India is expected to become the third largest construction market next year. For that, it needs huge investments
It’s advantage India when it comes to the infrastructure sector.
Considered as the most crucial one, the sector plays an important role in accelerating India’s overall development.
Hence, it is the key driver for Indian economy.
Foreign direct investments (FDIs) in the construction development sector and construction activities stood at US$26.08 bn and US$24.72 bn, respectively, between April 2000 and March 2021.
For the latest fiscal (2021), infrastructure activities accounted for 13% share of the total FDI inflows of US$81.72 bn.
India competes hand in hand across the globe as this sector is backed by notable government initiatives and huge investments. India plans to spend US$1.4 tn on infrastructure between 2019 to 2023.
Driving robust demand and opportunities, India is expected to become the third largest construction market next year. But for that, it needs ample investments to the tune of around US$777.7 bn.
Now that it’s established there’s massive scope in India’s infra story, how can one benefit from it?
Here are three ways to play the infra boom.
#1 Buying Infra companies
The most obvious choice would be to select strong infra companies available at attractive valuations.
Some big infra companies include:
Larsen & Toubro (L&T)
IRB Infrastructure Developers
GMR Infrastructure
Reliance Infrastructure
Hindustan Construction Company (HCC)
The list includes several other companies such as RITES, IRCON International, Dilip Buildcon, Ashoka Buildcon, Engineers India, and J Kumar Infra, among others.
These names are just for representation purposes and not recommendations.
#2 Buying suppliers to Infra companies
Infra companies need raw materials and commodities such as metals, paints, etc on a daily basis to continue their operations.
To upgrade roads, bridges, pipes, electric wires and railways, India will require enormous amount of steel, aluminum, copper, etc.
Since the government is focusing more on infra and increasing its spending, the demand for raw materials and the commodities needed, is expected to increase.
Infra companies will rely heavily on suppliers to build infrastructure. Other building materials, such as cement and lumber will also be used for construction projects.
Companies such as Bharat Heavy Electricals (BHEL), ISGEC Heavy Engineering, Praj Industries, Skipper, among others would be a part of this.
Metal and paint companies would also be included.
Interestingly there are startups now that have emerged in this area too. Start-ups like Infra.Market and Zetwerk.
Zetwerk runs a business-to-business marketplace for manufacturing items that connects OEMs (original equipment manufacturers) and EPC (engineering procurement construction) customers with manufacturing small-businesses and enterprises.
Meanwhile, Infra.Market helps construction and real estate companies procure materials and handle logistics for their projects.
#3 Buying Infra financiers
India’s infrastructure credit was estimated at ₹22.9 tn as of December 2020. During the nine months ended fiscal 2021, a mere 2% growth was reported due to contraction in banking sector credit.
However, infra financiers (IFCs) bucked the trend in fiscal 2021 and grew 11% in nine months ended fiscal 2021, led by disbursements related to the liquidity package for distribution companies (discoms) by the PSU IFCs.
Within the NBFC-IFC space, the public-IFC category continues to account for a majority share (94%).
So what is an IFC? IFC is a non-deposit accepting loan company which has a minimum of 75% of its total assets deployed in infrastructure loans.
As of 31 May 2021, there are nine NBFC infrastructure companies registered with the Reserve Bank of India (RBI).
Power Finance Corporation, REC, and Indian Railways Finance Corp (IRFC), among others are known names.
Other names include India Infrastructure Finance Company and L&T Infrastructure Finance Company.
Looking ahead…
In a crisis, there’s often an opportunity that can have a multiplier effect. The infrastructure sector has a multiplier effect on several other sectors.
Construction activities were the first ones to open up in gradual re-openings. While the economy is recovering, the havoc created by the pandemic on infra sector was on a large scale. India will have to invest heavily in order to recover.
The optimism on infra sector is backed by expectations of strong recovery in the capital goods cycle, India's revival, and the post-covid recovery of corporate India, which is dependent on new demand.
The government has tried to stoke such demand with PLI (production linked incentive) schemes. MNCs like Apple, Samsung, Dell, and Foxconn are all lining up to set up capacities in India.
India's cab service provider Ola is all geared up to become the largest electric 2-wheeler maker in the world.
Indian companies are bagging contract manufacturing deals from global behemoths.
All in all, the demand for new infrastructure and expected growth in contracts for engineering sector is expected to keep the sector in favour in the near term.
In one of her editorial, Co-head of Research at Equitymaster, Tanushree Banerjee shared why she is banking on the infra sector for India’s Revival.
