India's top 200 companies are set to outperform their Chinese peers despite the country's infrastructure bottlenecks, according to a report by S&P Global Ratings. The reports published today are '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'.
S&P Global Ratings credit analyst Mehul Sukkawala said,
Our analysis 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. This directly affects companies' flexibility to reduce capital spending, generally results in weaker profitability, and eventually shows up in higher leverage, Sukkawal said.
The difference in the size of the private sectors in India and China is significant. Private entities account for about 75 per cent of net debt and EBITDA (earnings before interest, taxes, depreciation, and amortisation) of the top 200 Indian companies, compared with less than 20 per cent 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 per cent of the companies in the sample account for 60 per cent 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, 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.
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, opined S&P.