Financial analysis of infrastructure companies in India

Abstract

Infrastructure, a collective term used for the power, water, telecommunication, land and water transport ways, air and sea ports, oil and gas supply network etc. has been considered a public good with governments having major responsibility for their creation and upkeep. Infrastructure assets require massive investments and businesses set up to manage them are viewed as the backbone of economy. Although infrastructure development has remained a priority of the successive governments, there exist huge gaps in each of its sub-sectors. Planning Commissions reports suggests that due to lack of adequate infrastructure Indian economy has grown 2% less than its actual potential. It not only effected domestic economic activities both in rural and urban areas, but also has an adverse impact on foreign direct investment flow in the country. These all factor led the Government to increase investments in infrastructure projects from the initial 5% to 9 % at the terminal year of the current Five Year Plan, in addition to increased focus on private sector participation in public private partnership mode. It is now widely accepted that Government alone cannot meet investment requirements of the infrastructure sector and active private sector participation would be essential. However, returns commensurate with the associated risks and also addressing governance system related rigidities are a prerequisite for attracting private investment. The past performance of the infrastructure companies is a key indicator of the benefits of being engaged in this sector. Towards this end, the dissertation attempts sub-sector wise financial analysis of major infrastructure companies for their performances over a 10 year period. Analysis has been done for representative infrastructure companies from construction (69), infrastructure engineering (13), maritime (17), power (22), and telecom (10) sub-sectors. The specific aspects examined include sector wise risk and return analysis, impact of 2007 financial meltdown, performance comparison with Indian Industry, and performance of infrastructure stocks with respect to overall stock market. The financial ratios examined include return on equity and return on net worth and coefficient of variation is examined for risk reward relationship. The analysis indicates significant growth in the aggregate performance of all infrastructure sub-sectors during last decade, albeit there was an adverse impact of the 2007 global financial meltdown. The construction, infrastructure engineering and telecom sub sectors recorded significant growth with the construction sector having the highest growth. Profit margins were high for power and maritime sub sectors but were lowest in case of construction sector. The highest average return on equity and net worth were from infrastructure engineering sub sector. In comparison with the overall Indian industry, the returns on assets and net worth from infrastructure were lower. However, risk per unit reward for infrastructure sector was lower than that of the overall Industry average. Further, in equity market, the infrastructure related return was higher, which is a reflection of market confidence in infrastructure stocks. In infrastructure sector the debt was lower when compared to overall industry average. But over the period the debt in comparison to equity has decreased for industry whereas it is showing an increasing trend for infrastructure. There is a need for uniform definition of infrastructure for sound policy formulation, implementation and monitoring. Improvement in governance for prompt and efficient disposal of various clearances and support in land acquisition will be the key for reduction in project delays/uncertainty and thus attracting private investments. Debt to equity is relatively lower in infrastructure sector and there is a scope for increased use of debt. Debt can be raised for financing infrastructure projects. Tax benefits on bonds issued by infrastructure companies could reduce cost of funds to the infrastructure sector. The results suggest that the infrastructure sector being central to country s economic development would require continued government support, for improving its profitability, attracting higher private sector participation, widening its coverage and also matching the overall economic growth requirement.