S&P expects India to lead infra investments in South Asia: Key highlights

South and south-east Asian (SSEA) countries will see the emergence of strong regional infrastructure companies given the spending growth in these economies, said ratings agency S&P.

According to S&P Global Ratings, some of the world's most intensive infrastructure investments will take place in SSEA countries and, therefore, capital expenditure (capex) will be a key driver of credit ratings among infra players.

The Indian infrastructure companies will deleverage even as they maintain elevated capex levels as many will see rising cash flows on the back of new capacity additions, said S&P. As a result, the average ratio of debt to EBITDA from 2018-2020 is expected to fall below 5x.

Utilities are scaling up to plug power deficits and improve electrification in India and Indonesia, said the report. It quotes an Asian Development Bank estimate that the SSEA needs to spend $9.5 trillion on infrastructure from 2016-2030, which includes expenditure to deal with the effects of climate change.

The report said credit profiles would hold up for companies operating in sectors with strong regulations, or those with balance sheets that can withstand higher capital expenditure. “Indeed, given the strong growth compared with peers', we think strong regional infrastructure majors can emerge in the region.”

The stable outlook for most of S&P’s 24 rated infrastructure companies in South and Southeast Asia largely reflect expected regulatory stability. Adani Transmission and power company PT Pelabuhan Indonesia III (Persero) are the only ones among the 24 that have a negative outlook. India’s GMR Hyderabad International Airport is the sole company with a positive outlook. The remaining 21 including NTPC, PowerGrid, Delhi International Airport and Tata Power have stable outlooks.

S&P estimates leverage would rise for the Indonesian infrastructure companies and fall for the Indian companies, on an average. “We expect sector companies in Singapore, Malaysia, Thailand, and the Philippines to maintain stronger credit profiles and lower leverage than those of Indian and Indonesian peers. Downside risks include negative regulatory surprises and or leverage deteriorating beyond our expectation to fund capex,” said the report.

The more highly leveraged companies will be more vulnerable to regulatory risks besides rising interest rates or lower-than-expected revenues. Infrastructure majors with ratios of debt to EBITDA above 5.5x and companies using a high proportion of debt (3x or higher than equity) to fund new investments could face financial pressure.

S&P expects India and Indonesia to lead infrastructure investments in the region. Capex will likely remain elevated in India and rise sharply in Indonesia. “For our rated (24) companies in these two countries, we estimate cumulative capex will exceed $25 billion each over the three years from 2018-2020. In Indonesia's case, this implies a 47% jump in spending from the previous three-year period.”

Across-the-board spending on infrastructure Investments will remain elevated in India because the country has infrastructure deficits across all sub-sectors, it said. Most of the heavy lifting will be done by state-owned enterprises (SOEs). This includes toll roads, where private sector participation has declined in recent years due to disputes and payment delays. Private companies are more active in the power sector, especially in the fast-growing renewables sector.

Government entities plan significant investments in ports and airports, though delays have regularly marred past such initiatives. Despite strong growth and high margins, only a few private players participate in ports and airports, due to their capital intensity and regulatory uncertainty. Widely diverging credit profiles among the Indian infrastructure players reflects varying regulatory and competitive landscapes for different sub-sectors.

With airports, there are no timely or consistent regulations, and this diminishes cash-flow visibility, which weighs on sector ratings. “While our outlook on Indian infrastructure companies is mostly stable, we note that high leverage across the sector leaves limited room for cash flow volatility, without a negative impact on ratings,” said the report.

The region's power utilities will continue to lead capital expenditure, largely on the back of high investment in Indonesia and India. Renewables are set for strong growth from a low base, but financial positions will remain stretched amid aggressive capex and early-stage portfolios. We foresee strong demand supporting the transportation infrastructure sector, but a slower pickup in volume for ports. Trends in capex are likely to be the key driver for any potential revisions in credit ratings but leverage levels are expected to largely remain unchanged as regulatory returns or strong competitive positions will support cash flows.

In India, the power majors are expected to maintain their credit profiles despite planned capital expenditures on the back of already highly leveraged balance sheets.

"Nevertheless, we believe financial pressure on companies including NTPC Ltd. (BBB-/Stable/--) and Power Grid Corp. of India Ltd. (BBB-/Stable/--) is mitigated by supportive regulations that provide good certainty on cash flows. India has a good track record of fine-tuning regulatory returns as conditions warrant; though any sharp deviation in the regulatory reset due in 2019 could create uncertainty in cash flows.”

 

FOCUS ON INFRA

• With spending on the rise, South and south-east Asian (SSEA) nation to see emergence of strong regional infra firms
• Indian infra companies will deleverage even as they maintain elevated capex levels, S&P said
• Because many of India’s infra firms will see rising cash flows on new capacity additions 
• According to Asian Development Bank estimates, SSEA needs to spend $9.5 trillion on infra from 2016-2030, which includes spending to deal with the effects of climate change