Reducing Worries of Investors in Infra - Ind-Ra

The proposal to relax the banks' cash reserve ratio and statutory liquidity ratio requirements for long-term infrastructure bonds, put forth in the Union Budget 2014-15, will not only create an appetite for longer-term investments but also deepen the debt markets, says India Ratings & Research (Ind-Ra). This proposal will reduce the asset-liability mismatch faced by banks on the sectoral exposure. We believe setting up infrastructure investment trusts will also help the objective of deepening infrastructure debt markets, which is the need of the hour.

The proposal to supply adequate coal to power generators is a reassurance to the sector and could reduce the qualms of foreign investors. We believe foreign investors are more interested in the thermal energy sector given the recently concluded acquisitions. We also believe this proposal will encompass merchant generators (independent power producers who do not have long-term power purchase agreements with state utilities). This will not only boost foreign investors' confidence, but also revitalise stalled capacities. That said, Ind-Ra would await the modalities of supply and its cost impact on generation.

The 8,500km target for award of roads projects for the National Highways Authority of India is a bit aggressive, given the achievements during the last two years (FY14: 1,172km, FY13: 1,116km). However, it accentuates the government's assurance to enhance the pace of attracting investments. The budget reaffirms the government's pledge to alleviate sector issues by fast pacing implementation of dispute resolution measures related to contract renegotiation and environment clearances. We believe these initiatives will help achieve the target of award.

The proposed development of airports on a public-private partnership mode in Tier 1 and 2 cities is a positive as is the proposed 16 new port projects which are likely to be awarded this year.

The policy to promote renewable energy at a large utility scale would help achieve near-grid parity. We expect this fillip to help the lenders diversify their energy portfolio into various subsectors. This proposal is in line with domestic and foreign investors' expectations to invest in renewable energy space, which has been witnessing a consistent increase. The proposal to allow various policies and exemptions of custom duty for wind, solar and biogas equipment will help reduce overall project cost and achieve investment objectives. Although the savings might be marginal, it is a small step in the right direction.

The government's commitment to decongest traffic in non-major metros is evidenced by the proposal to inject additional capital into the metro rail projects in Lucknow and Ahmedabad. We believe this trend will be expanded to other cities as well.

The government's intention of attracting private investments is also clearly elicited by its intention to develop a 15,000km gas grid by inviting private participation.

On the whole, Ind-Ra opines that the announcements have a potential to attract private investments and rejuvenate the much capital-starved sector. Also, the budget seems to be in line with the investment objectives of the Twelfth Five-Year Plan.

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