Infrastructure Equity and Firm Performance in India

Abstract

The growing financing requirements coupled with tightening of fiscal purse strings point to the pertinence of market-based finance for infrastructure provision and enhancement. For this, the question of the sectoral performance of infrastructure takes centre stage and this becomes the basis for the present study. The study assesses the risk-return and volatility profile of Nifty Infra, the National Stock Exchange (NSE) sectoral index for the 30 biggest infrastructure firms in India vis-à-vis the broader Nifty 50 for the time period 2010–2018. The study employs the standard financial economic analysis methods of capital asset pricing model (CAPM) and generalized autoregressive conditional heteroskedasticity in mean (M-GARCH) model and finds the sectoral equity performance of infrastructure to be marginally below that of a broadly diversified index. Further, the study analyses the cash flow and leverage characteristics which are imperative factors in medium-term risk-return profile of infrastructure stocks. The disaggregated firm level analysis of 10 select firms reveals that rent-like return does exist for the biggest players in the sector due to past installed capacities, while the subcontracting mechanism percolates to meagre cash flows for smaller players, partly bearing the greenfield risks. This suggests the need for state-induced measures to prop up liquidity in equity trade for infrastructure firms. This would not only enhance the risk-return profile but also mitigate excessive volatility for these heavily leveraged firms.

Risk hedging properties of infrastructure: a quantile regression approach

“…Marzuki and Newell (2021a) and Marzuki and Newell (2021b) used a unique data set of both listed and unlisted infrastructure to examine its portfolio diversification potential to find significant results in favor of infrastructure. Apart from this, two recent studies based on Indian data, Hasnat (2021) and Majumder (2021), found no significant evidence of stable cash flows by infrastructure investments. Similarly, Bianchi et al (2014) explored the separate asset class status of listed infrastructure in the USA and concluded against it.…”

Beyond traditional financial asset classes: The demand for infrastructure in a multi‐period asset allocation framework

“…Numerous recent studies focus on the risk-return profiles of infrastructure and their overall benefits in the investment context (Marzuki et al, 2020). Their performance has been explored not only in the United States (Newell & Peng, 2008), but also in multiple countries, such as Australia (Newell et al, 2011), China (Newell et al, 2009), India (Hasnat, 2021;Majumder, 2021;Singhal et al, 2011), the United Kingdom (Oyedele et al, 2013), or Jordan (Gharaibeh, 2019). Most studies indicate that they offer higher profits and less risk than most liquid asset classes, such as stocks or bonds, but may be outperformed by, for example, private equity (Inderst, 2009).…”

Evolution of infrastructure as an asset class: a systematic literature review and thematic analysis

“…Two recent studies examine the performance of infrastructure using listed Indian data. While Hasnat ( 2021 ) uses a composite Nifty infra index, Majumder ( 2021 ) uses eight different Nifty thematic indices including energy and infrastructure. Based on standard CAPM and M-GARCH, Hasnat ( 2021 ) finds lower returns and lower volatility for Nifty infra as compared to Nifty 50.…”

“…While Hasnat ( 2021 ) uses a composite Nifty infra index, Majumder ( 2021 ) uses eight different Nifty thematic indices including energy and infrastructure. Based on standard CAPM and M-GARCH, Hasnat ( 2021 ) finds lower returns and lower volatility for Nifty infra as compared to Nifty 50. Also, the author concludes that the asset class is more prone to exchange rate changes indicating large foreign investment.…”