Infrastructure sector outlook negative: Ind-Ra
India Ratings and Research (Ind-Ra) on Thursday reported an overall negative outlook for the infrastructure sector for FY15, considering that most project companies' continued weak credit profiles.
The sub-sectors, however, have a split outlook. The outlook for power projects, barring renewables, remains negative while certain pockets in the transportation sector have a stable outlook.
Contrary to the popular expectation, Ind-Ra does not expect a sharp movement, especially in the short term, in the fortunes of the sector following the Lok Sabha elections in 1HFY15.
However, Ind-Ra believes that policy support from the government will somewhat help the beleaguered sector recover from some of its issues elaborated in the report.
According to Ind-Ra, prolonged uncertainty surrounding economic conditions, over-ambitious traffic estimates and enhanced construction risks (to name a few) have plagued the road sector for some time now.
The expected continuance of the current situation in the near term will continue to be a drag on the project cash flows of toll road assets.
On the positive side, aspects like stable and assured revenue streams from highly rated counterparties and standard maintenance requirements are the dominant reasons for the stable outlook on annuity road projects.
Notwithstanding the numerous measures taken by the government to improve the ailing power sector, Ind-Ra believes that it will take some time, say post FY15, before the full benefits of these measures actually trickle down to power-generating project assets.
The thermal power sector is simultaneously tackling (or at least trying to tackle) a bundle of problems such as lack of adequate provisions in fuel supply agreements, volatility in coal prices, high interest costs, the financial health of off-takers and depreciating rupee.
Renewables on the back of reduced construction risk, stable operating performance and remunerative tariffs provide a silver lining to an otherwise 'dark' sector.
That being said, technological risk on account of limited track record and regulatory risk on possible reductions in tariff cannot be ruled out in the solar power space.
Ind-Ra has revised the outlook on the airport sector outlook to stable for FY15 from stable to negative, due to the progress on completion of expansion plans, regulatory clarity on tariff fixation and sustained growth in international traffic (specially against the headwinds of a weak global economy).
Delayed monetisation of real estate assets and airlines' continued weak financials, though in different degrees, could be a drag on projects' cash flows.
Though minor sea ports are likely to remain largely stable, non-major private ports, which are still in ramp-up stages, are on a Stable to Negative Outlook.
Timely implementation of proposed policy measures would be the key ingredient to revive waning investor confidence towards the sector. A buoyant economy would be more conducive for asset sales, some which Ind-Ra has seen in the recent past, and raising of much-needed equity.
The Outlook report proposes some measures, across sub-sectors, which could be a starting point for the change in fortunes of the infrastructure sector.
(Posted on 13-02-2014)
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