Axis Infra Index - Index Construction Approach

Primary objective

The primary objective of the Index is to convey a sense of investment conditions in infra sectors and the ability of the segment to draw in capital funds. Therefore, the Index places inordinate weight on funds flows, which after all, is the ultimate outcome of all the underlying conditions, the efficiency in commissioning projects, the regulatory environment, tax incentives, etc.

Indexes, which are similar in nature to the Axis Infra Index, typically represent the opinions of decision makers, investors and other stakeholders collated through primary surveys. However, surveys incorporating qualitative assessments by respondents would probably be too subjective in gauging infrastructure investment conditions.

Components of the Index and associated data structures

Output indicators: The intention is to capture primarily supply side performance of selected sectors. Data availability plays an important role in selection of the indicators. Some indicators also have a demand signal built in, e.g., base and peak load demand shortages in electricity.

Capex proposals and intent: The first stage in project development, this signals the intent of project developers and perceptions of opportunities and latent demand.

Flow of funds: Financial closure is a signal of the commercial viability of the project, even with VGF. Funds flows have been separated into equity and debt components, to reflect the different risks associated with each:

• Equity: Although project finance typically has a 4:1 debt - equity ratio, equity has been given a higher weight in view of the risk characteristic of equity and its role in pulling together debt funds.
• Debt: Bank loans have been the largest source of debt funds for infra projects. However, data on bank credit flows into projects classified as infrastructure by the RBI is only available at quarterly intervals. We have adopted a rule of allocating the quarterly disbursements equally across the three months.
• Equity Market Index: The performances of infrastructure sector equity stocks have also been incorporated through the CNX Infrastructure Index. Strong equity market performance is a likely precursor to higher equity market fund flows to the sector as it is an indicator of attractiveness of the sector.

Commencement of operations: The beginning of operations is a reflection of capacity addition in the system. The beginning of revenue visibility is an important milestone. This is probably the best representation of ground conditions in infrastructure, translating the project implementation pipeline into commercial operations.

Regulatory and policy developments: Because of natural monopoly characteristics, infrastructure segments are amongst the most closely regulated. Due to the non-recourse nature of the project financing, the risks associated with changes in the legal, policy, tax and regulatory environment have a large role in determining commercial viability of projects. While there has been a clear improvement in the policy environment, progress has been incremental and intermittent. The Index incorporates these changes as ordinal indicators in the form of 1, 0 or -1, as a qualitative representation of policy developments.