CONSTRUCTION & INFRASTRUCTURE January 5, 2016 Bridging the chasm …long road ahead Given the government thrust on the infrastructure investment, we witnessed that over the last two years project awarding picked up from the urban infrastructure segments like Roads, Buildings, and Metro projects. We believe that capex on urban infrastructure projects will continue given the strong bid pipeline from road and metro projects. The issues with respect to land acquisition and weak balance sheets of infrastructure companies got addressed as the government increased capex spending on EPC mode rather BOT/PPP projects which, helped companies raise funds; as well as funding from multilateral agencies also increased Given the importance of government spending in driving the order books of our coverage universe as well as the increasing importance of the states in becoming enablers of growth, we have analyzed certain states which form 50% of India’s GDP. Our analysis reveals that the states are easing bottlenecks with respect to land acquisition and other clearances and infrastructure capex rather than industrial capex remains the core focus Nitin Arora Research Analyst [email protected] +91 22 66242491 Kushan Parikh Research Associate [email protected] +91 22 66121431 INDUSTRY REPORT Construction & Infrastructure India Equity Research | Sector Report Contents Bridging the chasm …long road ahead .................................................................................................................................................... 3 Projects awarding: First leg of capex revival driven by Urban Infrastructure projects ............................................................................. 4 Roadways sector: Awarding picked up, momentum to continue in FY17E ........................................................................................... 9 Hybrid annuity: NHAI targets to awards 576km in FY16E/1105 km in FY17E ...................................................................................... 16 Key policies announced in the road sector ........................................................................................................................................... 27 Traffic growth picked up, negative WPI moderates toll hike ................................................................................................................. 28 Attempt to revive stuck projects ............................................................................................................................................................ 31 Outlook and opportunities at the state level .......................................................................................................................................... 32 Finances of NHAI and Government ...................................................................................................................................................... 37 Land Acquisition for road projects increased on higher cost ................................................................................................................ 38 Other projects capex beyond FY17E once NHDP capex starts tapering off ......................................................................................... 39 Infrastructure Investment Trust ............................................................................................................................................................. 41 Railways: A slow start; capex driven by metro and dedicated freight corridor projects ................................................................... 42 Core Railway Capex: Focus on Doubling/new track laying and station development........................................................................... 49 Railways: What went wrong?................................................................................................................................................................ 53 States That Will Matter.............................................................................................................................................................................. 63 Karnataka: Focus on roads, urban transport ........................................................................................................................................ 64 Haryana: Beneficiary of DFC and DMIC projects, focus on road awards as well ................................................................................. 69 Uttar Pradesh: Focus on Road and metro projects ............................................................................................................................... 73 Telangana: Focus on roads, water and industrial development ........................................................................................................... 76 Punjab: Centre to do major capex, state level finances restricts capex growth .................................................................................... 84 Bihar: Capex concentration towards Roads ......................................................................................................................................... 86 Maharashtra: Focus on Urban infrastructure projects ........................................................................................................................... 94 Andhra Pradesh: Plans for new capital city to drive capex ................................................................................................................... 98 Madhya Pradesh: Focus on roads, metros and industrial corridor...................................................................................................... 102 Ports sector ............................................................................................................................................................................................. 106 Defence Sector ........................................................................................................................................................................................ 111 Companies IRB Infrastructure — Growth momentum to accelerate ...................................................................................................................... 127 Sadbhav Engineering — The appeal of EPC vs transient pain of BOT .............................................................................................. 133 Ashoka Buildcon — EPC Business to drive growth ............................................................................................................................ 137 IL&FS Transportation — Leverage issues persist .............................................................................................................................. 141 Larsen & Toubro — A tightrope walk .................................................................................................................................................. 146 NCC — Margin improvement key catalyst .......................................................................................................................................... 151 J Kumar — Strong Earnings visibility .................................................................................................................................................. 155 Ahluwalia Contracts — Well placed .................................................................................................................................................... 159 KNR Constructions Initiating Coverage — Healthy order book to drive earnings growth ................................................................... 163 Simplex Infrastructure — Working capital remains a constraint.......................................................................................................... 169 PNC Infratech Management Meet Update — Healthy order book, execution is key ........................................................................... 173 ITD Cementation Management Meet Update — Margins to improve from CY16 ............................................................................... 179 Trend in Customer Advances and Retention Money ........................................................................................................................... 190 Adani Ports — Transient pain, structurally intact ................................................................................................................................ 192 Gujarat Pipavav — Rough sailing ....................................................................................................................................................... 201 Emkay Research | January 5, 2016 2 India Equity Research | Construction & Infrastructure © January 5, 2016 Sector Report Emkay Construction & Infrastructure Your success is our success Bridging the chasm …long road ahead Adani Ports ACCUMULATE . Given the government thrust on the infrastructure investment, we witnessed that over the CMP Target Price last two years project awarding picked up from the urban infrastructure segments like 258 306 Roads, Buildings, and Metro projects. We believe that capex on urban infrastructure projects will continue given the strong bid pipeline from road and metro projects. The Ahluwalia Contracts BUY issues with respect to land acquisition and weak balance sheets of infrastructure CMP Target Price companies got addressed as