The Indian infrastructure industry is experiencing a notable surge, helped by the escalating demand for robust public works projects in the transportation and energy sectors. The infrastructure in India rises in front of the investors’ eyes - the buildings they live in, and the roads they drive on and is an obvious choice for investment opportunities. In this comprehensive Industry Analysis, we delve into the intricacies shaping the sector for investors keen on exploring new dimensions for their growth. Herein we present the growth drivers and challenges that the industry is facing right now.
Infrastructure Industry - Foundations and Applications
Understanding the key tenets of the infrastructure industry is critical to understand its potential. The infrastructure sector encompasses a broad spectrum of activities, ranging from the construction of roads, bridges, and airports to the development of power plants, telecommunication networks, and water treatment facilities.
These endeavours necessitate a diverse range of raw materials and specialised applications, reflecting the multifaceted nature of the infrastructure industry. Cement, steel, chemicals and other construction materials form the backbone of these projects, facilitating the creation of sturdy and sustainable infrastructure that is vital for the nation's progress. Thus the Indian infrastructure industry is not a standalone one but relies on many other industries, and also affects them in turn.
Global Dynamics
The industry's current expansion is predominantly driven by public investments in transportation and energy infrastructure. Moreover, a surge in government-backed initiatives for the development of smart cities and sustainable infrastructure projects is further amplifying the demand for construction materials.
The global economy experienced a moderate 3.4% GDP growth in 2022, and escalating inflation and geopolitical tensions impacted global financial stability. This led to a downward revision of the global GDP growth forecast for 2023 to 2.8% by the IMF. This macroeconomic situation, along with a consistent rate hike by central banks poses one of the major challenges to the infrastructure industry. However, not all is bleak.
As per a Reuters report, Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments, emphasised the delayed impact of the on-shoring initiatives and infrastructure spending. Meaning that the public expenditure during the COVID-19 pandemic to spur demand is finally hitting the ground. He notes that the expenditure was thought to be happening in 2020 and 2021, but the money is just now flowing into the economy.
Dynamics in India
The Indian economy fared much better and demonstrated resilience with a robust 7% GDP growth in FY 2022-23. This growth was supported by increased government spending, with the Capital expenditure spending raised by approximately 33% to Rs 7.5 lakh crore for FY 2022-23.
The Indian rupee also remained among the best-performing currencies globally, ranging between Rs 76 to Rs 82 per USD in the second half of FY 2022-23.
Furthermore, India's focus on accelerating infrastructure investment, particularly in transportation and logistics, has been instrumental in enhancing the country's competitiveness. The National Infrastructure Pipeline (NIP) of USD 1.4 trillion highlights the significant infrastructure investment opportunity in India, supported by tax concessions for Sovereign Wealth and Pension Funds and a conducive market for Infrastructure Investment Trusts (InViTs) to monetise developed infrastructure assets and free up capital.
The implementation of the 'Gati Shakti' initiative reinforces India's commitment to strengthening its transportation infrastructure. By reducing regulatory burdens and enhancing the ease of doing business, India aims to improve its global competitiveness and attract more investments, positioning itself as a favourable business destination. The rising FDI preemptively provides another boost to the infrastructure sector.
Growth Drivers
The FY 2023-24 financial budget aimed to blueprint future growth and foster an empowered economy, with key emphasis on infrastructure, investment, last-mile connectivity, and green growth. A noteworthy Rs 35,000 crore was earmarked for energy transition, supporting the 'Green Growth' priority. The revamped credit guarantee scheme, infused with Rs 9,000 crore, aimed to facilitate additional collateral-free credit of Rs 2 lakh crore, reducing credit costs by approximately 1%. This higher spending capacity directly translates to growth prospects in the infrastructure sector, amidst rising demand.
International Partnerships
PM Narendra Modi, during the G20 meeting launched the scaled-up Partnership for Global Infrastructure and Investment (PGII) and India-Middle East-Europe Economic Corridor. This program will establish sustainable infrastructure in India, West Asia, and the US, promoting quality investments. Even USA President Joe Biden emphasised the significance of the corridor, connecting India with the Middle East through rail and ports, aligning with his Middle East strategy and countering China's 'Belt and Road' initiative. The initiative aims to enhance connectivity, commerce, and digital networks transparently and sustainably providing an impetus to the infrastructure industry in India.
Aviation Sector
For the civil aviation sector, India remains the third-largest domestic aviation market globally and is poised to surpass the UK, becoming the third-largest overall air passenger market by FY 2023-24. The sector's contribution to the nation's GDP is around 5%, playing a vital role in economic development.
Initiatives like the UDAN regional connectivity scheme and plans to expand airport infrastructure, including the development of global air traffic hubs, reflect the government's commitment to nurturing the sector. Airlines like Air India and Indigo are aligning their investment strategies with the sector's growth, with plans to expand their fleets and enhance India's position as a global air traffic hub. The fleet size is projected to increase from approximately 700 to 1200-1400 by 2030, indicating the industry's robust growth prospects. These prospects bode very well for companies like GMR.
Railways
Even railway stocks have surged with increased government spending, especially the 48% rise in the railway allocation in Budget 2023-24 to Rs 2.41 lakh crore. Indian Railways plans to develop 3,000 km of dedicated freight corridor (DFC), aiming for a 45% modal share in freight. Significant investments are anticipated for technology modernisation and high-powered locomotives.
Recent Notable Developments
The inauguration of the Vizhinjam transshipment container port by Adani Ports in India on October 15 marks a significant milestone in the country's maritime infrastructure. This is the first time a port of 24 metres depth will be operating in India which would allow bigger cargo ships to serve with faster turn-around times. Earlier, these ships used to skip India’s ports due to their shallow depth. With an investment of Rs 77 billion ($925 million), the port is expected to handle up to 1 million twenty-foot equivalent units (TEUs) in its initial phase and aims to add approximately 6.2 million TEUs in subsequent phases. Positioned strategically along the international shipping routes, this port will enable India to tap into the 30% global cargo traffic passing through the region, potentially boosting India's current container traffic.
For your cursory analysis, here are some of the notable players in the Indian Infrastructure sector:
Company Name | Market Cap | Last Traded Price | P/E Ratio |
NCC Ltd | Rs 10,228 Cr. | Rs 163 | 15.4 |
Larsen & Toubro Ltd | Rs 4,30,949 Cr. | Rs 3,066 | 38.4 |
Adani Ports & Special Economic Zone Ltd | Rs 1,74,086 Cr. | Rs 806 | 23.5 |
GMR Airports Infrastructure Ltd | Rs 35,491 Cr. | Rs 58.8 | - |
JSW Infrastructure Ltd | Rs 37,202 Cr. | Rs 177 | 50.1 |
HFCL Ltd | Rs 10,631 Cr. | Rs 74.4 | 33.5 |
Reliance Infrastructure Ltd | Rs 6,038 Cr. | Rs 172 | - |
Dilip Buildcon Ltd | Rs 4,870 Cr. | Rs 333 | - |
The Gist
Despite global economic challenges, India's resilient economy showcases impressive growth, facilitated by increased government spending and strategic initiatives. International partnerships, particularly the PGII and India-Middle East-Europe Economic Corridor, fortify India's infrastructure landscape, along with advancements in the aviation and railway sectors. The recent inauguration of the Vizhinjam transhipment container port further underscores India's commitment to enhancing maritime infrastructure and global connectivity. The sum-total of all these developments clearly points towards the growth prospects available in the Indian infrastructure sector and paints an optimistic picture for the foreseeable future.
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