In a big thumbs up for India, S&P Global Ratings today said that the country’s companies are set to outperform their Chinese peers! According to S&P, India’s companies will be able to beat China’s, despite the country’s infrastructure bottlenecks. The S&P analysis says that “Comparison of India’s top 200 companies by market capitalisation against their Chinese counterparts shows that government influence is far greater for listed companies in China than in India.” S&P Global Ratings credit analyst Mehul Sukkawala is of the opinion that this “directly affects companies’ flexibility to reduce capital spending, generally results in weaker profitability, and eventually shows up in higher leverage”.
S&P’s analysis emerges from two of its reports titled “India’s Top Companies Set To Gain Even As China’s Continue To Feel The Pain” and “The Missing Piece In India’s Economic Growth Story: Robust Infrastructure”. “The difference in the size of the private sectors in India and China is significant. Private entities account for about 75% of net debt and EBITDA of the top 200 Indian companies, compared with less than 20% for the top Chinese companies. Indian private companies outperform both the Indian government-related entities (GREs) and Chinese companies by registering the highest (and relatively stable) returns,” says S&P.
S&P points out that the leverage has peaked for Indian companies overall but continues to increase for Chinese GREs. “At the same time, India faces the risk of debt concentration. About 15% of the companies in the sample account for 60% of net debt. India also suffers from a high interest rate environment when compared with other emerging Asian economies. This reduces the debt servicing ability of leveraged companies in India and can result in financial stress,” S&P cautions.
On the revenue growth, S&P expects the performance for India’s top companies to improve over the next two to three years, even though revenue growth for companies in both India and China has been trending down. “A better operating environment with increasing government spending and a likely improvement in the domestic economy will support growth. But much of the improvement in operating conditions in India could depend on its infrastructure, which remains inadequate,” the agency adds.
S&P is of the view that poor infrastructure is among the biggest hurdles facing the Indian government’s ambitious “Make in India” program that aims to turn the country into a top global manufacturing destination. “Besides, robust infrastructure development can provide a boost to many sectors, including steel, cement, auto, and real estate. India’s power infrastructure, traditionally a weakness, seems to be turning a corner in the generation and transmission sector. But transportation infrastructure still faces overwhelming capacity constraints,” says S&P.
“India’s transportation infrastructure sector could significantly benefit from a stable regulatory environment that has an independent regulator, appropriate dispute-resolution mechanisms, and supportive, comprehensive policies,” said S&P Global Ratings credit analyst Abhishek Dangra. “These are the same factors that underpin the improvement in power generation and transmission even though distribution remains a weakness due to the huge accumulated losses of distribution utilities,” adds Abhishek.
S&P believes execution capability will remain the biggest challenge for transportation infrastructure projects in India even if the government leads the initial spending. “The government is scaling up spending, but its heavy debt burden could derail its ambitions to improve public infrastructure. It will thus need funds from private sector investments unlike China, which has largely state-funded infrastructure,” it says.