India Ratings and Research (Ind-Ra) has maintained a stable outlook on the infrastructure sector, except thermal power, for FY20 on the back of stable economic growth, which underpins road and airport traffic volumes. Despite reasonable energy demand, fuel supply-related issues and constricted demand restrain plant load factor (PLF) of thermal plants (around 62%).
Stable for Roads: Economic growth-driven traffic and inflation-led toll rates revision support the toll roads sector. In few assets, corridor specific issues such as embargoes on sand/iron ore mining and local political issues dented traffic; Ind-Ra expects recovery to be slower. The agency's sample study of select speculative rating category reveals the need for debt haircuts for debt sustainability as elongation of loan tenor may not offer the desired results.
Given the upfront availability of land in many Hybrid Annuity road projects, large and strong developers' execution efficiency played in their favour with timely or earlier-than-scheduled construction in Ind-Ra portfolio. However, with peak order book to revenue ratio, FY20 would be a litmus test for some developers. While availability-based roads are stable, mushrooming minor maintenance issues and increased oversight standards reinforce timely maintenance. Therefore, financial health of the operation and maintenance operator remains a key monitorable for the investors/developers.
Stable for Airports: The sector continues to witness strong passenger growth (9MFY19: 14.5% yoy), however, capacity constraints at many airports could start affecting their operational parameters. Although the historical average delay in private airport of 30 months in tariff order did not materially dent the revenue, with multi-billion capex on the cards, timely order from Airport Economic Regulatory Authority of India is eminent. Non-aeronautical revenue assumes far greater importance than earlier, considering the limited capacity to accommodate high traffic growth at the four private airports. All airports have adequate liquidity to fund its portion of equity and in some cases the debt drawdown could be lower than originally envisaged.
Positive for Solar: Ind-Ra expects ratings of solar projects to inch up in FY20, especially for projects with strong counterparties, on timely construction completion and demonstration of stable operations. Solar will continue to be the largest contributor towards capacity expansion in FY20, amongst all the sources. The bulk of projects also perform in line with Ind-Ra’s base estimates. Breakthrough in technology can bring the solar tariffs further down, but concerns around land and transmission connectivity may lead to lower-than-targeted capacity additions.
Stable for Wind: Ind-Ra expects 5% underperformance from P90 level on a portfolio level in FY19, but the same is adequately covered by cushions in debt servicing, reserves and other liquidity mechanisms in its rated projects. Geographical and counterparty diversification provides stability to the project cash flows, given the volatility in generations and erratic payment from off-takers.
Stable for Thermal: Plants dependent on availability-based payments will remain at risk of coal availability, given the sticky inventory level of about 10 days across all major plants in the country. Plant load factors are expected to improve marginally, backed by a likely 7% growth in energy demand in the near-to-medium term. The sector may provide reasonable merger and acquisition opportunities in the near future, as many of them are available at a discount in the resolution/bankruptcy market.
Stable for Transmission: Ind-Ra expects stable performance by interstate transmission projects in FY20, backed by demonstrated availably levels in the past, to claim full revenue as per transmission services agreement. However, some underperformance is seen in payment realisation from Power Grid Corporation of India Limited in 1HFY19, and realisation below 95% for the whole of FY19 may have some negative rating implications, if improvement is not seen for a prolonged time period.
