Fitch comments on Indian Construction sector in 2010

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Jan 25 - Fitch Ratings has today said, in a just published Special Report, that it expects the 2010 outlook for the Indian construction industry to be stable, though a significant increase in asset ownership through build, own, operate and transfer (BOOT) projects may lead to some negative rating pressure.

The agency expects the credit profile of construction companies to remain stable in 2010. Revenue growth is likely to remain strong given comfortable order-book positions and expected increases in new orders.

In addition to strong government and power sector spending, a revival of private capex is likely to aid companies in gaining new orders. Margins are expected to remain stable, as construction material costs - especially steel and cement - will be at the same level as last year.

The stability will also be driven by the trend for many companies to move away from fixed-price contracts to ones that incorporate price escalations. Increases in new orders will ease the competitive situation.

The liquidity positions of Fitch-rated companies have improved, with some of them accessing the equity markets. Internal liquidity is also expected to strengthen during 2010, with lower working-capital cycles due to lower receivables.

There was some build-up of government receivables during the general election in 2009; this situation has since alleviated.

However, Fitch expects the FCF position of most companies to remain negative in 2010, due to an expected increase in working-capital requirements commensurate with revenue growth. However, interest rates may rise, driven by inflationary pressures, although the impact is not likely to be significant in 2010.

Factors clouding the rating outlook include customer/project concentration risk, and risks of increases in asset ownership through BOOT projects.

Construction companies have moved toward executing larger projects, leading to higher project and/or customer concentration. As the scale of the companies' operations increases, the proportion of larger projects is likely to grow.

The presence of favourable conditions - lower interest rates and more attractive financial terms - has led to increased participation in BOOT projects. Although these projects are expected to improve future cash flow stability once completed, they are likely to lead to increased leverage and execution risks, especially during the construction phase.

The special report, entitled "India Construction Outlook 2010 - Stable, Although Aggressive BOOT Strategy May Lead to Downward Rating Pressure", is available on www.fitchratings.com