Archive for the ‘Finance’ Category

Note: This response might seem incredible, but many ideas seem incredible or possible before reality happens and proves to the contrary.

Although this is not a statistically significant data set, I spoke to a few friends and was surprised to find that although some of them are non-religious and non-superstitious, it caused them to give a bit more credibility to the ubiquitous 2012 end of the world disaster rumor.

With global warming and climate changes approaching new levels, it’s very possible that natural disasters will become a more often, if not frequent occurence. This would increase the credibility given to the 2012 rumor.

We all know how powerful rumors are in bringing down banks. Warren Buffet had first hand experience with this and we’ve all lived through it. My hypothesis is that this earthquake and tsunami creates more credibility in the 2012 myth.

If people think the world is going to end for sure, then the present value of future cash flows of all equities, debt and any other financing instrument including (supposedly) zero risk securities would lose much of their value as people sell them and hold cash. Businesses would stop functioning in anticipation of zero demand, and production of products and services would come to a halt. People would scramble to buy (and steal) the remaining goods in anticipation of hard times and there will be massive inflation. Money may actually become completely worthless as financial (and all) markets are destroyed.

From this point of view, we’d multiply the new probability of 2012 disaster by the difference in economic welfare of the world between having and not having this disaster, and that would be this events effect on the market. However there will are many different forces on the market, so unless there are many more catastrophes like this one as 2012 approaches, it’s unlikely we’ll see a dramatic effect caused by 2012 mania.

However, as value investors, we stick by the rule of be fearful when others are greedy and be greedy when others are fearful. If 2012 rumors actually does take hold of the general public (low probability event, yes), I believe it would be wise to invest(if possible) in agriculture, mining and textile companies. Agriculture because people will need food, and it’s the first industry since the dawn of man. Mining because we need flint, tools and weapons. Textile because people need clothing to stay warm.

If people think the world is coming to an end, and it doesn’t, whoever owns these industries and can instill assuredness in his people to work for and with him, will be making a deeply valuable investment.


Michael Jiang – Campaign Manager at Marchex


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In order to sustain 8-9% economic growth, India plans to spend around U$1 trillion on Infrastructure (Roads, Ports, Rail, Airports, Power plants) in the coming 12th five year plan. This amount is almost double of the 11th five year plan that is close to achieving its target of US$420 billion. Investments in the telecom sector accounted for majority of the infrastructure investments in the 11th plan. This continues to emphasize the government’s focus on the Infrastructure sector that is expected to help the economy remain on the growth trajectory.

A look at the past indicates that the government began Infra spending to boost the economy – to recover from the recessionary phase. However, as the economy stabilized and the stock markets picked up; a number of Infra companies approached the markets to raise funds to re-finance their debt, expand their operations and construction projects. During the year CY 2010 more than 18 companies approached the markets to raise finance via the equity route and raised approximately US$3.8 billion. Jaypee Infratech, Power Grid and SJVN were three of largest issues that approached the market during 2010 collecting US$2.3 billion. This has helped them continue with their planned project implementations on track.

However, slower FDI investments in H2 2010, high interest rates, rising input costs and delay in project implementations (due to long drawn legal compliances and policies) have become a rising concern among investors. These have led a number of investors (Mutual funds, retailers, foreign investors) to liquidate their investments. BSE CG (that constitute majority of the engineering and allied companies) clocked 9% returns over the past year (Jan 2010-Dec 2010), however, BSE Power registered negative returns of 6% during the same period. The benchmark Sensex registered returns of 17% during the period indicating that the infrastructure sector underperformed due to the above mentioned impediments.

However, the stock market correction that begun during Q1 2011, has turned beneficial for infrastructure sector stocks. The falling stock valuations; a strong order book, good corporate results and increased project spending have brought infrastructure stocks into the limelight. Investors have begun identifying value buys in the sector with a few companies on their list such as IRB Infrastructure, REC, Nagarjuna Const., IVRCL Infrastructure, GVK Power and Infrastructure, Neyveli Lignite, etc. Giving the sector a further boost is the expected infrastructure investment worth US$308 billion over the coming five years with Road, Rail and Ports remaining the focal points.

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Ask the women who run their household, an industrialist who wants to apply for an industrial loan, a consumer who wants to buy durables or a house. They will all begin by saying that inflation has steadily creeped into their pockets and is eating away their budgets, their profits, etc.

A household lady says Rs.500 fetches one a small packet of vegetables (consisting of 2-3 vegetables) and another Rs.500 for fruits and another Rs.1,000 for the ration (including Wheat+pulses). A total of Rs.2,000 on food items , this is quite high compared roughly 23% to the amount spent on the food items in 2008…This indicates that inflation has affected our household in a huge manner..the rates of food inflation linger at 15% and more, theyeby increasing our expenditure on food..We are seeing that necessities are becoming expensive and are coming at par with luxuries…For example, a litre of petrol, a kg of onions and a litre of liquor (beer) costs the same around Rs.60-65/-.

A look at the consumer segment – buying houses and vehicles reveals that rising interest rates are expected to affect the buyers pocket. Housing loan rates have been witnessing a rise over the past two quarters, consumers who have taken a housing loan worth Rs.2,000,000 will witness a rise of Rs.350-400 per month in their EMI’s (Equated Monthly instalment). Similarly, when a consumer decides on buying an automobile the expected rate hike (25bps) will pinch him further…For example if he takes a loan of Rs.300,000 he will have to pay Rs.60 more every momth or Rs.800 annually. This will dissuade a number of buyers from purchasing a house or going in for new vehicles..

On the industrial front, esp manufacturing companies the bottom line has been affected due to rising interest rate costs, input costs, etc. Over a period of one year, the fuel prices have increased more than 12%y/y, cost of industrial machinery has increased 7%y/y and input costs have risen in the same range. This has affected the margins slightly with expectations of further rate increase to pressurise the profit margins. 

Thus whether it is consumers or industries rising inflation continues to pinch their pockets…

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Inflation continues to remain a pressing issue faced by the Indian economy. Over the past year, inflation numbers have remained in the double digit figures with the Reserve Bank of India (RBI) following a calibrated approach to fine balance economic growth and liquidity. A look at the RBI policy reviews indicate that the rates have been increased six times during 2010 with a few experts stating that RBI has been behind the curve while implementing inflation control measures.

Over the last quarter of CY 2010, the Wholesale Price Index (WPI) inflation eased slightly during October (c16.7%) and November (c13.0%). However, the month of December saw a sudden spurt in inflation figures touching c17% due to a rise in prices of food items and petrol. Food inflation hovered in the double digit range of 12% – 14% during Q4 CY2010 owing to unseasonal rainfall in Maharashtra. This resulted to a damage of Kharif crops creating a temporary demand supply gap.

Adding to the existing woes, an increase in international crude oil prices led to a domestic petrol hike. In continuance with its efforts to curb inflation, the central bank increased the repo and reverse repo rate by 25 basis points at the start of November 2010. However, as inflation moderated in November, RBI left the key policy rates unchanged at 6.25% and 5.25% respectively in its December 2010 policy review.

Going forward, RBI is expected to increase the rates once again by 25 basis points in January 2011. However, looking at the present situation, RBI’s target of 5% inflation rate by March 2011 seems slightly difficult to achieve despite expectations of a sufficient domestic crop supply in Q1 CY 2010; the inflation figures are expected to settle at around 6%-7%. 

Chart: Wholesale Price Index (WPI) and Consumer Price Index (CPI)

Source: Economic Adviser Industry and MOSPI

Base Year: 2004-05

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Is the Indian stock market facing: A Bull Run or a bubble?

I believe that the Bull Run will sustain for a considerable period of time.

Though the Indian economy is faced with pressing issues such as a continuously rising inflation issue, softening growth (IIP growth figures are moving towards single digits) and rising fiscal deficit. The markets will still sustain the Bull Run on the back of strong domestic consumer and capital demand.

In order to resolve the pressing issues, the Government and RBI have taken a number of steps. The government has raised almost Rs.450bn via the 3G auctions that is expected to ease the fiscal deficit situation a tad. However, the inflation figure continues to hover at double digits – 10% which is expected to impede growth. Despite, RBI’s measures to increase the bank rates – the inflation figures have not touched single digits as forecasted. This is an increasing problem for the economy as growth (GDP growth sustained in the range of 7%-8%) coupled with mounting inflation figures will result into overheating of the economy.

Adding to their existent woes (to control inflation) is the huge amount of capital inflows in the form of IPOs and FIIs. Though this is a positive indication for domestic companies to look at expansion, at the same time it creates a problem for the Government that is tackling the inflation problem at war footing.

A look at the capital raised during the past quarter indicates that huge capital was pumped into the domestic markets. This has caused the stock markets to touch the psychological 20K mark after 32 months and created euphoria among investors.

Companies perceive this as a good opportunity to raise funds for expansion and development and have joined the bandwagon….

Almost 13 IPOs have been launched in the past three months (1 Jul 2010 – 20 Sep 2010) and around 8 companies are lined up for the remainder month of September. The 13 IPOs helped garner around Rs.47bn in the market over the past two and a half months, with IPOs (Ramky Infrastructure, Orient Power, Electrosteel Integrated, Gallantt Ispat, VA Tech Wabag, Cantabil Retail India, Ashoka Buildicon, Tecpro Systems) worth Rs.28bn in the pipeline during end of September 2010.

Once all IPOs achieve closure the amount raised via the IPO and FPO route will touch Rs.75bn for the third quarter 2010 (calendar year) compared to the Rs.40-50bn raised in the past quarter (Q2 2010CY). This will be almost double the amount raised during the Q2 2010 (CY). Similarly, FIIs alone pumped in Rs.441.45bn during the past three months indicating huge investments in the stock market.

Company Amount raised (Rs.m) Subscription
Technofab Engineering 720 12.78
Hindustan Media Ventures 2,700 5.43
Midfield Industries 567 13
Engineers India Ltd 9,400 13.6
SKS Microfinance 15,000 13.7
Prakash Steelage 687 4.53
Bajaj Corp 2,900 19.2
Gujarat Pipavav 5,000 20.3
Indosolar 3,570 1.5
Tirupati Inks 515 8.7
Microsec Financial Services 1,480 12.2
Eros International Media 3,500 26.51
Career Point Infosystems 1,150 47.39
Total 47,189  

Source: NSE, Media Releases

An aggregate Rs.516bn has been raised via the IPO and FII route alone. Though the state of the Indian markets and the economy look positive, a few concerns are flagged by foreign and Indian investors. The top most concerns are European debt crisis (Restructuring of the Greek debt looming in the near future), RBIs ongoing aggressive monetary tightening stance, domestic currency strengthening against the dollar and the Indian economy being regarded as expensive (compared to its emerging market peers)*.

Apart from these factors and pressing issues, the Indian economy backed by robust domestic consumer and capital demand will help Indian stock markets sustain an upward trajectory.



2. Economictimes

3. TheHindubusinessline


5. Robert Parker, Senior Advisor Credit Suisse, ET interview –, dated 18 Sep 2010 – *According to a few global economists the Indian stock market is more expensive compared to other emerging markets such as China, Brazil and Russia based on the P/E multiple.  (Link: http://economictimes.indiatimes.com/opinion/interviews/Foreign-investors-positive-on-India-Robert-Parker-Credit-Suisse/articleshow/6579953.cms?curpg=1)

Disclaimer: The article is a compilation of the thoughts of the author. In case your views differ from the article please feel free to comment.

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The Wholesale Price Index (WPI) inflation – headline figure continued to hover around ~10% in May and Jun 2010 more or less stable at ~10% with a increase in Jun 2010. The WPI has been continuously on the rise since October 2009 easing a tad in May 2010. The main drivers of inflation continue to remain higher food prices (supply side constraints) followed by a recent increase witnessed in the manufacturing prices and fuel prices.

1. Food inflation clocked an average of 16% – 18% during Apr – Jun 2010, however, indications of a normal monsoon have slightly eased the supply situation and brought the figure down to around 12%-13% in early Jul 2010. The Government expects that a good monsoon will help increase agricultural output (to a great extent) and ease food inflation to single digits over the coming quarter.

2. However, lately fuel and manufacturing inflation figures have emerged as an area of concern with production costs witnessing a steady rise (owing to a robust growth in industrial output). Iron and Steel prices have risen substantially (~20%y/y) exerting pressure on capital intensive industries and automakers. Similarly, fuel prices have increased 13%-14%y/y.

3. Three factors a) tight market liquidity conditions – owing 3G mobile spectrum payments b) concerns over Europe’s debt crisis and c) increasing retail fuel prices are holding the RBI from undertaking an aggressive policy action.

Adding to the existing woes, a recent report about a dip in the bank deposit growth rate that grew 14% y/y in Jun 2010 compared to 22%y/y Jun 2009 has worsened the situation further. The dip mostly attributed to deposit withdrawals worth Rs.400 billion (US$9 billion) by Telecom companies to pay for 3G licences followed by loans undertaken to the tune of Rs.600 billion (US$13 billion). This temporarily drained Rs.1,000 billion (US$23 billion) out of the system indicating a minor liquidity crunch in the near term.

Over the coming months, credit demand is expected to outstrip deposit creation. Coupled with SLR investments and CRR requirements this gap will increase further. RBI and banks are proactively looking into the situation and are devising methods to avert the situation. Banks are increasing their deposit rates shortly to provide incentives to customers – in a move to increase deposit growth. RBI’ s move to increase repo and reverse repo rates by 25 bps and 50bps thereby making loans dearer with an aim to bring credit demand in line with deposit growth.

However, RBIs stance might affect the future credit growth and affect economic growth to some extent. Thus, a rising inflation rate continues to remain a key threat to the Indian economy.

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The government has continued its focus on modernization, expansion and development of infrastructure (roads, ports, airports, railways and power) to maintain a steady pace of economic growth at 8-9%. The enhanced budget allocations led to an increase in the infrastructure projects/orders allotted to private and public infrastructure companies generating a growing need for funding the undertaken projects.

1.1. Widening gap between Infrastructure allocations & investments:

With the positive news flowing in to the Infrastructure sector in the form of budget allocations and supportive measures announced by the government, Infrastructure companies have received boost. Financial Budget (2010-11) brought cheer to the Infrastructure sector companies as the plan allocated 47% (Rs.1,786,820 million – incl Power/US$400bn) of the total budget to Infrastructure development. Road transport accounted for a major portion (11%) of the total Infrastructure development budget followed by Railways (9%).

Infrastructure spend break up:

Particulars Rs.mn % of Total
Road 198,400 11%
Rail 167,520 9%
Ports 19,360 1%
Airports 95,880 5%
Power 51,300 3%
Other Infra (Telecom) 1,253,820 70%
Total 1,786,820 100%

Source: Budget FY2010-2011

Budget coupled with the recent announcement of the 12th infrastructure investment plan confirmed the upside in the sector as the investments are expected to double from the existing 11th plan infrastructure investments* (Rs.22,500 billion/ US$500bn) to Rs.44,500 billion (US$1,000 bn) reinforcing the infrastructure growth story. Of the total investment figure around 40-50% of the 12th Infrastructure investment plan (US$1,000 billion) will be financed by the government and the remainder by the private sector.

Despite the increased 12th investment plan there exists a wide gap between the expenditure to be incurred and the financial investment to be made in the sector with this gap increasing continuously.

1.2. Order Book: On the rise

The Infrastructure companies are expected to witness a substantial increase in their order books by around ~30-40% in FY11. Companies are competitively bidding for tenders and their order books indicate that the number of projects undertaken is increasing steadily. L&T, HCC, Gayatri Projects, Nagarjuna Construction, GMR Infra, IRB Infra, NMDC, NTPC, etc expect their order books to rise substantially to Rs.2,500 billion (US$55 bn) given the continued buoyancy in the Power, Oil & Gas and Infrastructure sector.

The table below indicates the current (FY2010) and expected (FY2011) order book figures indicating an upward surge in the infrastructure projects.

Co. name OB FY10 (Rs.mn)) OB FY11 (Rs.mn)
HCC 188,000 250,000
L&T 695,000 938,250
IRB Infra 89,590 134,925
IVRCL 234,000 320,000
GMR Infra* 32,000 64,000
Gayatri Proj 62,500 81,250
Nagarjuna Const. 153,700 199,810
IL&FS Trans & Networks 120,000 150,000
Reliance Infra* 192,600 250,500
Sadbhav Engg 72,000 108,000

*GMR Infra – EPC (Engineering, Procurement & Construction) order book, Reliance Infra -EPC order book. This is an indicative list of the companies in the Infrastructure space.

The Infrastructure sector is capital intensive in nature and is often faced with shortage of funds- for project completion. Though the government provided stimulus (working capital needs) to the companies; this was inadequate without private sector participation. This gave rise to a widening gap between the budgeted infrastructure allocations (resulting to increased orders) and funds for the capital expenditure (working capital needs of these companies). To reduce the funding deficit, infrastructure companies adopted a number of fund raising routes (Debt financing- primarily debt raised via Bank Credit, External Commercial Borrowings ECBs, Non-Banking Finance Companies, etc. and Equity financing via PE – private equity, Qualified Institutional placements, IPOs – Initial Public Offering/FPOs – Follow on Public Offers, FDI – Foreign Direct Investment, etc.) to ensure smooth completion of their projects.

1.3. Finance raising initiatives:

In order to fund projects, companies primarily approached banks and NBFCs. However, owing to the global financial crisis, the supply of credit to the sector was marred with most of the projects put on hold or delayed substantially.

However, during 2009 funds started trickling in the sector with companies’ increasingly borrowing debt from domestic banks. Borrowing slowly spread to loans availed from foreign markets as overseas debt could be raised at cheaper rates (loans at 9%-10%) compared to Indian banks. However, the recent European crisis triggered a second round of credit crunch causing an increased dependency on Indian bank and NBFC debts.

Debt-laden Infrastructure companies:

Infrastructure Companies financials are highly debt laden with mounting borrowing costs. A Major part of the debt (- short term in nature) used to fund working capital requirements (in contrast to other industries where debt is used to finance capital expenditure) is also used to finance BOT (– build, operate and transfer) projects that typically have a debt/equity ratio of 2:1. This increases their level of the working capital requirements on a regular basis.

Additionally, government contracts form a major portion of company order books resulting to delayed realisation of projects. Intensive working capital needs coupled with high gestation periods tend to lengthen the overall capital cycle. This leads to an increased need for working capital resulting to extension of existing loans with no incremental returns.

1.3.1 Debt route:

With reference to the 12th Infrastructure investment plan Infrastructure companies are expected to raise approximately 50% of the total US$1,000 billion via the debt route. Traditionally, Infrastructure companies raise approximately more than 60%-70% of their funding needs via debt. This has been steadily increasing over the past years with an increased project pipeline.

A few examples of debt raised during the recent period are listed below,

  • Hindustan Construction Company (HCC) raised Rs.1,000 million (US$22m) from J&K Bank (The Jammu & Kashmir Bank) for its hill city project – Lavasa.
  • IRB Infra has raised debt worth Rs.25,990 million (US$578m) with a consortium of financial institutions (IDFC, Canara Bank, Bank of Baroda and Union Bank of India) to fund four projects (Pathankot-Amritsar BOT project, Jaipur-Deoli project, Talegaon-Amravati BOT project and Panaji-Goa BOT Project).

The companies are highly debt laden and are expected to continue on the same path. Adding to existing woes, companies face constraints while obtaining domestic debt re-financing through ECBs (As Indian investment laws do not permit ECB debt re-financing) further narrowing down their borrowing options. Continuously mounting debt needs (to finance new projects and re-finance existing debt) and the tight situation of global credit availability urged companies to look at options other than debt.

As a move in this direction, companies extended their finance raising options to equity financing via primary and secondary stock markets, PE and QIP routes.

Buoyant domestic stock markets since early 2010, assisted infrastructure companies to raise a substantial amount via the equity financing route.

1.3.2 Equity route:

Funds raised by corporates during Jan – Jun 2010  in the Indian primary markets via IPO and FPO route increased manifold compared to the same period last year.

Till date, in Jan-Jun 2010 two Infrastructure FPOs raised a total Rs.100 billion (US$2.0 bn).

FPO Name Amt. raised (INR billion) Amount raised(US$ million)
REC 8.83 192
NTPC 84.80 1,850
Total ~ 100.0 2.0

Source: BSE, NSE, Media Releases

Overall, Infrastructure IPOs helped raise~ Rs.62 billion (US$1,500 million) during the period Jan-Jun 2010 and through the PE and QIP route the companies raised approximately Rs.1 billion (US$23 m).

The tables below show an indicative list of the IPOs, PE and QIP deals during the period.

List of IPOs/FPOs during Jan 2010 – Jun 2010

Company Name Amt raised (INR million) US$ million Subscription (No. of times)
REC (Rural Electrification Corp) 8,825 192 3.1
MBL Infra 1,020 23 1.3
Hathway Cable & Datacom 7,350 160 1.3
IL&FS Transportation Networks 7,000 152 33.4
Aqua Logistics 1,500 32 1.9
MAN Infraconstruction 1,410 31 62.3
ARSS Infrastructure 1,200 26 47
SJVN 10,790 240 6.6
Jaypee Infratech 22,500 500 1.2
Total ~62,000 ~1,500

Source: BSE, NSE, Media releases

List of PE (Private Equity) and QIP deals during Jan 2010 – Jun 2010

Deal Particulars Type US$ million
Temasek Holdings invested in GMR Energy (GEL) PE 200
GMR Energy (GEL) raised capital from investors led by the IDFC Group for its energy expansion plans PE 103
Allcargo Global Logistics (AGL) raised Rs.1,000 million through QIP QIP 23
Helion, Foundation Capital and IFC invested in Azure Power PE 10
International Finance Corporation (IFC) invested in Husk Power Systems PE 1.3
Saudi BinLaden Group (SBG) acquired 20% stake in Maytas Infra for Rs.3 billion PE 67

Source: Media Releases – These are a few selected deals during Jan-Jun 2010

The companies have been able to raise a fair amount of finance via the equity route and are increasingly doing so. The supportive budget announcement provided a boost to the infrastructure sector and has pegged the fund raising momentum in the market.

The companies that raised money through the equity route have received an overwhelming response (from the market with majority of the issues ending with oversubscriptions) laying ground for their peers to follow suit.

Riding the positive wave:

Riding the positive wave in the market, the infrastructure sector is abuzz with forthcoming IPOs, PE funding, QIP deals such as

  • HCC plans to raise around Rs.20 billion (US$444m) through an IPO for its unit Lavasa in FY11
  • IRB plans to raise around Rs.12 billion (US$267m) through a proposed QIP issue. This is in line with its step to support its balance sheet to win big orders from NHAI & State highway projects.
  • GMR Infrastructure stated that PE firm IDFC Private Equity Fund III, and four other investors agreed to invest Rs.4,650 million (US$ 99.63 m) in its unit, GMR Energy.
  • GMR Infrastructure, the infrastructure and power subsidiary of diversified GMR Group, plans to raise Rs.50 billion ($1,111 m) via equity route
  • ICICI Venture, the PE arm of lender ICICI Bank, plans to launch a Rs.22,500 million (US$500 m) fund by Jul 2010 to invest in infrastructure projects.
  • Larsen & Toubro Ltd (L&T) plans to launch a PE fund to invest in Indian power and road projects. The fund size is expected to be in the range of Rs.13,500 million (US$300 m).
  • SEW Infrastructure, an engineering, procurement and construction (EPC) company in Hyderabad, plans to raise Rs.1,520 million (US$33.7 m) from Jacob Ballas PE.

Overall, the deals above are expected to raise Rs.124 billion (US$3 bn) in the near term indicating that Infrastructure companies are actively moving out of the traditional realms of debt and venturing towards new financing options.

Though equity has been an expensive source of capital, companies are still exploring the area as they expect to sustain a good level of business growth over the coming years.

Going forward, fund raising activity will gather steam offering PE firms, domestic and global asset management companies and many other financial institutions a tremendous upside to participate in the infrastructure growth story.

* Footnote:

The government invested around ~US$350 billion in the infrastructure sector in the 11th plan (2006-2010). And the private sector, invested worth ~US$150 billion (- 30% of the total 11th planned infrastructure investments worth US$500 billion). The infrastructure investment target of the 11th plan was achieved with investments in telecom, airports, oil and gas pipelines sector exceeding the targeted figures. Looking at the buoyancy in the past it is expected that the same level or a higher level of investments will continue to flow in the infrastructure sector in the 12th plan.


  1. Annual report of Infrastructure companies
  2. Economic Times
  3. Business Standard
  4. Budget speech 2011
  5. 11th & 12th India Infrastructure Investment plan
  6. BSE, NSE
  7. VC Circle website
  8. Media Releases

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