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ROEs in the Infrastructure sector are understandably low, given the
large assets under construction and long gestation periods for
projects that have already been commissioned. Mundra Port stands
out as the only exception to this.
Till FY06, Jaiprakash was the only meaningfully large company within
this group. Over this period, it enjoyed improving ROEs due to
strong growth in construction revenues and strong capacity
utilisation of cement capacities. Since FY07, it has embarked on an
ambitious cement capacity expansion. In addition, the company’s
focus shifted from contracting to asset businesses. Capital invested
in power and real-estate-cum-expressway forays have further
increased asset intensity. As these initiatives are still in execution
phase, JPA’s ROE declined from 24.4% in FY06 to 9.6% in FY11.
While an improvement in cement capacity utilisation (from the
current ~50%) would help improve returns, continuing investments
in the power sector mean that ROEs are likely to remain lower in the
near to medium term.
GMR and GVK have witnessed low-single-digit ROEs due to large
capital investments in their airport projects in addition to power
forays and equity-raising over FY06-10 to fund this expansion.
Commencement of both airport projects should aid improvement in
GMR’s ROEs, while GVK should witness a similar improvement after
completion of the Mumbai airport project in December 2012.
However, recovery in accounting ROEs would be gradual, as large
interest and depreciation costs in the initial phases of an infra project
results in accounting losses / marginal profits.
A sustained rise in capacity utilisation and the operating leverage
therefrom has helped Mundra Port & SEZ to improve its ROE
Higher ROEs over the long term in lieu of low ROEs in the initial
phase of infrastructure business with long gestation periods would
materialise only if the asset developers make the right capital
allocation choices. For example, inherent operational and location
advantages of Mundra Port are now translating into strong ROEs.
However, the recent trend of infrastructure companies buying assets
(Bangalore airport, Abbot Point port terminal) at expensive
valuations does not augur well for sector ROEs.
Overall, the current trend of low ROE is a result of the large and
rapid growth in capital expenditure to build capacity, a large part of
which is still under development. Over FY07-11, gross assets for the
five infrastructure companies grew at an annual rate of 39.6%,
driven by large investments by GMR, GVK and JPA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ROEs in the Infrastructure sector are understandably low, given the
large assets under construction and long gestation periods for
projects that have already been commissioned. Mundra Port stands
out as the only exception to this.
Till FY06, Jaiprakash was the only meaningfully large company within
this group. Over this period, it enjoyed improving ROEs due to
strong growth in construction revenues and strong capacity
utilisation of cement capacities. Since FY07, it has embarked on an
ambitious cement capacity expansion. In addition, the company’s
focus shifted from contracting to asset businesses. Capital invested
in power and real-estate-cum-expressway forays have further
increased asset intensity. As these initiatives are still in execution
phase, JPA’s ROE declined from 24.4% in FY06 to 9.6% in FY11.
While an improvement in cement capacity utilisation (from the
current ~50%) would help improve returns, continuing investments
in the power sector mean that ROEs are likely to remain lower in the
near to medium term.
GMR and GVK have witnessed low-single-digit ROEs due to large
capital investments in their airport projects in addition to power
forays and equity-raising over FY06-10 to fund this expansion.
Commencement of both airport projects should aid improvement in
GMR’s ROEs, while GVK should witness a similar improvement after
completion of the Mumbai airport project in December 2012.
However, recovery in accounting ROEs would be gradual, as large
interest and depreciation costs in the initial phases of an infra project
results in accounting losses / marginal profits.
A sustained rise in capacity utilisation and the operating leverage
therefrom has helped Mundra Port & SEZ to improve its ROE
Higher ROEs over the long term in lieu of low ROEs in the initial
phase of infrastructure business with long gestation periods would
materialise only if the asset developers make the right capital
allocation choices. For example, inherent operational and location
advantages of Mundra Port are now translating into strong ROEs.
However, the recent trend of infrastructure companies buying assets
(Bangalore airport, Abbot Point port terminal) at expensive
valuations does not augur well for sector ROEs.
Overall, the current trend of low ROE is a result of the large and
rapid growth in capital expenditure to build capacity, a large part of
which is still under development. Over FY07-11, gross assets for the
five infrastructure companies grew at an annual rate of 39.6%,
driven by large investments by GMR, GVK and JPA.
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