What’s common between GMR Infrastructure, Mundra Port, Reliance Infrastructure, JP Associates and GVK Power and Infrastructure? All are infrastructure companies, with growth in sales and profits at an average of 30 per cent or more in the past two years.

Many believe infrastructure could be the next driver of growth, and companies in this sector could grow the same way as software companies like Infosys and Wipro grew for much of the past decade.

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Nikhil Gandhi, who developed a greenfield (entirely new) port (Pipavav), said after reforms, “what we have achieved in infrastructure as a country vis-a-vis what is required is merely 10 per cent”. ‘‘There’s room for 90 per cent, which will be achieved in 20 years. Things will speed up from here,’’ said Gandhi, CEO, Sea King Infrastructure.

He feels progress in the past 20 years was slow as we were stuck with the policy framework and financing issues, and not many promoters were confident of investing in infrastructure, as they perceived it to be a long-term game. ‘‘In reality, it is not so bad, as customers are willing to pay for better service,’’ he said.

In the early 1990s, it used to take 17 days for a ship to turn around from pre-berthing. ‘‘In Pipavav, we turn around ships in one-and-half days, and the customer who saved several dollars with a faster turnaround was willing to share an extra dollar,’’ Gandhi said. Similarly, transporters don’t mind paying toll if they can reach destinations faster.

The private sector is increasingly playing a major role. The 11th Five Year Plan (2007-12) had estimated an investment of $500 billion in infrastructure, with government bringing 70 per cent. Jayesh Desai, MD, Enam Holdings, said the private sector is already playing a bigger role, and the ratio was more like 50:50 today.

The National Highways Authority of India (NHAI) is widening 54,000 km of highways, of which 12,000 km is done. Of the remaining 36,000 km, 90 per cent would be done by private companies, while 10 per cent of the work could be done by NHAI. Today, 83 per cent of power-generating capacity is with public sector units. Going forward, the private sector will add over 50 per cent of new capacities.

‘‘All big business groups (Tatas, Jindals, Essar, Adanis), with the exception of Birlas, are looking at infrastructure. If you follow them, you can’t go wrong... If infrastructure doesn’t work, India won’t grow. And for infrastructure to happen, private companies have to come to the party, and generate returns for investors,’’ said Desai.

Vinayak Chatterjee, CEO, Feedback Ventures, said the opportunity in infrastructure is not just in new asset creation. It’s also about existing stock, 20-30 times the assets being created. ‘‘Opportunities exist across the chain; from rehabilitation and renovation to operations and maintenance. The opportunity is humongous,’’ he said.

Software had a dream run. It was helped by a huge dollar arbitrage, as the rupee kept depreciating against the dollar, a huge cost arbitrage and tax holidays. Conditions are different for infrastructure. It’s a 100 per cent domestic business, barring a few companies executing orders abroad. Earnings are in local currency, so there’s foreign exchange arbitrage. And, competition is intense.

Yet, experts like Gandhi believe infrastructure could have a bigger impact than software, as it would create far more jobs, top line and bottom line growth for companies. Andrew Holland, CEO-institutional equities, Ambit Capital, said the infrastructure story could be as compelling as the software one, if companies can get their execution right.
 

‘‘Going forward, roads will be a huge story,’’ said Holland. The biggest risk, however, is the execution risk and getting environment clearances. ‘‘Once you overcome these, you are a king. Promoters who are deeply committed and have the risk appetite will be able to deliver,’’ said Nikhil Gandhi.
 

Take the power sector, where at least four to five companies are planning to create capacities of 10,000 Mw each and several others 2,000-4,000 Mw each. ‘‘There are too many promoters working towards adding 10,000 Mw. I just hope they see the light of the day,’’ said GVK’s George. The situation is similar to 1997, when there were a spate of projects (320 MoUs were signed), but few saw the light of day.

There are too many risks – land acquisition (getting contiguous land is a big problem), fuel risks (fuel contracts are not bankable, wherein fuel suppliers won’t compensate you for debt-servicing or loss of revenue), or getting water allocation. ‘‘Getting land near a source of water is difficult. And if it is a fertile land, the issue assumes different dimension. There are too many problems. Can everyone solve it?’’ asked George.

The concerns are partly reflected in the valuation of infrastructure companies. Although fairly valued, with many stocks having doubled in a year, some like Gandhi feel the market is yet to recognise the full potential of infrastructure. ''There's a time lag between bidding for a project to construction and delivery. Typically, in BOT (build-operate-transfer) road projects, it takes six months for financial closure and the design, another two-and-half years to execute a project, while there could be unforeseen delays of six months on land acquisition or other disputes. It takes three years before a project starts generating income. Unless there's a delivery, the stock market doesn't get the confidence,'' said H S Bharana, CMD, Era Infrastructure, explaining the difference with the software sector and how it impacts valuations.

There’s one area where infrastructure companies will have to work hard if they hope to attract the kind of valuations and following that software commanded. ‘‘IT companies grew without needing any capital from investors. Also, they set a benchmark for corporate governance and shareholder friendliness, something infrastructure companies have not learnt,’’ said fund manager Samir Arora.

(With inputs from Sameer Mulgaonkar, BS Research Bureau)

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