Why credit growth in the sector is important
In the previous article, we saw the profitability growth of some segments of India’s infrastructure sector. The profitability measure and sales growth give us a fair idea of a slowdown in various infrastructure sectors. Infrastructure companies require high installment costs. These companies are normally highly leveraged. A highly leveraged company has a higher dependence on debt from banking and financial institutions. A growth or fall in the bank’s credit to any particular infrastructure sector or industry can be a growth proxy in a particular sector or industry itself. In this part, we will analyze growth in bank credit to some segments of the infrastructure sector. The chart below shows bank credit growth of the cement, iron and steel, power, and roads sectors.
Subdued credit growth
The chart above compares year-over-year bank credit growth in the period from October 2013-14 to October 2014-15. There was a fall in bank credit growth in the cement, power, and road sector. However, the pace of credit growth for iron and steel has increased.
Solvency remains stable
The interest coverage ratio is a solvency measure for a company. It is defined as the ratio of the EBIT (earnings before interest and taxes) over the interest expense of the company. A higher interest coverage is desirable. The chart above compares the interest coverage ratio for the electricity, cement, and iron and steel sectors for the first two quarters of fiscal 2016 with the corresponding period last year. The interest coverage ratio has fallen marginally for the electricity and iron and steel sectors. However, the fall in the cement sector from 3.4 to 2.6 is steeper.
India-focused mutual funds
India-focused mutual funds like the ALPS Kotak India Growth Fund – Class A (INDAX) and the Matthews India Fund – Investor Class (MINDX) have some exposure to the Indian infrastructure sector. INDAX’s portfolio holds infrastructure companies like Hindustan Petroleum and Reliance Industries. Some of INDAX’s holdings include large-cap banking companies like ICICI Bank (IBN). The funds also invest heavily in the technology sectors (INFY) (WIT).