The stable outlook factors in the contracted revenue visibility, long tenor contracts enabling financial flexibility to an extent and improving people traffic and cargo volumes, on the back of a strong economic recovery expectation for FY22
Credit ratings agency India Ratings and Research has revised its overall infrastructure sector outlook to stable for FY22 from negative last year. The stable outlook factors in the contracted revenue visibility, long tenor contracts enabling financial flexibility to an extent and improving people traffic and cargo volumes, on the back of a strong economic recovery expectation for FY22.
Some sectors, such as airports and wind power, will continue with a negative outlook, the agency said, as signs of demand recovery are scarce on the ground. Though infrastructure projects have a long operating period, stressed liquidity could lead to downgrades, especially in airports, metro rail and wind sectors, it said.
Vishal Kotecha, associate director, India Ratings, says, “Pooling of assets is favoured in Indian and foreign markets, as the diversification has emerged as a dominant method of addressing counterparty risk in renewable projects and traffic risk in toll projects. The traction in InvITs (infrastructure investment trusts) and pooled structures is expected to rise by about Rs850 billion in roads and Rs1,000 billion in the energy space over the next one to two years."
Pooling of assets is favoured in Indian and foreign markets, as the diversification has emerged as a dominant method of addressing counterparty risk in renewable projects and traffic risk in toll projects. InvITs have proved to be effective for pooling assets and are attractive for investors, given their governing regulatory structures. Furthermore, infrastructure projects with a stable credit profile are taking advantage of a low interest regime to refinance their loans. Sponsors are also using this opportunity to upsize debt and release funds for further growth.
Solar power will continue to enjoy a stable outlook as they have seen stable operations and an improving counterparty profile in recent years, as more projects have central government agencies as counterparties. Generation variability and payment delays from counterparties continue to weigh on the credit profiles of wind projects. Paragjyoti Saikia, analyst, India Ratings, says, “Wind assets are prone to more vagaries than solar power projects as generation variability in wind is seen at more than 10% year-on-year than that of solar variability generation at 3% year-on-year. Furthermore, reliance on original equipment manufacturers is significantly higher for wind power projects."
Thermal projects with high revenue visibility through long-term power purchase agreements are resilient to temporary stresses. These projects have adequate internal liquidity and better ability to raise short-term funds. The agency expects transmission projects to have stable operations, comfortable revenue collections and adequate liquidity. Revenue visibility through contracts and regulations continue to support the ratings.
The revision in the rating outlook to stable from negative on toll roads is aided by the recovery seen in toll collections to pre-covid levels in October and November 2020. This is led by the fast scale adoption of private transportation modes in 2Q and 3QFY21 and a swift commercial traffic recovery, which provides stability to toll revenues. The agency has revised the rating outlook on hybrid annuity road construction projects to positive for FY22 from stable, because many projects are nearing completion and would see rating upgrades.
As a prolonged international traffic recovery and continuing uncertainties on spread of covid-19 would outweigh the improvement in domestic traffic recovery, airports see their negative outlook persist. In December 2020, domestic traffic had reached 64% of pre-covid level. Ongoing capex by the airports is also placing pressure on cash flows. While the disruption will cause cash flow mismatches for most airports, those with a higher proportion of aeronautical income than non-aero would be witness limited permanent losses due to the regulatory nature of the sector. Metro projects are also likely to continue to suffer because of traffic uncertainty. Traffic recovery is slow because of work from home options, propensity to travel in own vehicles and less travel compared to pre-covid levels. Sponsor support remains a key factor given the high debt servicing requirements immediately after commissioning when the traffic ramp-up uncertainty is also high.