Contents

Infrastructure in India .............................................................................................................................................. 2 Industry Overview................................................................................................................................................ 2 Industry Performance .......................................................................................................................................... 2 Industry Outlook .................................................................................................................................................. 2 Industry Segments ................................................................................................................................................ 3 Trends in Infrastructure Sector............................................................................................................................... 4 Past Performance and Trends ............................................................................................................................ 4 Future Outlook and Government Initiatives ................................................................................................... 6 Attractive Investment Areas.................................................................................................................................... 9 Transaction Activity in the Infrastructure Sector............................................................................................... 11 Valuation Benchmarks and Sector Performance on the Markets .................................................................... 11 List of References ................................................................................................................................................... 13 Appendix .................................................................................................................................................................. 14

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Infrastructure in India
Industry Overview Planning Commission defines infrastructure as: electricity, roads & bridges, telecom, railways, irrigation, water supply & sanitation, ports, airports, storage and Oil & Gas. Snapshot of Indias Infrastructure
13 major and 187 operational minor ports 5th largest electricity generation capacity globally 4th largest railway network globally 454 airports and airstrips

The infrastructure sector accounts for 26.7% of India's industrial output (as on Aug, 2012). The Index of 8 core industriescrude oil, petroleum products, coal, electricity, cement, steel, fertilizers and natural gashave a combined weight of 37.90 per cent in the IIP (July 2012, Ministry of Commerce and Industry). India is second only to China in terms of PPP projects and second to Brazil in terms of investments (World Banks database). The role of Private players in infrastructure is that of designing, construction, operation and maintenance of project. They are also responsible for providing equity which they can get from primary market or from PE firms. PPP projects in India require a minimum shareholding commitment from project sponsors amounting to 51% of equity upto 2nd year of commencement. Industry Performance Lackluster progress in infrastructure sector in 2010-11 in terms of both physical development and pace of policy and reforms (as opposed to 2009-10). Targets for infrastructure projects were not met (Eleventh 5-year plan. 2007-12) and WEF ranked Indias basic infrastructure at 86th / 139 countries in its Global Competitiveness Report-2010, down 10 places from 2009. Major share of investments routed towards Telecom and Oil & Gas sectors. Roads, railways, ports, and water supply & sanitation witnessed shortfalls due to slowdown in the award of projects. However, at an aggregate level (upto 2011), infrastructure investment has been steadily increasing since 2004. According to PPP India Database (Ministry of Finance), 758 PPP projects costing INR 3.833 trillion have been awarded/are underway in India currently. The sector is facing dwindling funding sources banks have reached their sector exposure limit and face problems of concentration risk and ALM, Indian bond market is underdeveloped and growing at a slow pace, and ECB lending is highly dependent on interest rate scenario this has increased reliance on private sector to develop and maintain infrastructure projects1. The sector has been witnessing rising debt to equity ratios in the recent years with senior debt being contributed by commercial and public sector banks; use of subordinated debt is still limited. Land acquisition is the single largest roadblock for infrastructure development apart from regulatory and environmental clearances, improper project planning, funding constraints, and uncertain foreign investment scenario2. Industry Outlook High focus sector as the Government has set the planned investment in the 12th five year plan to around INR 40.5 trillion7, almost double from that of the 11th five year plan (INR 20.5 trillion). It also aims at increasing the infrastructure investment as a % of GDP to 10.5% from 7.5% (11 th Plan). Almost 50% of the new investment is expected to come through the private investment channel (increase over 36% in the 11th plan). Industry estimates of investment in Indias infrastructure are - Goldman Sachs: USD 1.7 trillion by 2022, McKinsey: USD 1.2 trillion by 2030. India is attracting the highest number of unlisted, closed-end funds that focus on a single country. 74% of India-focused funds will invest in Greenfield projects, 84% in brownfield and 42% will buy out the stake of other PE funds (Preqin analysis as on March 2011) Budgetary support in Union budget 2012-13 - financial institutions are allowed to raise around INR 60000 crore from tax-free bonds (with sub-sector caps)

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Industry Segments Railways: Indian Railways is the third largest railway network in the world and the largest in Asia. It has been a major contributor to the countrys socio-economic growth. It has been plagued by inferior infrastructure quality with capacity and safety being major issues and only around 10000 km has been added to the network in the last 62 years (however, revenue growth has been at a CAGR of 10.4% from 2007-12). Common bottlenecks present land acquisition, funding tie-ups, scope of changes in design, retendering of construction contracts, delay in approval from various ministries. Ports: Ports play a vital role in the development of the economy as they are the gateway to international trade by sea. India has 13 major ports and 187 operational minor ports (almost all private). It also has one of the largest merchant shipping fleet and is ranked 16th among the maritime countries. India has been unable to achieve optimum cargo handling levels because of constraints relating to handling of cargo, level of containerization, custom procedures and insufficient hinterland connectivity (major concern which is not addressed even in the Maritime Agenda). Other major reasons for delay in project implementation include provisions of environment clearances (estimated at 5 years to get all clearances to commence construction), bureaucratic procedures at most major ports at pre-tendering and post-aware stages, tariff issues (cost-plus-based fixing by TAMP does not incentivize players). Roads & Highways: Indian road network spans 41.09 million km and ranks among the largest in the world, but is still ranked at 85 in terms of quality (World Development Indicators 2012, World Bank). The various categories of roads include National Highways, State Highways, Major & Other District roads, Rural roads. Hurdles in road infrastructure development include inadequacy of funds (bank limit exposure to sector, refinancing hasnt caught up), land acquisition, obtaining clearances from ministries and departments (environment/wildlife/forest etc.), changes in scope and resultant disputes between NHAI and contractors. Power: It is ranked 6th among the leading sectors of the Indian economy on the basis on investment inflows. It includes power generation, transmission, distribution and power trading. The Government has been very pro-active to boost private investment in this sector schemes like National Electricity Policy (NEP), Ultra Mega Power Project Policy, Mega Power Policy, CERC Policy, Tariff Policy; FDI policy with 100% investment allowed in many fields. Aviation: India is the 9th largest aviation market in the world according to a report by RNCOS. It has 352 airports/airfields which are recognizable from the air, 15 scheduled passenger airline operators, with the number of aircraft in their fleet around more than 400. The governments Open Skies policy has liberalized the sector and is responsible for strong growth in the sector both in terms of players and number of aircrafts. Prominent high growing sub-sectors include - MRO (maintenance, repair, overhaul), Airport Retail which have also seen strong growth as a result of growth in the sector as a whole. Telecom: India has the 5th largest telecom services market and 2nd largest wireless network in the world and one of the worlds fastest growing markets. The market is highly fragmented and competitive with as many as 15 players. Major issues in the sector mired with controversies over the 2G spectrum allocation, availability of spectrum, impending strategy for penetration of broadband, security issues regarding telecom equipment procurement, messenger services and subscriber verification. Urban Infrastructure: It mainly includes Water supply, Sewerage, Solid waste management, Storm water drains, Urban roads, Urban transport, Street lightning, Traffic support infrastructure. Government

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realizes the importance of this sector as it expects growth in the urban population and the need to bridge the gap. Efficient transport system is one of the most critical issue of urbanization metro projects being taken up in Hyderabad (71.16 km, INR 123.32 billion), Bangalore, Chennai, Kolkata (East-West Metro corridor) and Mumbai and in-approval principle being given in Jaipur, Patna, Kochi, Lucknow. In addition, the hindrances to private sector investments include lack of adequate legal framework at state and city level, stakeholders dont have capacity or knowledge to carry out PPP projects.

Trends in Infrastructure Sector

Past Performance and Trends Overall investment targets in Eleventh 5-year plan have been met because of strong performance of Telecom and Oil & Gas sectors (overachievement of 34% and 655% respectively as of the mid-term appraisal). However, critical infrastructure segments like roads, railways and ports have underachieved their targets by 22% in the Eleventh 5-year plan3. Physical targets in key infrastructure sectors have not been met - 42% of the total numbers of 564 infrastructure projects in India are delayed and around 31% were sanctioned without any fixed commissioning date. This has resulted in average escalation of 16.9% which amounts to an incremental cost of INR 1.207 trillion thus bridging the investment shortfall but widening the gap between physical and investment targets4. The private sector has been active in investing in Indias infrastructure the share of private sector as a proportion of GDP has been increasing since 2006 till 2011 1.26% to 2.92%5. The Bank credit (outstanding loans as of date) to the infrastructure sector has been on a steady rise (as on March,2012) and the share of infrastructure lending as a part of Non-Food credit has also seen an increase (8.2% to 14.7% from April,07 to April,11). Out of 564 infrastructure projects, 43% were delayed, and only 25% were on schedule (as on May 2012). Costs overrun to the tune of INR 300 billion were noted in the Railways sector (highest). Railways: It has fallen short on the 5-year plan targets (investment target short by 23%) and overshot implementation schedules leading to time / cost overruns of more than 100% (highest among any infrastructure sector). The share of funding declined from 11% in 10th 5-year plan to 9.8% in 11th 5-year plan. PPP or private investments constitute only 4% of total investment as the sector hasnt adjusted to the private sector needs IR is the customer, competitor as well as the regulator in many projects and there is absence of a level playing field for private companies. The role of private sector in almost all railway PPP projects is limited to creation of infrastructure only. FDI inflows worth USD 246.57 million were noted from April 2000 to May 2012 (DIPP). Share of passenger movement by rail has reduced to 13% while that of freight has dropped to 39%. The major loss is to the road network. However, the Railways have generated INR 21027.96 crore of revenue earnings from commodity-wise freight traffic during April-June 2012 (increase of 27.38% from last year). Ports: Indias ports handle 95% of Indias external trade by volume and 70% by value and have a cargo handling capacity of around 1 billion MT. FDI flows into Ports in April 2000 - April 2012 stood at USD 1635.08 million (DIPP). The launch of NMDP (National Maritime Development Program) in 10th plan and overachievement of investment target by 63% was an achievement. However in 11th plan, the investments likely to amount to only 50% of original target and capacity addition expected to fall short by 39%.

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11th 5-year plan highlights investment of around INR 5566 crore with a capacity addition of 185.08 MT per annum and increase in traffic handling of 96.37 MT. During the mid-term appraisal, capacity addition at major ports was far short of the target (198MT as compared to 493MT) but the non-major ports were on the way to achieve the target (316MT-345MT). It witnessed strong growth in traffic during the last 5 years with a CAGR of 8.1% (major ports) to reach 1215 MT in 2019-20 and growth rate of 16% in the non-major ports. Non-major ports witnessed faster growth in cargo handling than major ones (due to capacity constraints at the latter). The average utilization of major Indian ports is 90% which is higher than international average of 70%. Roads & Highways: Road infrastructure accounts for 65% of the freight and 85% of passenger traffic. National Highways account for only 1.7% of the road network but carry 40% of the total traffic. NHDP highlights infrastructure program being undertaken to develop National Highways with an investment outlay of around INR 3000 billion and has seen a post launch CAGR of 5.7%. Only 32.6% of NHDP targets have been completed by the beginning of the Q1, FY13. Delays of the order of 9 years (Golden Quadrilateral which was due for completion in Dec, 2003 is still 99% complete) have been noted. Last 5 years (11th 5-year plan) have been rough with physical targets falling short average highway building rate of 13.72 km/day (now down to 10.39) from the intended 20 km/day. FDI received in construction activities (including roads and highways) sector from April 2000 to May 2012 stood at USD 11.613 billion (DIPP). PPP model is very popular for undertaking Road sector projects 53.4% of the 758 PPP projects are under Roads sector (FICCI, E&Y). Power: FDI flows into power during April-May 2012 stood at USD 100 million and USD 1.652 billion during April-March 2011-12 (DIPP). FDI in petroleum and natural gas totaled USD 2.7 billion, ranking 9th in foreign investment. Effective and investment friendly policy roadmaps by the government responsible for liberalization of nations economy leading to a positive investment climate in this sector. Based on a survey conducted by Bain India, Power sector has been the most confident sector for investment in the last 2 years. Power sector was among the top-5 sectors by deal value (2005-10) according to CRISIL research. Also, among the investment in infrastructure sectors, it has a share of 23.9% (2007-11) which is the highest share of a single sector. CCEA has approved FDI proposals worth USD 1322.4 million recently for downstream investments. The power generation capacity has been on a rise (April, 2011 to April, 2012) with YoY growth rate averaging around 7%. Aviation: Indias domestic aviation market has tripled in past 5 years, recording the strongest growth in the world (grew at 13.6% in 2010) with the major contributor being civil aviation. Remarkable growth in the sector has been seen liberalization of the sector in the mid-nineties, entry of large number of private players, boom in the tourism industry, increasing level of disposable incomes, strong government support and private participation. The sector previously did not extract the required level of confidence earlier, but the scenario is improving (Bain India Infrastructure Sector Survey). Government has invested around USD 10 billion in the 10th and 11th 5-year plans and the airports developed currently handle 60% of the passenger traffic in the country. FDI inflow into air transport (including air freight) has been USD 438.23 million from 2000-12 (DIPP). Government recognizes need to involve private players in airport infrastructure development Delhi and Mumbai airports have been take up under PPP model. Capex funding sources include private equity, borrowings, internal resources of JV companies.

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Growth slumped in 2009 but picked up in 2010 passenger growth at 18%, cargo at 33%, capacity utilization also increased with combined load factors for domestic and international air carriers increasing from 70% to 75%. Also, air cargo volume slacked a bit in mid-2011 but has picked up recently and is growing (as of March, 2012). Airport retail business reached more than USD 1 billion in revenue during 2011, on the back of robust growth in passenger traffic and more people shopping on the go and is growing at a rate of 17-18%, and emerging as a viable platform for retailers and operators of new airports. Telecom: Telecom sector grew by 40% in 2010 with 17 million connections being added every month. The target for the 11th Plan was achieved in 2010 itself. Launch of newer telecom technologies to fuel growth 3G and BWA spectrum auction held in 2010. 3G launched by winning bidders in all their respective circles and BWA yet to be launched. Telecom statistics have shown an increasing trend in the figures of total telephone, wireless, broadband subscribers, and overall teledensity. Growth in subscriber base has necessitated expansion of network coverage expansion of active/passive infrastructure. FDI during April-March 2011-12 stood at USD 1.997 billion (DIPP). It was the most valued sector by deal value (2005-10) according to CRISIL research with deals amounting to INR 310 billion. Also, among sector-wise investment in infrastructure, it stood at second place with 17.8% of the investment share (2007-2011). Urban Infrastructure: Witnessed a significant number of PPP contracts (152) valued at INR 294 billion, but still accounted for only 8% of the total value of contracts (smaller contract size). The deficit of investment can only be met through involving private players in the sector. Hindrances to private sector investments up till now lack of adequate legal framework at state and city level, stakeholders which dont have capacity or knowledge to carry out PPP projects Noteworthy development in 2010-11: approval of the National Mission on Sustainable Habitat which seeks to promote sustainability of habitat through improvements in energy efficiency in buildings, urban planning, waste management, and modal shift towards public transport and conservation Traditional paradigm for financing urban infrastructure consisted of internal accruals of local bodies and loans and grants from the State Government, direct credit from institutions linked to State Government guarantees and also bi/multi-lateral assistance. Mismatch between investment requirement State government estimated requirement at INR 8 lakh crore (JNNURM, 2005-06) while 11th 5-year plan had benchmarked only INR 2.6 lakh crore. The backlog for this sector is very large, ranging from 50-80 % across the cities of India. Future Outlook and Government Initiatives RBI permitted IFCs to raise funds through ECBs upto 50% of net-owned funds without approval (May, 2011) and on September, 2011 ECB limits under automatic route were liberalized (compared to current limit of INR 23.3 billion). Railways: Ministry of Railways formulated Vision 2020 in Dec, 2009 which identifies issues and the required improvements, aims at adding 25000 km to network, following of PPP model in projects, special task force setup for faster clearances (100 days). Budget 2012-13 highlights highest ever outlay of INR 60100 crore, funds for new lines, doubling, gauge conversion and electrification. The figures stand as 725 km (INR 6872 crore) new lines, 700 km (INR 3393 crore) doubling, 800 km (INR 1950 crore) gauge conversion and 1100 km (INR 828 crore) electrification targeted in 2012-13. Railways infrastructure for Industry Initiatives (R3i) policy aims at attracting private investments into railways projects for capacity enhancement and share in freight traffic. IR poised to sign a JV in April 2012 for setting up a wagon component manufacturing facility at a cost of INT 200 crore.

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Green initiatives highlights renewable energy sources like windmills (being set-up in Andhra Pradesh, Karnataka, Kerala, TN, W. Bengal), solar lightning powered remote railway stations and manned level crossing gates, bio-diesel under development, pollution control through mobile emission test cars. State government involvement 31 projects covering 5000 km in 10 states being executed with contribution from state governments, projects on cost-sharing basis in various states (Haryana, W. Bengal, Jharkhand, Rajasthan, Maharashtra, Karnataka, Andhra Pradesh, Madhya Pradesh). CRISIL research projects the investment in railways to be around INR 4713 billion (12% of the total investment in infrastructure) Ports: 12th 5-year plan highlights traffic to be handled at major ports estimated at 943.06 MT and 815.20 MT at non-major ports (increase of around 68% and 120% respectively) and proposed investment of INR 73793.95 crore6. Target of creating 244 MT of capacity during 2012-13 spread across 42 projects with an investment of INR 145000 crore along with establishment of 2 new major ports (Andhra Pradesh and West Bengal). Maritime Agenda highlights 10 year plan (2010-20) with combined USD 110 billion package for development, port sector investment at around USD 66 billion with 50% share from private investors. Government believes private sector will handle 50% of the nations cargo by 2015. However, even this does not address the hinterland connectivity issue of ports as it envisages only 6% of investments in port connectivity. 100% FDI is allowed under the automatic route for the following - Leasing of existing assets, Construction/ creation and maintenance of assets (ship repair, warehousing, carnage etc.), Leasing of equipment for port handling and leasing of floating crafts, Captive facilities. Ministry is in process of doing away with the tariff fixing and letting ports decide it themselves. Also, setting up of a regulator is in process (Port Regulatory Authority Bill 2011). Other policy changes entail Captive Port Policy and the Land Policy for Major Ports. The proposed sources of funding for the Maritime Agenda are (major/minor ports) internal revenue (19/2%), government budgetary support (5/1%), extra-budgetary support (9/1%), private investments (67/96%). This shows the share of private players in port development in India. Bain India survey reveal that the confidence level for investment in ports by private players has increased with an improved score for the next 2 years as compared to last 2 years. Roads & Highways: Union Budget 2012-13 highlights highway allocation enhanced by 14% to INR 25,360 crore (US$ 5.06 billion) and the government set a target of covering a length of 8,800 km roads under National Highways Development Project (NHDP) next fiscal. Currently 30% of total NH network is single-laned, 53% double-laned and 17% 4/6/8-laned. Double laning of single-lane highways in 8 states in the next 3 years planned under the National Highways Interconnectivity Improvement Project (NHIIP) at a cost of about US$ 4.26 billion. Road sector will require investments in the range of USD 75-90 billion over the next 5 years. It comes under the scope of the construction sector, which is expected to grow at 35% between 2009-2013 and private sector is expected to contribute 44% of total spend. 100% FDI under automatic route is allowed in support services to land transport (highway bridges, toll roads, and vehicular tunnels), services incidental to transport (cargo handling for land transport), construction and maintenance of roads and bridges on BOT basis (including toll collection). To accelerate the pace of NHDP, the Union Government has entered into MOUs with some State Governments who will undertake PPP projects on behalf of the Union Government. It has also started the Bharat Nirman Programme that aims to cover every village having a population of over 1,000 or over 500 in hilly and tribal areas, with all-weather roads.

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Tax breaks granted by CBDT - Highway widening projects will now qualify for the 10-year tax break under Section 80 IA of the Income-Tax Act (widening of existing roads will be considered as a new infrastructure facility). Roads sector will see a projected investment of INR 6882 billion (2011-12 to 2015-16) which amounts to 17.3% of the total projected investment (CRISIL Research) 10. Power: Very positive investment climate in the power sector with Ministry of Power setting targets for adding 76000 MW of electricity capacity in 12th Plan6 and 93000 MW in the 13th 5-year plan. Fund requirement for 12th Plan estimated at INR 1372580 crore with major sources being commercial banks, public financial institutions, dedicated infrastructure/power finance institutions, insurance companies, overseas markets, bilateral/multilateral credit, bond markets and equity markets. 100% FDI under automatic route is allowed in - projects of electricity generation (except atomic energy), transmission, distribution and power trading. FDI proposals for downstream investments worth USD 1322.4 million approved recently by the CCEA. Japanese power equipment companies keen to work with Indian companies in the entire chain of power from equipment supplies, maintenance and refurbishing old plants and upgrading them. Clean energy development initiatives - Setting of National Clean Energy Fund (NCEF) to be used for funding research and innovative projects in clean energy technologies, Aditya Urja Shops (renewable energy equipment shops) to be setup in all major cities countrywide to foster entrepreneurship in this sector. The government has exempted power firms with plans to set up units in Special Economic Zones (SEZ), from the positive net foreign exchange (NFE) obligation applicable to regular units in such enclaves. The future projections of power sector are just as strong as the current investment sentiment is CRISIL research estimates investments of INR 10333 billion (26% of total) during 2012-1610. The investment sentiment in private sector remains strong according Bain Indias Survey. Aviation: Aviation sector has shown very strong growth trends and is expected to grow at CAGR of 16% in 2010-13. Positive outlook in the industry private carriers expected to post healthy profit (USD 350 million), domestic traffic growth of around 17-18%, international passengers also to grow at around 10-12% over the next year. Government plans to invest USD 30 billion over the next 10 years seeing the success of the PPP model in the sector. the Ministry of Finance has also relaxed ECB norms announced in Budget 2012-13 with a ceiling of USD 1 billion. Vision 2020 highlights infrastructure development to handle 280 million passengers by 2020. Bain Indias survey conveys the increasing confidence of the private sector in Aviation related projects (with an increase in the confidence score). Indias aircraft needs estimated at 1320 new aircrafts valued at USD 150 billion over the next 20 years (Boeing). Greenfield airports 100% FDI under automatic route, model concession agreement developed by government, 49% FDI in domestic airlines under automatic route, PPP model being adopted (Bengaluru and Hyderabad international airports). Foreign airlines allowed to invest upto 49% in domestic carriers (14th September, 2012). While some airports are being developed under the PPP model, others are being taken up by the Airports Authority of India (AAI). The AAI has taken up the development of 35 non metro airports at an estimated cost of US$ 777.80 million. Telecom: Having shown strong growth trends historically, the telecom sector is expected to grow at 1213% annually (BCG). Sector likely to witness investment of around USD 112.6 billion in the 12 th 5-year plan6, out of which private players will be expected to invest USD 90 billion (DoT).

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National Knowledge Network (NKN) was approved by the Cabinet committee on infrastructure established to connect 1500 educational institutes around the country through high-speed data communication network with an outlay of USD 1.32 billion. Government to also facilitate growth of broadband by setting minimum speed limits for broadband and targets for broadband customers. This requires establishing a fiber optic network. National Long Distance (NLD) services have been opened for the Indian private sector with a minimum paid-up capital of USD 56.3 million. Rural connectivity government set to construct 10000 towers to increase connectivity. Mobile subscriber base expected to grow by 9% this year (Gartner) and mobile penetration to increase from 51% to 72% by 2016. Telecom sector to see investment to the tune of INR 3167 billion in the year 2012-2016 (CRISIL Research) 10. Urban Infrastructure: Urban population to reach 600 million in 2031 and sees the scale of investment required to be around INR 39 lakh crore the period 2012-31. Urban infrastructure investment requirement stands at INR 39186 billion (2012-2031) according to a FICCI and E&Y report. Out of this, major part of the investment will be required for urban roads (44%), urban transport (11%), renewal & redevelopment (10%) and then water supply, sewerage, solid waste management, and storm water drains will account for around 20%. Efficient transport system is one of the most critical issue of urbanization metro projects being taken up in Hyderabad (71.16 km, INR 123.32 billion), Bangalore, Chennai, Kolkata (East-West Metro corridor) and Mumbai and in-principle approval being given in Jaipur, Patna, Kochi, Lucknow. FDI up to 100 per cent under the automatic route is allowed both in setting up new and in established industrial parks. Bain Indias survey shows that private sector confidence has risen in water-related projects under urban infrastructure sector.

Attractive Investment Areas

The following are certain areas of interest for investment (in no particular order). Out of these sectors Telecom, Waste Management and Power are very strong contenders for key investment areas looking at the future growth prospects and backing by the government through policy initiatives and planned investments. Waste Management (Urban Infrastructure): The sector is set to grow by 15-20% annually plus there is rising demand for it. Strong growth drivers increasing urbanization coupled with increase in waste produced per capita, urban population growth due to migration from rural areas leading to increased demand and consumption, scarcity of land for open dumping of waste and higher transportation and logistics costs, rising commodity prices increase economic sense of recycling. Waste generation is of the order of 125 MT per year while the waste collection rate is around 7090% (big cities) and less than 50% for small cities and towns creating a huge opportunity. It is an under-researched sector, which has recently gained popularity with the Government. There is more than one avenue to invest as there are different types of waste disposal requiring different setup. A total of INR 505 crore investments have been noted in the sector so far. Also, PE activity has been on a rise in this sector with players investing in small water and solid waste management companies. The JNNURM has also been funding varied projects. Power (renewable energy/cleantech): Power sector as a whole has one of the most positive investment climates within the infrastructure sectors. Also, the demand-supply gap has been widening at an alarming pace,

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primarily led by growth in population and manufacturing activities (power deficit by 2012 to be around 10% and by 2030 demand for electricity to cross 950GW). Favorable policy environment with respect to FDI norms (100% allowed). Also, planning commission has projected a huge amount of investment with opportunity for the private sector to invest. Renewable energy is a sub-sector that holds great opportunity there have been active PE investments and planed investments in the pipeline in such companies in the current fiscal. The government has taken initiatives to increase investment and entrepreneurship in this sector NCEF, setting up Aditya Urja shops etc. This gives the private players opportunity to invest in high growth industry. Ports (Ship repair/Support services): The demand of private participation in port development is evident as public (major) ports are failing short of meeting the increasing demand. Thus private ports can cater to the spill-off demand and this is justification for expansion of capacity. Apart from core activities, ancillary ones are also required dry docks are necessary to provide ship repair facilities. Currently, out of the major ports, Kolkata has 5 dry docks, Mumbai and Vizag have 2 and the rest have 1 or none. Looking at the forecasted increase in freight traffic and the rate of utilization of ports, demand for ship repair and support services will go up. The major growth driver is planned investment in the port sector which will directly increase demand for these services (Maritim Agenda, 12th 5-year plan). Roads (Integrated Border Check posts): Roads sector has seen an enhancement of around 14% in the budget allocation over last year signifying the governments prerogative to fast track this sector. There is a huge deficit in terms of National and State highways which needs to be addressed. Roads and Highways project usually have long gestation periods and are risky as the revenue is dependent upon the toll collection (in case of certain PPP types). IBCP is a sub-sector within Roads and Highways which has relatively lower financing needs, lower risk (without loss of potential returns), and shorter construction period. It also links directly to road development as the demand for this rises with the expansion of the Road network. It also provides and understanding of traffic for further road projects to private players, thereby mitigating their risk in such projects. Even though it is at a nascent stage, there are strong growth drivers - simultaneous demand for IBCP development on all routes in a State (as non IBCP routes will be flouted by operators) raises funding requirement, development of dedicated corridors will raise IBCP demand (12th 5year plan). IBCP has been gaining momentum with many states showing inclination towards IBCP implementation through BOT PPP route and also minimize transit time by using integrated IT systems. PPP projects have been handed out mainly in Maharashtra (22 IBCP projects to SPV by Sadbhav and SREI in 2009) and Madhya Pradesh (24 projects to SPV by ITNL and Spanco in 2010). Apart from this, 6-7 more states have announced such projects. Telecom (rural expansion/newer technologies): India is the fastest growing telecom market in the world and is projected to have 1 billion telephones by 2015 and become the worlds largest mobile phone market by subscription. Teledensity is still at around 76% in urban regions and as low as 37% in rural, providing great scope for growth. The government already plans to setup 10000 more towers to increase the connectivity. Newer technologies like 3G, BWA have not been launched on a grand scale yet as there is need to setup special infrastructure by the telecom players. Also, the government plans to expand broadband access and improve minimum service quality which requires Pan-India establishment of a better (fibre-optic-cable) network.

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10

Transaction Activity in the Infrastructure Sector

India was the fastest growing PE market in Asia in 2011 with investors putting in USD 14.8 billion (55% increase over 2010). 531 deals were closed which is 40% more than last year. Deal making increased across all major sectors with volume surpassing 2007 peak. PE deal value was USD 3.8 billion in 1st half of 2012 (45% down in value terms compared to 1st half of 2011). M&A of around USD 24.6 billion, which has been the lowest in last 3 years (19% down from 1st half, 2011). Most deals are for small positions in target company or project (more than 82% of the deals have involved stakes of less than 25% and only 5% deals were with more than 50% stake) and also in companies in the formative stages. PE/VC investments are closely inter-linked with broader growth of economy. According to CRISIL research, the next 5 years (2013-17) present huge investment opportunities for private sector investment (INR 800-900 billion per year) out of which opportunity for PE is INR 1.13 trillion in infrastructure (up from INR 630 billion from 2006-11). Total PE investments from 2005-10 were around INR 2.206 trillion out of which 26% (INR 566 billion) were in infrastructure. Share of private players in investment has been around 4.2-4.4% last 2 years. India also attracted the most PE investment among 6 emerging countries between the same periods. There has been a dramatic decline in the number of exits only 88 in 2011 compared to 123 in 2010. This was owing to the depressed stock market (as IPO remains the most preferred exit strategy). The paradigm shift has been - VC evaluated larger-ticket investments while PE considered putting their money into small businesses with strong fundamentals like waste processing. Some of the hot PE sectors (2011) Real estate (USD 3.4 billion), Manufacturing, IT/ITES(ecommerce). Over the years 2008, 09, 10 the power sector attracted the most interest from PE investors. Telecom was the next target attracting around USD 1.9 billion over the same period (then Oil & Gas, Roads and Ports). Domestic PE firms rely heavily on foreign funds as Indian insurance/pension funds are barred from investing in PE (Bain- 2/3rd of the funds in next 2 years will come from FVCI and FDI). The following sectors have shown lackluster sectors (since 2010) BFSI and Infrastructure; Infrastructure investments remained almost flat at about USD 4 billion mainly due to constraints like government contract and policy delays even though there was some deal growth in engineering and construction. Positives for PE firms when investing in infrastructure projects low level of uncertainty once construction and initial operations are complete, stable cash flows over long gestation periods help in diversifying portfolio. Major question faced do they invest in infrastructure project or the construction company? Investing in companies is easier than projects as PE funds have horizon of around 5-7 years, company performance is also more predictable, and investments made are more liquid. Some PE funds have made infrastructure their focus 3i, IDFC PE, IDFC Project Equity (Bain). Looking at the quarterly trends of PE inflow, we note that Q2, 2012 and the last 3 quarters preceding it had a flat trend by value (and slightly decreasing by volume). Prior to that, the amount of PE coming was slightly on the higher side9.

The valuation benchmarks can be judged from the transaction comparable multiples from the past deals in infrastructure and related sector (details are in the excel sheet). CNX Infrastructure Index launched by NSE to track stocks in the infrastructure sector; includes companies belonging to Telecom, Power, Port, Air, Roads, Railways, Shipping and other Utility Services providers (constituted of 25 companies selected from the top 500 companies ranked according to free-float market capitalization and turnover).

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Valuation Benchmarks and Sector Performance on the Markets

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 Seeing the composition of the index, we can consider it as a safe proxy to judge the performance of the infrastructure sector in the market. Going by the movement of the index, we see the 2007-08 time period was pretty good as the index peaked during this period and fell in the 2008-09 period. Even though it recovered in mid-2009, the index hasnt performed at 2007 levels again. The last 1 year period yielded a negative return of -16.36% based on the index closing value. FTSE IDFC infrastructure index is another thematic index but the stocks contained are a subset of CNX Infrastructure Index, so we wont consider it.

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List of References
Reports: 1. Dealtracker Half Yearly, 2012, Grant Thornton 2. Dealtracker Annual Edition, 2011, Grant Thornton 3. Dealtracker Quarterly Edition, 2012, Grant Thornton 4. Dealtracker, July 2011, Grant Thornton 5. Private Equity Roundup India Edition-8, April-June 2011, Ernst & Young 6. Private Equity Roundup India Quarter 1, 2012, Ernst & Young 7. Private Equity Flash, September 2011, Ernst & Young 8. Mergers and Acquisitions Deal Snapshot, India Focus Edition, January-March 2012, KNAV 9. CNX Infrastructure Index, NSE 10. Accelerating Public Private Partnerships in India, 2012, FICCI, Ernst & Young 11. Avendus Infrasight, September 2011, Avendus 12. Avendus Infrasight, December 2011, Avendus 13. Avendus Infrasight, March 2012, Avendus 14. Avendus Infrasight, June 2012, Avendus 15. India Private Equity Report, 2011, Bain & Company 16. India Private Equity Report, 2012, Bain & Company 17. Private Equity Fueling Indias Growth, May 2012, Deloitte, VCAI 18. India Infrastructure Summit, 2012, FICCI, Ernst & Young 19. Conference On Building Infrastructure: Challenges & Opportunities, March 2010, GoI 20. Global Private Equity Report, 2011, Grant Thornton 21. India Infrastructure Report, 2010, IDFC 22. India Infrastructure Report, 2011, IDFC 23. Logistics Industry: Industry Snippet, Q-Caliber India Services Pvt. Ltd. 24. Adding Wheels Investing In The Indian Transportation & Logistics Industry, 2010, KPMG, CII 25. India @ 9% Role Of PE & VC, May 2012, Crisil Research Website: 1. IndiaPE 2. OIFC 3. IDFC 4. Mergers of India 5. KNAV Deal Sources: 1. KPMG Sector Reports 2. Avendus Infrasight 3. KNAV Deal Snapshots 4. Kvezar Database

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Appendix
(Detailed graphs and charts are present in the Excel)

1. Sources of funds for PPP Forms Domestic sources Debt

Domestic commercial banks Domestic term lending institutions Domestic bond markets Specialized infrastructure financing institutions

External sources
International commercial banks Export credit agencies International bond markets Multilateral agencies International developers Equipment supplier funds Other international equity investors Multilateral agencies

Equity

Domestic developers Public utilities Other institutional investors

Sources: Accelerating public-private partnerships in India, FICCI, E&Y

2. Roadblocks to Infrastructure Development Major Issues

Resistance from local communities Rehabilitation packages dispute Sponsors launch projects w/o preparation Cost of R&R (LARR) will increase project cost Bureaucratic complexities create disputes Various approvals required at every stage in project life Multiple layer approval (Central, State, Local) Lack of coordination between different agencies

Proposed Resolution
LARR bill Relaxing land transfer guidelines Guidelines for authorities for awarding projects 2-tier structure for monitoring: PMU, PRU Setting up Quasijudicial authority for infra sectors Concerted effort required from sponsoring agencies/authorities Tracking mechanism Performance based incentives/penalties Indian Co. can avail ECB upto USD 10b Setting up of IDFs Tax benefits: reduction of Withholding tax Better evaluation of capabilities of player Pro-activeness of government (above mentioned points)

Land Acquisition

Regulatory clearances Environmental clearance

Under construction projects to comply with revised standards Authorities side-step procedure to rush projects Poor project planning & engineering design result in poor quality and lacks attention to detail Cost overruns due to incorrect/obsolete estimates PPP/EPC contracts are treated as same unsuitable projects under PPP offered for bidding Large developers/EPC are already over-leveraged and cant fund new projects Banks/FIs have reached their sector exposure limit Unfavorable equity markets due to uncertain economic conditions and regulatory requirements Total no. of large developers/EPC contractors are low Lack of skilled manpower and equipment shortage Many small players who form JVs to take on contracts and then dont deliver upto standard Early-stage delays and decreasing margins due to competition Uncertain regulatory environment (w.r.t. infrastructure)

Project planning

Funding constraint

Wary Foreign investors

Sources: India Infrastructure Summit 2012, FICCI, E&Y

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Capacity of Private players

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3.
Infrastructure Investment in Eleventh 5-year Plan Sector Original Electricity (incl NCE) 666525 Telecommunications 258439 Roads & Bridges 314152 Irrigation (incl watershed) 253301 Railways (incl MRTS*) 261808 Water supply & Sanitation 143730 Ports (incl inland) 87995 Airports 30968 Storage 22378 Oil & Gas 16855 Total 2056151
India Infrastructure Summit 2012, FICCI, E&Y

Actual 658630 345134 278658 246234 200802 111689 40647 36138 8966 127306 2054204

Under/Over Achievement -1% 34% -11% -3% -23% -22% -54% 17% -60% 655% 0%

4. Infrastructure deficit & 11th 5-year plan physical targets Sector Deficit Roads/Highways Ports Airports
65590km of NH comprise only 2% of network Carry 40% of traffic; 12% 4-laned, 50% 2-laned, 38% single laned Inadequate berths and rail/road connectivity Inadequate runways, aircraft handling capacity, parking space and terminal buildings

11th Plan targets

6-lane 6500 km in GQ 4-lane 6736 km NS-EW 4-lane 20000 km, 2-lane 20000 km, 1000 km expressway New capacity: 485 m MT in major ports; 345 m MTin minor ports Modernize 4 metro and 35 nonmetro airports 3 greenfield in NER; 7 other greenfield airports 8132 km new rail, 7148 km gauge conversion modernize 22 stations; dedicated freight corridors Add 78577 MW capacity Access to all rural households Develop 16 mha major and minor works; 10.25mha CAD Reach 600 m subscribers 200 m in rural areas 20 m broadband, 40 m inernet

Railways Power Irrigation Telecom/IT

Old technology; saturated routes; slow speeds Low payload to tare ratio (2.5) 13.8% peaking deficit; 9.6% energy shortage 40% transmission and distribution losses Absence of competition 1123 BCM utilizable water resources; yet near crisis in per capita availability and storage only 43% of net sown area irrigated Only 18% of market accessed Obsolete hardware Acute human resource shortages

Sources: Development of Infrastructure report

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5. Share of Private Sector in Infrastructure Development as a Proportion of GDP (at 20067 prices)
3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2006-07
India Infrastructure Report 2011, IDFC

2.92% 2.21% 1.26% 2.42% 2.61%

% of GDP

2007-08

2008-09

2009-10

2010-11

6. Sectoral Investment Planned in 12th Five year plan

7% 12% 1% 4% 31% 2% 2% Ports Airports Power Oil & Gas Telecom Irrigation 10% Water Supply Storage 6% 25%
India Infrastructure Summit 2012, FICCI, E&Y

Road & Bridges Railways

7. Infrastructure Investment in India (5-year plans, INR billion)

45000 40000 35000 30000 25000 20000 15000 10000 5000 0

20496 Private investment 7429 2252 6809 10th actual 13113 11th revised 12th projected 20496 Public investment

Accelerating public-private partnerships in India, FICCI, E&Y

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8. Annual VC/PE investments in India (deals)

700 600 500 400 300 200 100 0 9.5% 7.0% 5.7% 3.0% 99 2005 283 2006 654 2007 539 2008 Real GDP growth 10.5% 9.3% 9.6% 6.2% 6.7% 2.7% 172 2009 4.4% 4.2% 8.4% 8.4% 12.0% 10.0% 8.0% 6.0% 4.0% 363 2010 386 2011 2.0% 0.0% PE/VC investments % of Private sector investments

India @ 9% Role of PE & VC, CRISIL Research, May 2012

9. PE Quarterly Trends
4 3.5 3 2.5 2 1.5 1 0.5 0 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Volume Q4 11 Q1 12 Q2 12 Value (USD bn)
PE roundup, E&Y, 2012

123 108 86 95 96 94 94

122

118 98

140 120 100 80 60 40

2.6

1.9

2.2

1.6

2.5

3.5

1.9

1.8

1.6

1.7

20 0

10.
Sector-wise infrastructure investments 2006-07 to 2010-11 Sectors INR billion % share Power 5315 23.9% Oil & Gas 3852 17.3% Roads 3180 14.3% Railways 1961 8.8% Irrigation 2027 9.1% Telecom 3960 17.8% WSS 1168 5.3% Ports 345 1.6% Airports 367 1.6% Warehousing 72 0.3% Total 22247 100.0%
*P: Projected; India @ 9% Role of PE & VC, CRISIL Research, May 2012

2011-12 to 2015-16 P* INR billion % share 10333 26.0% 7187 18.1% 6882 17.3% 4713 11.9% 3334 8.4% 3167 8.0% 2520 6.3% 1028 2.6% 348 0.9% 182 0.5% 39694 100.0%

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