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«“A STUDY ON FUNDAMENTAL ANALYSIS OF INFRASTRUCTURE INDUSTRY IN INDIA” / 187 of Asian Business Management Vol. 3, No. 1, January-June 2011: ...»

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of Asian Business Management

Vol. 3, No. 1, January-June 2011: 187-204




Director, Roorkee Collage of Management and Computer Application, Roorkee


Director at OIMT, Rishekesh, Uttrakhand.


PhD in International Marketing, Director at Lucknow Infrastructure Industry in India have been experiencing stupendous growth in its diversified sectors with the development and growing urbanization and increasing involvement of foreign investments in this field. The current scenario of Infrastructure industry in India is positively concerned of developing and creating better Infrastructure to provide benefits of those to the general public for their living standards, wellness and aims to know that Infrastructure companies are better in growth and how customers know about to invest in better Infrastructure company. This study is an attempt to analyze the various factors of the industry like cost structure & profitability, government policy, competition, labour & R&D and economic factors like foreign exchange position, inflation, interest rate, deficit slowdown & taxation whether it impact on the fundamentals of the company or not.

Keywords: Investors; Rational; OPM; NPM; EPS; DER; ROA; PE; DPS; DPO; CR; ROI; PE;

Infra; ANOVA.


This study is an attempt to analyze the various factors of the industry like cost structure & profitability, government policy, competition, labour & R&D and economic factors like foreign exchange position, inflation, interest rate, deficit slowdown & taxation whether it impact on the fundamentals of the company or not. The core objective of this study is to evaluate the past performance and the expected future performance of companies, to analyze the profitability position of the companies and to analyze the various ratios of the past five years of sample companies based on market capitalization.

The present study adopts analytical and descriptive research design with convenience sampling based on the secondary data collected from the annual reports and the balance sheet, published by the companies’ respective websites. Five Infrastructure companies are chosen as sample size of the study, on account of having lowest market capitalization Tools for Analysis Ratio Analysis: Ratios have been calculated for past five years for the purpose of analysis.

Ratios being designed are named as: Earning Per Share (EPS), Operating Profit Margin


(OPM), Net Profit Margin (NPM), Debt Equity Ratio (DER), Return on Assets (ROA), Price Earning Ratio (PE),Dividend Per Share(DPS), Dividend Pay Out(DPO),Current Ratio(CR), Return On Investment(ROI),Price Earning Ratio(PE) Analysis of Variance (ANOVA): The statistical tool that is used for testing hypothesis and interpreting the results is one-way Analysis of Variance (ANOVA).


In present global world infrastructure is a sighing of nation success and development and India is emerging as late leaders by denoting “you have seen the crowed now see the leaders”. With government effort in development of urbanization and involvement of foreign investments Infra Industry in India is growing at a gradual pace in its different sectors. Considering the importance of infrastructure the government of India has taken initiatives to develop the infrastructure sector, with major emphasis on construction, engineering, IT, entertainment, textiles, food, and utility etc. The Infrastructure industry in India is highly fragmented and has about 300,000 construction companies operating nationwide and reported an estimated growth of 6.78% year-on-year in 2006. The government has allowed 100% foreign equity in the construction industry. Among the major infrastructure projects are the US$7-8bn India-Iran gas pipeline, the US$2.8bn construction of two power plants, the US$2.3bn power project in Tamil Nadu, and the US$ 977 41 million of National Highway Development Programme etc. In addition to these projects GOI plans big push for infrastructure in 2010 onward. To compete globally government is planning a raft of new strategic efforts to pitchfork investment in infrastructure to about 9 per cent of GDP in the coming five years in comparison to 4.5 per cent of GDP currently. An estimated investment of 500 billion US dollars is required to upgrade India’s highways, ports, airports, and power and telecom infrastructure to compete international standard in the next five years. This is more than 10 times of the current level of investment in infrastructure projects (H. Times).

In India Heavy Engineering Industry play important role and is one of the largest segments of Infrastructure Industry. It embraces complete range of industries such as Turbines, Generators, Heavy Electricity Machinery, Transformers, Switchgears and Textile Machinery etc. all of which are essential infrastructure for the development of industrial sector. For effective and efficient industrial development the utility commodities like the switchgear and control gear, air circuit breakers, MCBs, switches, rewire able fuses and HRC fuses with their respective fuse bases, holders and starters are produced.

Construction machinery, diesel engines, tractors, transport vehicles equipment for irrigation projects, cotton textile and sugar mill machinery are other manufactured objects of great demand of the Infrastructure Industry. In addition to this there are some major strategic areas where these are in use are the petrochemical complexes, chemical plants integrated steel plants, multi-crore projections for power generation like nuclear power stations and, non-ferrous metal units etc. In India BHEL are undisputed leader in engineering and manufacturing sector and manufacturing over 180 products under 30 major product groups and catering the core sectors of the Indian Economy.

The GOI has set a growth rate target of 9 per cent for Eleventh Plan with emphasis on a broad-based and comprehensive approach that would lessen inequalities across


regions and communities and improve the quality of life for all. In Eleventh Plan period total investment in infrastructure is estimated to be around US$ 494.43 billion. Center share of investment is expected to amount US$ 166.59 billion and state government is expected to invest US$ 128.95 billion. Total public sector investment is expected to be around US$ 296.11 billion. Private sector will play the lead role in investment and is expected to account for over 65 per cent of total investment in telecom, ports and airport sectors during the Eleventh Plan. Improvement in rural infrastructure is one of the chief indicators of a nation’s development. To maintain balance development in nation the government is also likely to announce a new package for rural roads by providing an additional US$ 1.02 billion under the existing Bharat Nirman programme, Out of the total projected investment of US$ 301.37 billion to be incurred by the centre and the states in the Eleventh Plan, US$ 85.53 billion would be spent entirely towards improvement of rural infrastructure. Moreover; the World Bank has said that it will lend US$ 14 billion to India by 2012 for infrastructure development.


A survey of literature shows that a large numbers of researchers have carried out extensive research in the field of Fundamental Analysis, John Colnan, Mark P Bauman, Cristina Abad, Sten A. Thore, Joaquina Laffarga, Jim Berg, Frank Shostak Kotrappa, Dominic Crag, Ben McClure, Ehab Mohamed, Mohamed Azim, and they came up with important findings which became paramount in this arena. How ever most of the studies done in advance countries like UK, USA, etc. The critical out come of these studies shows that no systematic study has yet been made to test the validity of these important concepts in the context of the industrial undertakings operating in developing nations.

So far as developing nations are concerned no systematic study in this area was conducted and thus the present paper seeks to make a humble beginning in these respects. John Colnan (1994), Senior Research Analyst from SHAN stockbroking’s Research Department, provides some brief pointers on what information to look for and how to make sense of what is available, Mark P Bauman (1996) The study verified its descriptive validity regarding the mapping of accounting numbers into stock prices. This paper identified three major issues associated with practical implementation of the model, the prediction of future profitability, the length of appropriate forecast horizon, and the determination of the appropriate discount rate. Cristina Abad, Sten A. Thore, Joaquina Laffarga (1998) study reveled a predictive information link tying current financial data to future earnings, and a valuation link tying future earnings to firm value. At each step, a large number of causal factors have to be factored into the evaluation. Jim Berg (1999) examined that fundamental analysis looks at the fundamental issues that drive the value of a particular company. These issues include its financial position, its industry sector, and the current economic environment, Kotrappa (2000) slacked that the success of a corporation greatly depends upon sound Financing. When the original financing has been sound, a co-operation has less fear for the future, provided it is given by a competent management Dominic Crag (2002) examines financial trading from the aspect of security selection. There are two main methodologies used, namely, fundamental analysis and technical analysis and examine the practice of fundamental analysis; B.

Vanstone, G. Finnie, and C. Tan (2004) examine financial trading from the aspect of security selection. In practice, it is unrealistic for a financial trader to participate in the


full market of tradable securities, and a selection mechanism must be employed to reduce the number of possible securities competing for investment capital. Essentially, there are two main methodologies used, namely, Fundamental Analysis, and Technical Analysis and examines the practice of Fundamental Analysis, Ben McClure (2004) reveled that each industry has differences in terms of its customer base, market share among firms, industry-wide growth, competition, regulation and business cycles.

Learning about how the industry works will give an investor a deeper understanding of a company’s financial health, Larson and Holz (2005) reveled that fundamental analysis studies reasons of price changes at the macroeconomic level and represents analysis of economic and political conditions in countries or separate industries, Charles Savage and Ken Stand field (2006) depict that, Advances in Fundamental Analysis & Technical Analysis. In the Knowledge Economy, traditional “flat-world” accounting cannot deal with knowledge - its value, importance, or true worth, Chung Yan Yee and Charles Yeah (2006) suggests that there is no significant correlation between firm size and profitability. Large firms, which are endowed with greater resources and prowess, are not guaranteed to be more profitable. However, firm size has some influence on generic strategies, as large firms tend to adopt either a broadly targeted or a non related diversification strategy, Ehab Mohamed, Mohamed Azim (2007) examines the extent to which the disclosed fundamental financial information is transparent to shareholders in Egypt’s stock market. The speed of adjusting market-to-book ratio can fairly be used to examine the issue of transparency and concluded that the disclosed financial information can fairly be used in the course of fundamental analysis in the Egyptian stock market Manual Garcia (2009) provides evidence on the extent to which the quality of human resources is related to the value of accounting variables that are used in fundamental analysis due to their perceived usefulness as proxies for investors’ expectations on the firm’s future profitability and growth in both, earnings and shareholders’ equity.



Fundamental analysis is method of scientific analysis as it tries to estimate the intrinsic worth of the company. It efficiently analyses the basic fundamental criteria of the company like sales, profits and balance sheet studies. It pays deep attention to a company’s debt-equity ratio, earning per share, dividend payout, profit margins, interest, asset and dividend coverage, sales penetration, market share, product and market innovation and the promoters track record. It is conservative, non-speculative approach of evaluating equity shares on value based method and consists of three phases: economic analysis, industry analysis and company analysis. We have analyzed five companies in the field of Infrastructure sector at the basis of Fundamental analysis. In fundamental analysis we find out the comparative balance sheet, profit & loss account of each

company. Five companies as given below:

1. Atlanta

2. Gayatri Project

3. Supreme Infrastructure


4. Unity Infrastructure

5. Pratibha Infrastructure


Operating profit margin indicates how effective a company is at controlling the costs and expenses associated with their normal business operation. This ratio is found out

using the following formulae and in percentage terms:

–  –  –

The operating profit margin of sample companies is depicted in above table and

discussed further:

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