India's top companies better placed than China's despite infrastructure gap: S&P

SINGAPORE - India's top companies are set to outperform their Chinese peers despite India’s infrastructure bottlenecks, according to S&P Global Ratings. "Our analysis of India's top 200 companies by market capitalization against their Chinese counterparts shows that Government influence is far greater for listed companies in China than in India," S&P says.

Credit Analyst Mehul Sukkawala said: "This directly affects companies' flexibility to reduce capital spending, generally results in weaker profitability, and eventually shows up in higher leverage."

The difference in the size of the private sectors in India and China is significant, S&P says. 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.

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.

“On revenue growth, we expect 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,” S&P says.

“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.

“In our view, poor infrastructure is among the biggest hurdles facing the
Indian Government's ambitious "Make in India" programme that aims to turn India 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.” www.standardandpoors.com (ATI).