual passenger traffic will have to double. This will require huge investments in airport infrastructure. The movement has already begun with the privatisation of Mumbai and Delhi airports and construction of greenfield airports at Bangalore and Hyderabad. Next in line are Kolkata and Chennai airports. The government has also begun the groundwork for second airports at Mumbai and Delhi. Capacity expansion and upgradation of 35 smaller airports are also on the anvil. The Investment Commission estimates an investment of $10 billion will be required in this sector over the next five years. The biggest gainers due to the aviation boom will be GMR Infrastructure, GVK Power & Industries and L&T.
STEEL
In a fast-growing economy, the spend on infrastructure, capital goods and white goods keeps surging. In India, where per capita steel consumption is around 34 kg, against a world average of 139 kg, the growth opportunity for this sector is huge. Even if steel consumption increases three times to 100 kg per capita by ’15 — which is 40% of China’s current consumption — it will provide an upside potential to steel companies. This is visible from capacity expansion plans announced by almost all firms. Companies which have backward integration will benefit the most because iron ore and coking coal (two major raw materials for steel) prices are growing rapidly. So, it is better to invest in SAIL, Tata Steel and Jindal Steel.
INDIA IS set to emerge as one of the world’s largest economies. This is not achievable unless infrastructure improves, and the process has already begun. From power and oil & gas, to roads, ports and airports, huge investments are taking place in the infrastructure space. But how big is this opportunity for India Inc and its investors? ETIGhas benchmarked India’s infrastructure growth against other countries to highlight the gaps and identify the investment opportunities.
ELECTRICITY
A growing economy needs power, both for domestic and industrial use. India is highly energy-deficient. The power consumed by an average US citizen per day is equal to that consumed by an Indian in more than 20 days. This, coupled with the fact that the affluent Indian middle class is spending a lot on domestic appliances, and a growing manufacturing industry needs more power to meet its energy needs, provides tremendous growth potential for companies in the power sector. Even China has a per capita electricity usage rate of 1,684 KwH — almost thrice that of India. This means that if Indians aspire to achieve the same standard of living as that of an average Chinese, power generation in India should triple from its current level. Assuming an average capital cost of Rs 4 crore to generate one mw of power, the estimated investment works out to over $250 billion over the next few years. Around 30% of this will go to EPC contractors (such as L&T, HCC and IVRCL). The bulk of the balance $165 billion will be spent on buying equipment from suppliers (such as Bhel, Siemens and Alstom). This amount is over10 times the current turnover of the industry.
As metal (especially steel) is a major raw material for equipment manufacturers, 50% of the capital expenditure in the power sector is likely to be captured by metal producers such as SAIL, Tata Steel, Sterlite Industries and Hindalco. This translates into a revenue upside of $80 billion. This amount is more than one-and-a-half times the metal industry’s turnover last year. The additional generating capacity will translate into an equally huge upside for power generators like NTPC and Tata Power. Assuming a plant load factor of 80%, they are likely to generate additional annual revenues of over $75 billion, assuming an average sales realisation of Rs 2 per unit. In comparison, India’s largest power generator, NTPC, clocked revenues of $8 billion in FY07. More power will require additional transmission and distribution infrastructure. It will also lead to more power trading, as merchant power plants may become the norm. This will give greater upside to companies such as Power Grid Corp, which is building a national power grid, and PTC, the largest player in the power trading business.
OIL & GAS
An economy energy matrix is incomplete without hydrocarbons. Carbonbased fuels such as crude oil, natural gas and coal are the original sources of energy used to run power plants, transport networks and industries. In the past 10 years, India’s crude oil consumption has witnessed a CAGR of 4.9%, making it the world’s fifth-largest energy consumer. Despite this, the per capita consumption of petroleum products in India is among the lowest in the world. In ’06-07, an average Indian consumed 108 kg of crude oil — almost one-third that of an average Chinese and less than one-twentieth that of an average American.
So, even if we assume that India catches up with China in terms of per capita energy consumption, the domestic demand for petro-products will more than triple from its current level in a few years. Out of India’s current annual need of crude oil of 120 mt, a little under 30% is met through domestic production, while the remaining has to be imported. So, it has become imperative for India to invest in exploration projects, to boost production and reduce dependency on imports. Most of India’s oil & gas reserves remain untapped, mainly due to lack of E&P infrastructure. Billions of dollars of investment will be required to identify and monetise India’s oil reserves. An investment of $33 billion is expected over the next five years in this sector, according to the Planning Commission of India. Downstream refining and marketing infrastructure is also witnessing an investment boom. India is increasing its refining capacities, aiming to become an international petroleum refining hub. In the next three years, domestic refining capacity is slated to cross 190 mt with an investment of $15 billion. In the near future, the availability of natural gas is expected to grow faster than oil in India. As a result, a number of companies, including Gail, RIL and Gujarat State Petronet are investing in pipeline networks. Cross-country pipelines are being laid to connect the natural gas production centres with consumption centres. These initiatives will create a national gas grid and will also support a number of city gas distribution projects. Around $8 billion will be invested in creating the pipeline infrastructure during the 11th Plan period. Increasing spend on petroleum E&P will benefit companies which provide support to E&P majors. This includes Shiv-Vani Oil, Aban Offshore, Jindal Drilling, Maharashtra Seamless and Deep Industries. Creation of refinery infrastructure will boost the outputs of refining companies such as Reliance Petroleum and Essar Oil. Companies such as L&T and Punj Lloyd build and supply some of the equipment to refineries and hence, stand to benefit as well.
ROADS & RAILWAYS
Why should the industry use more energy if it finds it difficult to bring in raw materials and evacuate the finished goods to the market? India is deficient in land-based transport infrastructure, be it roads or railways. A global comparison reveals that the per capital availability of road and railway infrastructure in India is one-third that of a large developing country like Brazil. But the future looks bright. To improve road conditions, the government has launched an ambitious highway project in partnership with the private sector. The first phase of this project — Golden Quadrilateral — is nearly complete and its scope is getting bigger by the day. This has opened up new avenues of growth for construction majors, equipment suppliers and building material suppliers. So, how big is the opportunity for India Inc in the roads sector? Even if we catch up with China — which has built over 34,000 km of expressways, compared to less than 8,000 km in India — we will require an additional capital expenditure of nearly $40 billion. The bulk of the expenses will be captured by construction majors such as L&T, IVRCL and Gammon India in the form of topline. Indian roads are predominantly pitch roads, but the new concrete roads and flyovers will generate revenue for cement and steel companies. If 30% of the said investment amount is spent on concrete — of which, steel will have a share of 40% and cement 60% — it will create a demand potential of over Rs 18,734 crore for the steel sector and Rs 28,100 crore for the cement sector. This will benefit SAIL, Tata Steel and ACC. Similarly, the expansion of railways and modernisation plans like freight corridor and metro rail will boost India’s infrastructure. If India has to catch up with developed countries, its rail network will have to at least double in the next decade. This will require additional investment of $200 billion. Out of this, around 40% will go to EPC and equipment suppliers like Bhel, Kalindee Rail Nirman Engineers and BEML. The balance $120 billion will be used for rail tracks, which will benefit SAIL and Jindal Steel.
PORTS
Ports are required to carry out international trade, as 95% of the global trade by volume is conducted by sea. Development of ports and their cargo-handling capacities influence foreign trade. Thanks to its coastline of over 7,500 km, India has nearly 200 ports. But their capacities are way below global standards. The average per capita cargo handled at Chinese ports stood at 4,265 kg in ’06, while the average in the US was even higher at 7,953 kg. But the average per capita cargo handled at Indian ports was less than one-seventh that of China, at 572 kg. If India has to reach the half-way mark of China’s current level, heavy investments are required in this sector. According to the Planning Commission, the domestic port sector needs investments of $18 billion by ’12. Of these, $13.5 billion will be invested to boost the infrastructure at major ports under the National Maritime Development Programme (NMDP), while the remaining will be needed to improve minor ports. Mundra Port and SEZ, which is developing a port in Gujarat, has already tapped the capital market. More such beneficiaries will emerge over the next few years, as and when more port development projects are commissioned.
AIRPORTS
Air travel has made the world shorter, but it’s still beyond the reach of most Indians. As the economy grows, the number of people travelling by air will explode, which will require expansion of the existing airports and building new ones. Currently, India has 125 airports in total, of which, 12 are international ones. But there is huge scope for improvement in passenger traffic. Currently, only 71 persons out of every 1,000 individuals travel by air every year in India. This ratio is 151 in China and as high as 4,780 in the US. If India is to reach even China’s current standard in the next couple of years, the annual passenger traffic will have to double. This will require huge investments in airport infrastructure. The movement has already begun with the privatisation of Mumbai and Delhi airports and construction of greenfield airports at Bangalore and Hyderabad. Next in line are Kolkata and Chennai airports. The government has also begun the groundwork for second airports at Mumbai and Delhi. Capacity expansion and upgradation of 35 smaller airports are also on the anvil. The Investment Commission estimates an investment of $10 billion will be required in this sector over the next five years. The biggest gainers due to the aviation boom will be GMR Infrastructure, GVK Power & Industries and L&T.
STEEL
In a fast-growing economy, the spend on infrastructure, capital goods and white goods keeps surging. In India, where per capita steel consumption is around 34 kg, against a world average of 139 kg, the growth opportunity for this sector is huge. Even if steel consumption increases three times to 100 kg per capita by ’15 — which is 40% of China’s current consumption — it will provide an upside potential to steel companies. This is visible from capacity expansion plans announced by almost all firms. Companies which have backward integration will benefit the most because iron ore and coking coal (two major raw materials for steel) prices are growing rapidly. So, it is better to invest in SAIL, Tata Steel and Jindal Steel.
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