Bumpy road ahead for infrastructure sector; H2 outlook negative: Report

MUMBAI: India Ratings has maintained a negative outlook for the infrastructure sector in the second half of 2013, citing the current unfavourable macroeconomic variables and project-level challenges.

"The slowing economy will have a negative impact on transportation assets, particularly those in early ramp-up stages. Road and port projects continue to be plagued by execution challenges and poor traffic, while a sizeable number of power projects continue to be impacted by fuel shortages, execution bottlenecks and weak off-taker quality," the rating agency said in a report released here today.

This, the report said, will constrain the sponsors' ability to raise equity, which in turn will pressurise weaker projects, especially those with frail financial structures.

India Ratings, however, added that "the long-term credit fundamentals for infrastructure projects remain protected, underpinned by favourable demand trends due to the massive infrastructure deficit in the country. But pain points over the next 6-12 months are unlikely to materially subside."

Noting there was near four-fold rise in the number of companies with a negative outlook since December last, the report said as of July 15, as many as 21 per cent of firms in portfolio carried a negative outlook. This is a massive jump from 8 per cent in December 2012.

With already 39 per cent of the firms rated by it having 'Ind BBB-' or even lower ratings, the report warned that any further worsening of the economic variables beyond those factored in could lead to pressure on rating levels.

However, the report also noted that there have been some rating upgrades as well, as a few companies addressed their risks leading to improved cash-flows.

A combination of project-level failures and negative macroeconomic conditions has contributed to the deterioration in credit profiles, which saw around 7 per cent companies' ratings getting downgraded to 'Ind C' or 'Ind D' during the last six months. This reflects defaults in debt service or pending loan recast, said the report.

Eleven per cent companies in India Ratings' portfolio saw project delays due to impediments in land acquisition and issues in obtaining statutory permits for captive coal blocks, leading to a regulatory threat of licence cancellation.

The weak finances of several state electricity boards (SEBs), which are preventing them from signing up long-term power purchase pacts with merchant power plants, is also adding pressure on the sector, the report said.

When it comes to the road and port sectors, the problem is of another nature as the rating agency said that lower-than-expected traffic growth continues to be the single largest rating constraint for toll road and greenfield port projects, which are in the ramp-up phase.

"The low GDP growth is resulting in depressing vehicular growth even on high-density roads. The issues pertaining to land and right of way acquisition continue to magnify completion risks," said the report.

The rating outfit believed that the numerous policy measures unveiled in the recent past are positive for the sector but their impact on credit quality will be felt only over the medium term.

"If translated into quick and effective actions, these measures will help remove impediments to timely completion, improve counter-party credit quality and facilitate induction of strong sponsors. "They will also help arrest further impairment to projects' credit profile and improve rating levels over the next 12-24 months," the report said.