Outlook for Indian infrastructure negative, says Fitch
15 Dec 2011
The outlook for Indian infrastructure projects is negative, driven by a range of sector-specific issues and macro-economic factors with varying degrees of impact on different assets.
According to ratings agency Fitch, these factors are likely to combine to negatively affect the credit profiles of Fitch-rated project companies, beyond levels previously incorporated into Fitch's stress scenarios at the current rating levels. This may lead to downgrades or revisions of Outlooks to Negative of select projects.
Although a majority of the credits are currently on Stable Outlooks, primarily due to many new ratings assigned in 2011, Fitch expects negative rating actions to dominate in 2012.
Besides directly impacting the performance of projects, a slowdown in GDP growth, rising inflation and interest rates, a depreciating currency and a negative investment climate are likely to dilute project promoters' ability to support projects - an important feature in ensuring that default is avoided.
However, Fitch expects operating projects that have established a track record of positive performance, or those that have well-structured off-take arrangements to absorb external shocks and still have stable, or even improving, credit profiles.
While the sector continues to benefit from strong fundamental demand for energy and transportation, the projects themselves are exposed to various risks. However, these risks are incorporated in the low rating levels, which might provide some cushion from very severe rating actions. Overall, Fitch foresees a further deterioration in a variety of already prominent credit risks, with power projects more exposed than transportation projects.
If issues pertaining to land acquisition, permits and systemic fuel shortages are addressed through committed and forceful policy action, completion and operations risks may be mitigated. This would enable infrastructure projects - particularly power - to stabilise their credit profiles. In addition, softening interest rates may provide relief to stressed cash flows.
- Power projects: The sector outlook for Indian power projects is also negative. Many coal-based power projects approaching their commercial operations dates may be impacted by fuel shortages, despite formal linkages. Further, deteriorating finances among state-owned off-taker utilities will pose heightened risks for projects with higher generation costs.
The viability of many biomass projects has been impaired due to a more-than-doubling of fuel costs. If the long-term power purchase agreements with off-takers are not renegotiated, Fitch expects further downgrades of biomass projects in 2012.
- Road projects: The overall sector outlook for Indian toll roads is stable to negative. Toll roads that would enter into the crucial ramp-up phase during a probable prolonged slowdown may be negatively affected, as was seen during the global financial crisis of 2008-2009, when GDP growth was still around 7 per cent.
As most projects suffer from poor initial demand forecasting, external shocks tend to magnify traffic risks. Particular roads dependent on international trade such as port connectivity projects or serving industries catering to export markets could suffer from lower patronage. Projects that are already operational and have established some track record of toll collections are less likely to suffer than those that have not yet started tolling.
- Airport sector: Fitch's outlook for the Indian airport sector is stable to negative. Declining global economic activity and a potential recession in developed economies may adversely affect airport traffic - both passenger numbers and cargo volumes - and non-aeronautical revenue streams such as real estate. Fitch expects this sector to be further impacted by high oil prices, capex cost overruns, the weak financial position of airlines and regulatory uncertainty on tariff setting.
