Companies in the Infrastructure-roads and highways segment are set to grow further as more number of contracts are expected to be awarded in FY 2017-18 with increase in allocation on the budgeted spending in the form of Engineering Procurement and Construction (EPC) and the Hybrid Annuity Model (HAM) models.
In the past only about 1,000km of road construction projects had been awarded in the year 2013. The removal of infrastructure bottlenecks is seeing an increase in road construction now, with contracts being awarded rising to over 4,000km in financial year 2016-17.Also, with just 24% of the National Highway network being four-lane or more, the scope for improvement is immense.
The government had set a target of awarding 25,000km of road projects in FY 2016-17. Of this, 15,000km was to be awarded by NHAI and the remaining 10,000km by the ministry of road transport and highways (MoRTH).NHAI and MoRTH had together awarded about 10,098km of national highway projects in FY16 against 7,980km in FY15. During April-February 2017, NHAI and MoRTH together have awarded 9,700km of projects.The awarded contracts are well short of the target on account of issues related to land acquisition, but with an expectation of more clearances on this front more number of projects are likely to be awarded in the current financial year as compared to the previous one.
The BJP led NDA Government was already focusing on infrastructure as it was one of its main agenda after it came into power and the increase in the outlay by 10% to Rs.3.96 trillion as compared to the last year’s budget is the testimony.
The allocation for Roads and highways has increased to Rs.649 billion for FY 2017-18 from the earlier FY 2016-17 allocation of Rs.524.47 billion. Rural roads construction work is expected to accelerate to 133 kms per day in 2016-17 from 73 kms per day in 2011-14. There is an increase of 8% in the allocation for railway expenditure to Rs.1.31 trillion with 3,500km of railway lines to be laid in 2017-18 against 2,800km in 2016-17. The increase in allocation for the infrastructure sector would mean that companies in the public private partnership space would receive more orders from the Government. Companies that build roads and highways would be big beneficiaries as increase in their order book would eventually translate into higher revenues and profitability for them.
The Government at the Centre has also launched the Bharatmala scheme for construction of expressways in the country. According to government officials working out the details of the scheme, the total road length to be developed as expressways under Bharatmala will be around 51,000km. In the first phase 29,000km will be developed with an outlay of Rs.5.5 trillion. The total investment for this flagship programme is estimated at Rs.10 trillion—the largest ever outlay for a government road construction scheme.
Bharatmala will replace the National Highways Development Project (NHDP) which is expected to be completed this year, with only 10,000km of highway construction left under the scheme launched in 1998 by then Prime Minister Atal Bihari Vajpayee.
Infrastructure sector supports other sectors such as cement and capital goods which gain as the demand for their products increases. The roads and highways segment in the infrastructure space is set for the next leg of growth and companies in this space would be able to deliver on financial performance for next few years.
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The main driver of the benchmark indices the Sensex and the Nifty is the weighted average earnings growth for the companies in the respective indices. The Sensex is expected to reach levels of 40,000 offering an upside of 39% till the year 2019. The new portfolio is designed to capture the potential growth from the sectors that are expected to grow faster as compared to the benchmark indices of Sensex and Nifty.
Sectors such as Consumer Durables, Automobiles, Microfinance, Financial Services, Aviation, Infrastructure, Telecom Infrastructure and Retail are expected to witness higher growth than other industries or sectors in terms of revenue and profit.The business opportunity for each sector gives the rationale behind selecting these sectors over others for investment purpose in the new portfolio. The growth in terms of revenue and profitability for the selected sectors is explained below.
Retail industry in India is expected to grow to USD 1.3 trillion by 2020, registering a Compound Annual Growth Rate (CAGR) of 16.7% over 2015-20. The country is among the highest in the world in terms of per capita retail store availability. India’s retail sector is experiencing exponential growth, with retail development taking place not just in major cities and metros, but also in Tier-II and Tier-III cities. Healthy economic growth, changing demographic profile, increasing disposable incomes, urbanization, changing consumer tastes and preferences are the other factors driving growth in the organized retail market in India.
Automobiles and Consumer Durables
The 7th Pay Commission, higher rural income on government’s budget 2017-18 thrust on the rural economy are expected to prop up demand for Automobiles and Consumer Durables. The tax cut of 5% for individuals having income in the range of Rs 2.5 lakh to Rs 5 lakh would directly increase the buying power of middle class consumers. This move is expected to give additional thrust to buy automobiles in the rural as well as the urban areas.
The allocation for Roads and highways has increased to Rs.649 billion for FY 2017-18 from the earlier FY 2016-17 allocation of Rs.524.47 billion.The increase in allocation for the infrastructure sector would mean that companies in the public private partnership space would receive more orders from the Government. Companies that build roads and highways would be big beneficiaries as increase in their order book would eventually translate into higher revenues and profitability for them.
Mobile internet penetration is at 35% and smart phone user’s penetration is at 29% in India and it is estimated to reach 60% by the end of 2019. With increase in number of smart phones, data consumption will lead to higher demand for optic fibres across India. Indian telecom industry has seen incredible growth in terms of expansion of 3G network capacity and rollout of 4G/LTE. Tower capacity in India is around 350000 – 400000 units out of which 10% of them are fiberized. It is expected fiberization will increase to a level of 60% – 70% of total towers as telecom players are likely to set up infrastructure and develop technology in line with Rjio’s digital set up. Next technological upgrade in telecom industry would be 5G internet services, to enable this services 100% fiberization is required and they are likely to get started by 2020 in India.
India’s civil aviation industry is on a high-growth trajectory and aims to become the third-largest aviation market by 2020 and the largest by 2030. India is the ninth-largest civil aviation market in the world, with a market size of around USD 16 billion. India is expected to become the third largest aviation market by 2020. In FY16, the Indian domestic aviation market grew at 21.6%. The growth is attributed to the large and growing middle-class population, rapid economic growth, increased spending and low aircraft penetration levels in the country. India has only 150 million passenger trips a year as compared to China’s 450 million and the US’ 800 million. According to the latest data from the Directorate General of Civil Aviation (DGCA), passenger traffic during January-November 2016 zoomed by 23.10% to 90.36 million.
Microfinance and Financial Services
The microfinance sector, which is seen as a vehicle of financial inclusion, has seen a boom over the past year as government has laid more emphasis on financial inclusion. The sector is expected to grow robustly in the next few years as large players would consolidate their position in the market.
India is today one of the most vibrant global economies, on the back of robust banking and insurance sectors. The country is projected to become the fifth largest banking sector globally by 2020. The report also expects bank credit to grow at a Compound Annual Growth Rate (CAGR) of 17 per cent in the medium term leading to better credit penetration. Life Insurance Council, the industry body of life insurers in the country also projects a CAGR of 12–15 per cent over the next few years for the financial services segment.
The India 2019 equity portfolio consists of ten fundamentally strong companies with some of them being market leaders in the above mentioned high growth sectors. The India 2019 equity portfolio consists of ten stocks which are expected to have earnings growth significantly higher than those in the Sensex and the Nifty. These companies in the new portfolio have good fundamentals in terms of growth in revenues and profitability along with higher than industry average ROE and RoCE. The cashflows for most of the companies are in the positive territory while those with a negative cashflow have lot of investment going in them to generate value for the stakeholders in the long run.
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