Outlook for infra negative: Fitch

More sector-specific stresses, macroeconomic challenges in store

Fitch Ratings on Monday said there was more pain in store for India’s infrastructure projects, already reeling under delays and regulatory hurdles. Sector-specific stresses and macroeconomic challenges would continue to plague the sector, it added.

The rating agency maintained its negative outlook for Indian infrastructure projects. Ratings of project companies would remain under pressure, owing to various factors, including equity capital constraints, high interest rates, currency depreciation and fuel shortages, according to a Fitch statement.

Slowing economic growth and prospects of slow growth in traffic would also exert pressure on the infrastructure sector. The proportion of ‘negative’ rating outlooks in Fitch’s portfolio (excluding projects rated since December 2011) now stands at 24 per cent, against 19 per cent seven months earlier. And, this would have been higher, if not for the non-contractual sponsor support and expectations of continued support in many cases.

The low rating levels already factor in some of the risks, and this contributes to the high level of stable outlooks. Outlooks for a few old projects might also be stable for cases in which Fitch has already taken adequate negative rating action to accommodate foreseeable stress.

Sponsors with stretched balance sheets would struggle to raise funds for a growing number of construction projects and to support underperforming assets, largely because of the weak and volatile stock market, Fitch stated. Also, developers may be forced to selectively support projects with a long-term economic value, against the earlier strategy of preserving bank relationships by propping projects. This could trigger project loan defaults or necessitate debt restructuring programmes.

Power projects would continue to grapple with fuel shortages and weak off-take utilities. State-owned Coal India’s mandate to sign fuel supply agreements is unlikely to overcome the systemic shortage of domestic coal, the rating agency said. Despite the recent fall in global coal prices, power generated from imported coal would remain expensive, owing to financial constraints of several off-take utilities. Also, a weak rupee negates the benefit of falling coal prices.

The economic slowdown could moderate traffic growth expectations in the transportation sector---both for toll roads as well as airports.

However, lower interest rates, a rebound in economic growth, renewed investor appetite (facilitating equity flows into infrastructure) and a strengthening rupee could help stabilise the credit quality of infrastructure projects, Fitch added. Government action to remove hurdles and ensure projects are executed on time, addressing fuel scarcity and initiating reforms like strengthening utilities could also help preserve credit quality.