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On the expressway

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Increased allocation
Irrigation players to benefit
Sufficient equity to become key to bid
Extended tax incentives to give comfort

ON THE fast lane.
ON THE fast lane.

Vidya Bala

It appears to be a Budget focussed on infrastructure-led growth. Bharat Nirman is likely to emerge as the biggest provider of business for infrastructure companies. Rural water supply, irrigation and road projects would ensure steady flow of revenues for even small and mid-cap companies such as Era Construction or PBA Infrastructure. Increase in the corpus of the Rural Infrastructure Development fund to Rs 10,000 crore will further ease the financing position for rural projects.

The Budget outlay for irrigation for 2006-07 has increased by 58 per cent compared to 2005-06. Another development in the space is the programme for repair, renovation and restoration of water bodies at a cost of Rs 4,481 crore funded through multi-lateral agencies. Provision under Rajiv Gandhi National Drinking Water Mission has also increased by 30 per cent to Rs 4,680 crore. These measures would mean higher revenue growth for companies such as IVRCL Infrastructures and projects and Nagarjuna Construction.

Over the past 15 months, the number of projects in the road sector has increased significantly. Order-books of construction companies such as Gammon India, Hindustan Construction reflected the same with orders of five-six times FY-05 revenues. Budget support of Rs 550 crore for the north-eastern region is likely to open up opportunities for smaller players who do not qualify for bigger orders.

The 1,000-km access-controlled expressways would see big players such as Larsen and Toubro bidding on a competitive basis.

These design-build finance-operate models may, however, require financial qualification warranting medium-sized companies to bid jointly or ramp up capital. Capital adequacy may be a key to participate in the increasing public private partnership models. Players willing to participate in the public private partnership models are likely to emerge key beneficiaries.

Apart from budget allocation, amendment of Section 54EC to include only National Highways Authority of India (NHAI) and REC bonds as investment options for claiming long-term capital gains exemption is likely to channelise more funds for roads and highways.

Raw material cost of construction companies is unlikely to see much change, as the duty structure for primary steel remains unchanged.

Fall in steel prices, if any, may give comfort to the operating margins. Extension of tax incentives from March 2006 to March 2009 will continue to give comfort to the bottomline of companies in the infrastructure business.

(This article was published in the Business Line print edition dated March 1, 2006)
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