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Better late than never
15 January 2014
India Heavy Construction Sandip Bansal
Analyst firstname.lastname@example.org +91-22-6155 6059
Strong pick-up in environmental clearances (EC) by new Environment minister Media reports suggest more than 70 projects, worth about US$25bn, were cleared over the past three weeks (mostly in power/coal). ECs had hit a five-year low in FY14 with thermal/infrastructure/industrial worst hit (not in keeping with the Cabinet Committee on Investment (CCI)'s proactive approach). EC delays had been a key reported industry grouse. News reports say the Minister will decide all pending cases by end-January 2014; the cabinet secretariat has asked him to fast-track many infrastructure projects. CCI activity might accelerate too; enhancing approval ambit to smaller projects Formed in January 2013, the CCI has approved some 300 projects worth about US$70bn (most pertain to u/-construction but are stuck due to last-mile approvals). CCI was to coordinate clearances for projects over Rs10bn; the government is considering halving this limit. About US$250bn in projects are still with CCI; news reports imply more than a thousand projects could be impacted if the limit is reduced to Rs5bn. Base being set for revival after too little for too long; benefits post-elections EC is a necessary but not sufficient condition in the long investment process. While clearances might not change things materially before the elections (investments might fructify only after the next government forms), we view this as a significant sequential improvement (after monthly clearances had hit five-year lows) with likely bunched-up tangible/on-the-ground benefits post elections: 1) it may set a base for revival; 2) it completes a key time-consuming process (some approvals were pending for years), and 3) it aids sentiment (general expectation was that the government was unlikely to do much, given elections). We think mining approvals are key, as while outlays might be small, they could potentially trigger power/industrial sectors. While not all clearances will result in new orders, they will clear bottlenecks and support economic output on completion. Also, smaller projects could impact faster, given relative ease to complete. Key beneficiaries: E&C/power-related stocks; we like L&T, BHEL, Coal India We remain constructive on L&T and these measures lend visibility on a cyclical recovery in E&C activity. While structural issues in power remain, we think power could benefit from the above (needs multiple approvals; about 80% of CCI approvals are in power).
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Figure 1: Number of projects granted ECs
800 700 600 500 400 300 200 100 0 FY10 FY11 FY12 FY13 FY14-YTD
Figure 2: Number of projects granted ECs, by sector
Sectors Industrial projects Infra & Misc. projects & CRZ Thermal projects Coal mining Mining projects New constr. projects & Industrial estates River valley & Hydroelectric projects Nuclear projects Grand Total
FY10 FY11 FY12 FY13 FY14-YTD 360 83 60 56 93 63 15 1 731 223 84 69 33 87 37 7 1 541 389 563 182 60 51 21 45 25 5 290 142 32 39 25 31 4 84 18 8 19 46 10 4 1 190
Source: Ministry of Environment and Forests (MoEF)
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we believe it sets the base for the next stage of revival. UMPP to be considered for EC without linking it with EC & stage-1 FC of linked coal block. UBS EC process. Coal mining of up to 8mt capacity. News reports also suggest that the Cabinet Secretariat has asked the Environment Ministry to fast-track 27 major infra projects on a priority basis.050MW of Monnet Power in Odisha CRZ nod to 1. see Figure 9) and is likely to provide bunched-up benefits post elections. It completes a key time-consuming process in project implementation (many clearances had been pending for a number of years) India Infrastructure 15 January 2014 2 .benefit Tilaiya/Orissa Coal India output may increase 30-40MT Coal Mining Brick earth and ordinary earth mining Mining of minor minerals River sand mining Thermal plants less than 5MW New units/expansion of leather production Source: News reports. equity raising. The Posco plant. Figure 3: Key initiatives of the new Environment Minister Sector/Project Industrial Nuclear Hydro-electric Thermal Thermal Infra Infra Coal mining Coal mining Coal Mining Thermal Action EC (revalidation) with conditions to steel plant of Posco in Odisha EC to 2.040MW Hinuja National Power Corporation in AP EC to Vizhinjam Container Terminal at Trivandrum Clearance for New Major port In Dugarajapatanam In AP EC to Bhakra UG Coal Mine EC to Kotma. has already received re-validation of its EC with conditions. particularly at the state level eased.The new Environment Minister has taken many decisions over the past three weeks… The Petroleum Minister took additional charge of the Environment Ministry on 24 December 2013. Benefits: We see multiple benefits While clearances are unlikely to result in material actual investments until the elections (as many steps might still remain pending in the long process of investment. debt tie-up. done away with mandatory EIA and public hearings Media reports suggest that the Minister wants to have no proposals pending by the end of January 2014. land acquisition. We think this is a significant sequential improvement given the low-level of clearances in the past (monthly clearances had hit a five-year low over the past few months. allowed up to 50% without public hearing under the environmental appraisal process.800MW PHWR Haryana Atomic Power Project EC to NHPC’s 520 MW Teesta-IV project in Sikkim Water usage clearances to 1. including the Sasan UMPP and the LNG terminal at Mundra. which was one of these projects. Govinda & Meera Coal Mines EC to Central Coalfields in Jharkhand If a coal-block is not in inviolate areas. such as forest clearance. and so on). involving one time capacity expansion. He has finalized multiple decisions in the Petroleum Ministry and since 24 December has also undertaken various measures in his short stint as an Environment Minister. These projects might be stuck due to environment/forest clearances. Impact/Project Value (Rs bn) 520 230 60 51 50 50 40 1 0 EC for UMPP to be fast.
…together with CCI decisions.Fertilizers Commerce and Industry-DIPP Civil Aviation Chemicals and Fertilizers .257 14. in our view. Figure 4: PMG/CCI project clearance (Rs bn) Sectors Power Steel Petroleum and Natural Gas Coal Road Transport and Highways Commerce and Industry . out of which projects worth Rs3.Commerce Railways Mines Shipping Chemicals and Fertilizers . the impact of smaller projects on supporting economic output could be faster given the relative ease to complete such projects. A large number of under-construction projects were stuck due to lack of approvals/clearances and they would be now able to move forward.537 33 128 110 45 71 70 58 35 120 50 Pending 5. Projects worth about Rs15trn are still pending with CCI.Chemicals and Petrochemicals Textiles Grand Total Source: Union Cabinet Secretariat Cleared 3. We believe that mining-related approvals are key as. CCI has cleared projects worth Rs4. while absolute outlays could be relatively lower.950 A large number of projects cleared by CCI do not pertain to fresh investment proposals (see Figure 11) and are related to projects that are being implemented but that are stuck due to lack of approvals/clearances (that had been pending for a India Infrastructure 15 January 2014 3 . While not all clearances will result in new orders.411 957 524 523 451 444 271 192 263 120 50 13 19. they will remove last-mile sticky issues in project completion and support economic output on commissioning.565 4.390 2. especially in the power sector. So far.207 4. they trigger further investments in the power/industrial sectors. as they get off the ground faster and are less complex to implement (the reported number of such projects is also high at over a thousand). Also.422 2.257bn. will help support business sentiment CCI has cleared a large number of projects. The CCI was formed to co-ordinate on projects with a value of more than Rs10bn and media reports suggest that the government wants to lower this limit to Rs5bn (industry bodies are supportive of the functioning of the CCI/PMG and want the investment threshold to be lowered). Also supports in restoring business sentiment (the general expectation was that this government was unlikely to do much given the impending elections).537bn or about 80% are in the power sector.283 847 480 523 380 374 213 192 228 13 Grand Total 8.028 4.
Environmental Clearances had been declining The number of ECs granted in FY14 hit a five-year low . the fresh investment proposals cleared by CCI are likely to result in orders in the future.long time). likely due to withdrawals/lapses. by sector FY12 182 60 51 21 45 25 5 FY13 290 142 32 39 25 31 4 FY14-YTD Sectors 84 Industrial projects 18 Infra & Misc.a combination likely of both a lower number of clearances by the Ministry of Environment and Forests (MoEF) and also lower number of proposals (given the muted investment sentiment). Figure 7: No. by sector Sectors Industrial projects Infra & Misc. and so on). Figure 5: Number of projects granted ECs 800 700 600 500 400 300 200 100 0 FY10 Source: MoEF FY11 FY12 FY13 FY14-YTD 60 40 20 0 FY10 Source: MoEF FY11 FY12 FY13 FY14-YTD Figure 6: Number of projects awaiting ECs 140 120 100 80 The decline in ECs granted was across sectors. The number of projects awaiting ECs had also been steadily increasing over the years during the tenure of UPA-II (though there has been a decline in FY14 YTD without a corresponding increase in ECs granted. Further. of projects-ECs awaited. projects & CRZ Thermal projects Coal mining Mining projects New constr. infrastructure projects and industrial projects being the worst hit. of projects-ECs granted. projects & Industrial estates River valley & and Hydroelectric projects Nuclear projects Grand Total Source: MoEF Figure 8: No. The number of projects awaiting Terms of Reference (ToR) for the preparation of an Environment Impact Assessment Report India Infrastructure 15 January 2014 4 . a sore point for industry has now been addressed and these projects can now make further progress. with thermal projects. projects & Industrial estates 4 River valley & and Hydroelectric projects 1 Nuclear projects 389 563 190 Grand Total Source: MoEF FY10 360 83 60 56 93 63 15 1 731 FY11 223 84 69 33 87 37 7 1 541 FY10 FY11 FY12 FY13 FY14-YTD 6 20 5 2 8 8 4 28 5 13 22 2 1 1 69 38 10 3 11 17 2 81 49 44 4 9 23 4 133 11 5 5 4 19 13 57 ECs granted had been steadily declining over the course of the past year and had been especially low in the past few months with monthly clearances hitting the lowest levels for the past five years. projects & CRZ 8 Thermal projects 19 Coal mining 46 Mining projects 10 New constr. With the CCI coordinating clearances for such projects.
in sectors such as infrastructure and manufacturing. of projects-TOR awaited. or any other critical projects. and delays. by sector Sectors Industrial projects Infra & Misc. To prescribe time limits for issue of requisite approvals/clearances by concerned ministries and departments. To make decisions to grant or refuse approvals and clearances of specific those projects that have been unduly delayed. To monitor the progress of identified projects—time prescribed and taken to obtain each approval and clearance. To review procedures followed by ministries and departments to grant or refuse approvals and clearances. projects & Industrial estates River valley & and Hydroelectric projects Nuclear projects Grand Total Source: MoEF website CY09 CY10 CY11 CY12 CY13 3 3 1 1 5 8 2 7 98 3 6 1 6 114 186 4 3 11 11 7 31 253 218 58 9 34 120 10 27 476 Cabinet Committee on Investment The Cabinet Committee on Investment (CCI) was formed in January 2013. India Infrastructure 15 January 2014 5 . To simplify rules and procedures followed by the respective ministries and departments for decision-making.(the preparation of an EIA is a key step in the process of securing ECs) has also been steadily increasing over the past five years. To review the implementation of those projects that have been delayed beyond the stipulated timeframe. The committee is headed by India's prime minister and has heads of important Ministries as its members. of ECs granted since January 2013 120 100 80 60 40 20 0 Apr-12 Source: MoEF Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Figure 10: No. To require statutory authorities to discharge functions and exercise powers under the relevant laws and regulations. involving investments of Rs10bn or more. CCI's key functions are: To identify key projects to be implemented on a time-bound basis. Prescribe timeframes to promote investment and economic growth. projects & CRZ Thermal projects Coal mining Mining projects New constr. Figure 9: No.
3 13 Indira Gandhi Aravali. U-1.2. a Project Monitoring Group (PMG) was formed in the Cabinet Secretariat in July 2013 to resolve issues between ministries and Centre-States.12 33 Durgapur Steel. U-1.2 35 Bhusawal. 3x660MW Adani Mundra. Haryana. U-1. U-5. AP. U-1. AP. 4X300MW 25 Vizag. Jhajjar. Angul. NTPC. Chhattisgarh.2 19 Rajiv Gandhi. 4X600 MW Mumbai Airport New Terminal Talwandi Sabo. 2X500MW.6 32 Vindhyachal.2 16 Nelcast. NTPC. Chhattisgarh. 2X500 MW. 3X500MW. Tangedco.4 27 Meenakshi Energy. 2X500MW.2. Moser Baer.5 36 Korba West. 2X600MW 22 Shree Singaji (Malwa).2 34 Mauda. Painampuram. U-1. Orissa 15 Nabha. U-1. U-1. U-1. 2X660MW 18 Raghunathpur. 4x360MW Damodaran Sanjeeviah. 20 North Chennai. U-1. NTPC. U-1. Chhattisgarh. Orissa.2 26 Nasik. Sipat. U-1. Punjab. U-5 & 7 37 Harduaganj. 2X800MW.320MW 11 GAIL.2. SAIL 2X500MW. Reliance Power. NTPC. UBS India Infrastructure 15 January 2014 6 .3 14 Utkal Alumina (Subsidiary of Hindalco). U-1. MP.Also.2 31 Rihand. DVC West Bengal. U-1. 2X660MW. 3X500MW. Ministry-Department Power Power Civil Aviation Power Power Power Power Power Power Power Petroleum and Natural Gas Power Power Mines Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Power Estimated Investment (Rs bn) 150 120 120 100 99 99 99 90 80 77 76 75 75 70 70 66 66 60 60 60 60 60 60 60 54 54 54 51 50 50 50 50 50 50 50 50 50 Status Coal Linkage restored Operational Design was approved Under Construction Operational Under Construction Under Construction Under Construction Under Construction Under Construction Cleared Under Construction Operational Trial prodn. 1.3. 2X600MW.2. 2X540MW. UP. TNEB.3 Bara. 2X700MW. in Dec-13 Under Construction Under Construction Under Construction Under Construction Under Construction Under Construction Under Construction Under Construction Operational Operational Under Construction Under Construction Under Construction Under Construction Under Construction Under Construction Operational Operational Under Construction Under Construction Under Construction Operational Under Construction 10 Lanco Amarkantak. MPPGCL.2 17 Jhajjar. NTPC. U-1. 2X500MW.3 Uchhpinda. 2X500MW. UPRUVNL 2X250MW. NTPC. 900MW 28 Monnet Power. 1. 2X500MW. NTPC. Haryana. Orissa 29 Marwa. 2X600MW. Sterlite Energy. 3X660MW.2. Figure 11: Projects cleared by CCI (with estimated investment of Rs50bn or above) Project Name 1 2 3 4 5 6 7 8 9 North Karanpura.2.Jagdishpur .2. 2X540 MW.Haldia Pipeline 12 Vallur. U-11. 2X500MW. 2 30 Tuticorin. 2X600MW 23 Lanco Anpara.050 MW. U-1. U-8 & 9 Source: Union Cabinet Secretariat. 3X660MW. 2X600MW. U-1.2. U-1&2 24 Rosa. 3 3X600MW. Chhattisgarh. Mahagenco. U-4. 3*660 MW Jharsuguda. Punjab. 2X600MW 21 Anuppur. NTPC.
Coal India: Production growth has been a key challenge for Coal India and approvals for new mines would enable the company to address this issue. The power sector. BHEL: The power sector is likely to be the biggest beneficiary of the speeding up of approval processes. requiring multiple approvals. and BHEL is the most leveraged to revival in the power sector. New mine approvals would boost Coal India's production plans. We think key beneficiaries under our coverage universe would be L&T. Coal India Key beneficiaries of greater number of project-related approvals by the government would be E&C contractors/capital goods companies as multiple projects getting approved would result in higher execution/orders.400 1.600 1. BHEL and Coal India. L&T: Diversified skill sets provide the ability to benefit from project approval across sectors.000 Price (Rs) 800 600 400 200 0 Mar-04 Mar-05 Mar-06 Price Mar-07 9 Mar-08 Mar-09 13 Mar-10 17 Mar-11 Mar-12 21 Mar-13 25 Mar-14 Source: UBS estimates India Infrastructure 15 January 2014 7 . in our view. Figure 12: L&T one-year forward PE band chart 1. should be the sector that benefits the most (power is also the sector that has received the most approvals.Key beneficiaries. power is also the largest component of the total infrastructure spending in India). Stake sales in its development portfolio/assets is another upcoming key stock catalyst in our view. BHEL.L&T. Valuations are quite attractive for the stock.200 1.
Evalueserve staff provides research support services to UBS. employee of Evalueserve. for his assistance in preparing this research report.Figure 13: BHEL one-year forward PE band chart 700 600 Price (Rs) 500 400 300 200 100 0 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Price Source: UBS estimates 8 12 16 20 24 Figure 14: Coal India one-year forward PE band chart 600 550 500 450 400 350 300 250 200 150 Nov-10 May-11 Price Nov-11 8 May-12 12 Nov-12 16 May-13 20 Nov-13 Source: UBS estimates We would like to thank Lokesh Pareek. India Infrastructure 15 January 2014 8 .
commodity prices and interest rates. including those of execution. regulatory hurdles. India Infrastructure 15 January 2014 9 . policy.Statement of Risk The sector faces multiple risks.
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as of 14 Jan 2014 Coal India (Rs) Price Target (Rs) 500 400 300 200 100 0 Stock Price (Rs) 01-Jan-09 01-Jan-10 01-Jan-11 01-Jan-12 01-Oct-12 01-Jan-13 01-Oct-11 01-Jan-13 01-Oct-10 01-Jan-12 01-Oct-09 01-Jan-11 01-Jan-10 01-Jan-09 Buy Neutral No Rating Source: UBS. as of 14 Jan 2014 India Infrastructure 15 January 2014 01-Apr-09 01-Apr-10 01-Apr-11 01-Apr-12 01-Apr-13 01-Jan-14 01-Jul-09 01-Jul-10 01-Jul-11 01-Jul-12 01-Jul-13 01-Jan-14 11 .BO LART.BO 12-month rating Buy Buy Buy Short-term rating Price Price date 14 Jan 2014 14 Jan 2014 14 Jan 2014 N/A Rs162. Bharat Heavy Electricals Limited (Rs) Price Target (Rs) 600 400 200 0 Stock Price (Rs) 01-Jul-09 01-Jul-10 01-Jul-11 01-Jul-12 01-Apr-09 01-Apr-10 01-Apr-11 01-Apr-12 01-Apr-13 01-Jul-13 01-Oct-11 01-Oct-12 01-Oct-13 01-Oct-13 01-Oct-10 01-Oct-09 Buy Neutral Sell No Rating Source: UBS. Ratings in this table are the most current published ratings prior to this report.90 N/A Rs972.Company Disclosures Company Name Bharat Heavy Electricals Limited Coal India L&T Reuters BHEL.45 Source: UBS. All prices as of local market close.70 N/A Rs289.BO COAL. They may be more recent than the stock pricing date Unless otherwise indicated. please refer to the Valuation and Risk sections within the body of this report.
as of 14 Jan 2014 1000 1500 2000 500 0 Buy Neutral No Rating Short-term Buy 01-Jan-09 01-Apr-09 01-Jul-09 01-Oct-09 01-Jan-10 01-Apr-10 01-Jul-10 01-Oct-10 01-Jan-11 01-Apr-11 01-Jul-11 01-Oct-11 01-Jan-12 01-Apr-12 01-Jul-12 01-Oct-12 01-Jan-13 01-Apr-13 01-Jul-13 01-Oct-13 01-Jan-14 Stock Price (Rs) Price Target (Rs) India Infrastructure 15 January 2014 12 .L & T (Rs) Source: UBS.
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