Make money from traffic jams in India

The Indian government has finally woken up the country's congestion problem. It's planning to plough up to $500bn into infrastructure projects - and we've uncovered two construction firms destined to soak up the cash.

India may have enjoyed 9.2% economic growth last year, but the country's progress is resting on the shakiest of foundations. After 60 years of neglect, India's road system is bursting at the seams. Eighty per cent of the country's traffic is crammed onto just 3% of the available roadway, with commuters crawling to work at an average speed of 20 miles an hour. Up to 40% of farm produce is lost because it is left to spoil in fields or rots in lorries while waiting to be delivered. Congestion is already costing the country as much as $6bn a year.

Now, though, it seems the Indian government is finally waking up to the crisis. Prime Minister Manmohan Singh has promised a "Marshall Plan-scale effort" to rebuild the country's infrastructure, says Steve Hamm in BusinessWeek. With plans to plough $330bn-$500bn into new roads, subways, airports and power plants over the next five years, India's construction groups look set to reap huge rewards.

Sounds great, but where's all that money coming from? Not all of it can come from the government, that's for sure the country's public debt already stands at 82% of its annual output, the 11th-worst in the world. So it's turning to the private sector. In 2005, the task of building India's infrastructure was opened up to foreign and domestic financial institutions through public-private partnerships, where the government and firms share the risks, costs and payoff for each project. UK private-equity firm 3i has already announced plans to raise $5bn for an infrastructure firm that will focus on India. About a quarter of the promised $500bn will be funded this way, with the government cutting the builders in on future revenues, says Andy Stone in Forbes; they will collect user tolls on projects for up to 30 years before handing back to the government.

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Indian construction companies are revitalised

The initiative has given Indian builders a new lease of life. "Sleepy Indian construction companies that a few years ago existed on occasional handouts of government contracts now have fat order books," says Stone. But the government will have to be careful that all of that money reaches its intended destination. "With corrupt officials skimming at every step, many public works projects either go over budget or are never completed," says Hamm. You can typically write off 25% of the cost of any project to corruption, says Verghese Jacob, head of Byrraju Foundation, which promotes rural development. Worse still, the money left over after paying corrupt officials is spent on cheap materials, which soon degrade, requiring extensive repairs. Every summer, monsoons strip the road network, revealing potholes and the shoddy workmanship underneath.

But unlike China, where investing in construction can be dicey because of its attitude to the legalities of property ownership, investors can take comfort that infrastructure contracts will be respected in India, says Stone. With no international giants such as Halliburton operating in the market, smaller Indian building firms will soak up all the benefits of the government's building plans. And with such a healthy backlog of projects, the companies involved won't have to bid low to get new business if a project doesn't look attractive enough, they can more than afford to pass it up in favour of the next job to come along. We have a look at a couple of attractive plays on the sector below.

Two ways to profit from India's construction boom

Madhucon Projects (LX:MDHG) is one of the most ambitious Indian road builders, says Andy Stone in Forbes. The company is currently undertaking four major road construction projects, including a 129km stretch of highway between Madurai and Tuticorin, which is the longest stretch awarded by the National Highway Authority of India. The firm has an order backlog of $1.2bn, which, as Stone points out, amounts to 12 times 2006 revenues of $98m, "making it the richest order book in percentage terms among India's publicly listed construction companies". Madhucon Projects has also seen growth of 24% in its average earnings per share over the last two years. Despite this, the shares trade on a very attractive forward p/e of nine for 2009. Shares in the company are available as Global Depository Receipts, which trade on the Luxembourg Stock Exchange.

Nagarjuna Construction (NAG) is another company enjoying "stellar growth", says Stone. Revenues have grown at an annualised 56% over the last five years to $584m last year, largely due to the increasing proportion of road projects on its books. Nagarjuna trades on a forward p/e of 12.6 for 2008, and the company's shares are available as Global Depository Receipts on the London Stock Exchange.

Eoin came to Money Week in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.

Eoin acts as managing editor of MoneyWeek's newsletters.