Infrastructure Equity and Firm Performance in India

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-a-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.