FY19 Infrastructure Outlook: Light at the End of the Tunnel, Outlook Revised to Stable

The infrastructure sector is showing signs of stability, although pockets of stress still linger, says India Ratings and Research (Ind-Ra).

The agency has revised the outlook on the sector to stable for FY19 from negative in FY18 with visible improvements in toll roads and wind projects. The outlook for telecom has been revised to negative-to-stable from negative. The outlooks for thermal power (project level), oil and gas (including city gas distribution), power (corporate utilities), ports and airports remain unchanged.

Ratings to Remain Stable: Ind-Ra expects its portfolio ratings to remain largely stable during the course of FY19. Toll roads, where pressure points existed during FY17, have exhibited visible improvements in 2018. While the wind sector continues to exhibit underperformance, protection from fixed capacity charges and built up of reserves provide stability to the ratings. The telecom sector, however, continues to exhibit significant pressure on its average revenue per user despite industry consolidation. Ind-Ra expects FY19 to remain a challenging year for incumbent telecom operators as reflected in Negative Outlook on the ratings.

Consolidation to Continue: Given the stress the infrastructure sector has gone through and is still in the midst of resolving, Ind-Ra believes the consolidation trend would continue over the next 12-18 months. Consolidation is by and large completed in the telecom sector; renewables could see some further consolidation during FY19. Some toll roads with stressed engineering, procurement and construction entities have been acquired by stronger foreign players, this could continue in FY19. The resolution of stressed assets under the ambit of National Company Law Tribunal may also drive consolidation in toll roads and thermal power. The oil and gas sector could see a phase of consolidation within public sector enterprises to establish larger entities.

Competitive Intensity to Remain High: Significant competitive intensity has been witnessed in bidding of solar and wind projects. Although the bids will see continued competition in solar, the tariff could inch up if the safeguard duty is implemented and solar panel prices firm up. The telecom sector is still trying to adjust to aggressive pricing of Reliance Jio Infocomm Limited. Ind-Ra believes return of pricing power is uncertain and would be dependent upon complex factors such as Reliance Jio Infocomm's pricing and consumer reaction to tariff increases. The return of pricing power, although crucial, appears difficult in FY19.

Structural Issues Overhang Remains: Ujwal DISCOM Assurance Yojana paves way for transfer of debt load to state balance sheets and gradual improvements in technical parameters. Although credit profile of some states has exhibited marked improvements driven by lower aggregate technical and commercial losses, better power purchase cost management, tariff hikes and volume growth, payable period for other states has either remained static or deteriorated to the power producers. Notwithstanding the renewable power forecasting and scheduling, states continue to resort to grid curtailments for high cost renewable power. This approach is not scientific because these costs are factored in while arriving at the current tariffs.

In the backdrop of moderate demand growth, proliferating renewable capacity and modest thermal capacity additions, several states have surplus power tie ups. Despite broadening of economic recovery, this position would continue in FY19 and plant load factors would remain close to 60%.

City gas distribution would remain favourably placed driven by the highest priority accorded in the domestic gas allocation policy, favourable regulatory regime, competitive pricing in relation to alternate fuels, and government's direction of moving towards cleaner fuels. Petrochemicals are likely to form a healthy proportion of the overall profitability of the refiners, as they look at converting a part of their output into petrochemicals, driven by an expectation of growth in polymer demand and long-term expectation of slowing demand growth in petrol and diesel, as electric vehicles and compresses natural gas powered vehicles increase their share.

Bank Appetite to Improve; Bond Market an Alternative: The recent recapitalisation of the Indian public sector banks is likely to provide some push to credit growth in the infrastructure sector. While Ind-Ra believes that most of the capital would be consumed for meeting provisioning and migrating to Basel III requirements, it would still aid additional funding of infrastructure projects in toll roads and solar power, with corporate utilities (regulated power and oil and gas entities) continuing to have access to both bank and bond markets. Some of the project level entities could also tap the bond market either on their own or with credit enhancements. Risk aversion to certain sectors such as thermal power, wind energy and telecom would keep banks selective in terms of their additional exposure to these sectors.

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