Fitch: Outlook for Indian infra sector remains negative

Fitch Ratings says in a new report that the outlook for Indian infrastructure projects remains negative, driven by an expected further increase in macroeconomic challenges and sector-specific stresses.

Fitch expects the ratings of project companies to remain under pressure from equity capital constraints, high interest rates, slowing GDP growth, currency depreciation, fuel shortages, weak off-takers, execution delays for power and prospects of slowing traffic growth for transportation.

The proportion of Negative rating Outlooks in Fitch's portfolio (excluding newly rated projects since December 2011) is 24%, but would have been higher if not for non-contractual sponsor support and the expectation of continued support in many cases. As against this, only 19% had Negative Outlooks seven months ago.

The generally low rating levels have already factored in some of the risks; this cushion contributes to the high level of Stable Outlooks. Rating Outlooks for some of the older projects affected by the above factors may still be Stable in cases where Fitch has already taken sufficient negative rating action to accommodate foreseeable stress. 

Fitch believes that sponsors with stretched balance sheets will 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. Thus, developers may be forced to selectively support projects with a long-term economic value in contrast to their earlier strategy of preserving bank relationships by propping up projects. Such a strategy could trigger some project loan defaults or necessitate debt restructuring programmes.

Power projects will continue to grapple with fuel shortages and weak off-taker utilities. The state-owned Coal India Limited's mandate to sign fuel supply agreements is unlikely to overcome the systemic shortage of domestic coal. Despite the recent fall in global coal prices, power generated from imported coal will still be expensive given financial distress for several off-taker utilities. Also, a weak rupee negates the benefit of falling coal prices.

The economic slowdown could moderate traffic growth expectation for the transportation sector - both toll roads and airports.

In Fitch's view, 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. Government action aimed at removing hurdles to timely project execution, addressing fuel scarcity and initiating sector reforms (e.g., strengthening utilities) could also help preserve the credit quality.

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