Infrastructure Reboot 2.0
NIP Task Force submitted the final report to Finance Ministry on 30th Apr 2020. NIP envisages doubling Infrastructure spend from ~5% of nominal GDP to ~10% over FY21-23. The report not only delves deeper into segment wise capex outlay but has detailed planning on mitigating challenges, intiating reforms and roadmap on mobilizing financial resources. NIP talks about Financial reforms as well and sets tone for long term Infrastructure financing. On the face of it NIP target looks very ambitious and unachievable, still at HSIE we believe that even if ~50% hurdle is met we are home. Multiple issues needs to be ironed out like (1) Installing long term financing vehicles (2) Opening up of Insurance/Pension funding further (3) Attracting long term foreign capital & (4) Setting mechanism for dispute resolution.
Infra outlay at Rs 111tn over FY20-25E, increase of 9.1% vs Dec-19 draft NIP Overall NIP allocation has increased by 9.1% (vs. draft NIP Report dated 31st Dec 2019 considering incremental data from Ministries/State govts). Allocation to roads increased by 3.8%, while for energy it has gone up by 9.8%. Other noteworthy sectors where there has been increase are - Urban Infra (17.7%), Irrigation (16.2%) and Agri (181%). Amount unallocated to any fiscal has reduced by 26%, which has been spread more or less uniformly across FY21-25.
Financial sector reforms key for NIP success
Encouraging Green Finance, Revitalizing the bond and credit market, Sale of land and non-operational PSU assets, ToT Monetization, InVIT/ReITs, Securitization of Infrastructure loan assets via credit enhancement and Strengthening Municipal bond markets are some of the key reforms envisaged in the NIP report. With low bank rate and high spreads vs infra bonds a vehicle like Credit Guarantee enhancement Corporation announced in FY20 budget can aid funds availability for the Infrastructure sector.
Infrastructure financing needs long term solution
Infrastructure financing is dominated by Banks, with the outstanding credit to infrastructure as a percentage of gross non-food credit at 12% in FY19. Power and road sectors have the largest exposure at ~72% of the outstanding infrastructure credit as on FY19. Higher funds allocation is required from Pension/Insurance funds to the sector. Regulation need to change to enable funds flow.
DFIs' lending to infrastructure need of the hour
DFIs bring in a balanced approach to lending towards critical projects. DFIs free up banks' exposure limits to lend to operational assets and further recycle capital in the form of down-selling exposure to bond investors and patient capital, such as pension funds and insurance companies. Large DFIs exposures are currently in Power and Railways sector.
Whilst near term COVID-19 headwinds limit large ticket uptick in Central/State Govt Infra spend, mid to long term drivers remain intact. India has been always capital starved for Infrastructure capacity creation and NIP lays out roadmap for reforms and on securing loan term financing. We remain positive on large well diversified Infra services and product companies like LT, Siemens, ABB, KEC, KPTL. In transportation EPC we prefer PNC, KNR, DBL, Ashoka. Urban Infra/Housing/MRTS - Capacite, Ahluwalia, JKIL and ITD will benefit. Outlays on Irrigation and Water will benefit players like KNR, NCC, JMC Projects, KSB Ltd, Kirloskar Bros. NBCC may benefit from the Govt PSU's non core land bank monetization.