That roads play an important part in the life of a nation is known to everybody. That companies that make these roads within the cost and time constraints drive their way to the bank is also known.
What is less known and appreciated are the companies that make the equipment that the road-makers use. Investors can carefully scan the companies in the sector and accumulate them over a period of time for attractive returns.
But first, the back ground. India has about 33 lakh km of roads, which is the second largest network in the world. Roads handle about 70 per cent of the freight movement and 85 per cent of the passenger traffic within the country. It is quite evident that roads touch the common man more than rail or air links.
Here's a surprising revelation. The national highways that account for less than 2 per cent of the total road network carry almost 45 per cent of traffic. Effectively, this means that 98 per cent of the second-largest road network is not put to effective use.
There are valid reasons why the usage of the roads, other than national highways, is low. Only a minuscule portion of the 33 lakh km road network, about 2-3 per cent, are four-laned highways. Here lies an opportunity. About 97-98 per cent of our network needs to be widened. To do this, you need a lot of equipment, including rock breakers, earth movers, mixers, pavers, kerb layers and road rollers in other words, from "rock" to "roll".
Around 32 per cent of our national highway network is single-laned, not to talk about state highways, district and village approach roads. Another reason for low usage is the quality of the roads. The quality is so poor that vehicles prefer taking a longer but qualitatively better route.
Then there is the issue of congestion. While the road network in India is growing at 7-10 per cent per annum, the vehicle population is increasing at a rate of 12 per cent.
Therefore, large investments are required to increase and upgrade the Indian road infrastructure, something that will take care of the present needs and also of the foreseeable future.
We believe that increased spending in road infrastructure will generate huge demand for road construction equipment.
We expect that for the total estimated investment of Rs 1,75,000 crore in road and highway construction projects over the next 13 years, approximately Rs 35,000 crore (20 per cent of the total investment) will be required for construction equipment.
Compared with China's infrastructure spending of 20 per cent of its gross domestic product; India spends just 6 per cent. It needs to increase that to at least 10 per cent to spur economic growth.
Apart from increased spending on infrastructure, what will root for the road construction equipment manufacturers is the stress on timely completion of projects and the need for shorter turnaround times.
Earlier, a contractor could have a set of machines, make a portion of the road and then push his machines a bit further to complete the next leg of the road. Work would happen at a snail's pace. But with rigorous stress on timely completion, contractors have to have multiple units for the same job. Despite this, the density of machines per km is just 25 per cent of that in China.
Look out for companies that provide a bouquet of products and not just one or two machines. Contractors would like to deal with one and not many vendors when it comes to fixing responsibility.
As fresh road construction would normally take place in the interiors, supply of spares and servicing of equipment will also be high on the agenda, when it comes to vendor selection by the contractors.
Also look at the kind of technological advances the company has made over the years and how competitive it has been vis-a-vis imported machinery.
The ability of the manufacturer to overhaul existing machinery and extend its life is also something that the vendor would cherish in his vendor.
Finally, heed the Chinese proverb, "To know the road ahead, ask those coming back." There's no better way to know which company is better than to ask the contractor themselves, and then you will have a winner on your hands.
