India Ratings Maintains Stable Outlook for Infrastructure Sector in FY25
India Ratings and Research (Ind-Ra) has maintained a Stable rating outlook for the overall infrastructure sector for FY25, while keeping a Positive outlook on airports. The rating outlook for thermal assets has been revised to Stable from Positive, and for wind assets to Stable from Negative.
The Stable outlook for the infrastructure sector reflects anticipated stable operating performance for most projects, long-term revenue visibility under concession agreements and power purchase agreements (PPAs), and expected improvements in cargo and traffic volumes. Positive factors include growth in electricity demand, leading to higher utilisation of thermal assets, and increasing traffic volumes at airports. Key monitorables include maintaining adequate internal liquidity and receiving timely payments from counterparties. Additionally, the potential impact of rising interest rates due to proposed increases in provisioning norms on borrowing costs remains a concern for projects with thin debt coverage.
Continued Stable Outlook for Solar Power Projects, Outlook Revised to Stable for Wind: Solar projects continue to have stable operations, adequate debt service coverage and comfortable internal liquidity. The capacity addition continued to be strong in FY24 at about 15GW (FY23:12.8GW; FY22:13.9GW). Though the fall in module prices during FY24 is a positive for under-construction projects, they face procurement and pricing risk because of the re-imposition of Approved List of Module Manufacturers effective April 2024, in addition to implementation risks. Wind projects have performed better during FY24, though continue to be marred by generation variability. The net capacity addition in the sector also witnessed traction with 3.3GW added during FY24 (FY23: 2.3GW; FY22: 1.1GW). The revision in Outlook to Stable for wind projects for FY25 reflects a moderate improvement in generation, comfortable debt coverages to withstand a moderate amount of stress on generation and the presence of adequate liquidity.
Outlook Revised to Stable for Thermal Power Projects: The Outlook revision is based on an improvement in the electricity demand, healthy plant load factors (PLFs), improved traction in capacity addition, high revenue visibility through PPAs, the presence of coal cost pass-through feature in imported coal-based PPAs. Thermal power plants’ PLFs have increased in the past three years (FY24: 69%; FY23: 64%; FY22: 59%) and the agency expects PLFs to remain healthy at 70% in FY25. Adequate liquidity and working capital limits are critical to manage increase in costs or some delay in receivables.
Continued Stable Outlook for Transmission (availability-based) Projects: Ind-Ra expects transmission projects to have stable operations, comfortable revenue collections and adequate liquidity in FY25. Revenue visibility through contracts and regulations continues to support the ratings. Counterparty risk exposure to generation entities or renewable park developers for under construction assets till the commissioning of the such renewable assets and receivable trend of intrastate assets are key monitorables.
Continued Stable Outlook for Toll Roads: Toll roads are backed by the economic growth expectation and adequate coverages. Ind-Ra expects a moderation in toll collection growth in the range of 6%-7% in FY25 compared to double-digit growth seen in FY23 and FY24. Impact of traffic from new roads is a key monitorable.
Continued Stable Outlook for Annuity Roads: The agency has maintained a Stable rating Outlook on projects based on hybrid annuity model for FY25. This is because of sustained high competition, significant chunk of projects won by a new sponsor in either under-construction or pre-appointment date stage, persisting land-related issues and lower awarding activity in FY24 and 1HFY25. All these factors could cause developers to aggressively bid for projects leading to a build-up of stress in the sector.
Outlook Positive for Airports: The continued Positive Outlook for airports is based on steady traffic growth and improving non-aero revenues. Ind-Ra expects the prevailing high leverage ratio for rated operating airports to taper down in the next two to three years, post the implementation of a new tariff order. Ind-Ra expects the overall growth in passenger traffic at 10%-12%, driven by an improvement in regional connectivity in India post the introduction of UDAN scheme and robust passenger growth in metro airports. The government’s focus towards the development of greenfield airports has become a driving force of growth, facilitating the addition of significant capacities. The government has so far accorded in-principal approval for setting up 21 greenfield airports, of which 12 airports have been operationalised. The development of these greenfield airports is expected to cater to the increased demand for air travel in many cities.
Continued Stable Outlook for Sea Ports: Ind-Ra has maintained a Stable rating Outlook for sea ports for FY25, supported by a moderate demand in external trade. There was no material impact of the Red Sea crisis on Indian trade between November 2023-March 2024, as alternative routes such as Cape of Good Hope or even land routes were explored to circumvent the impacted transit route. Ind-Ra expects merchandise exports and imports growth to remain stable in FY25. The agency expects the cargo volume growth (major and non-major ports) to remain close to 7% yoy with expected throughput at Indian sea ports cumulative of 1,645MTPA in FY25.
Outlook Stable for Electric Buses: The rating outlook follows adequate delivery track record, sponsor support and operational track record post commissioning. Debtor days are comfortable for Ind-Ra rated entities, though with some instances interim delays. The ratings will be driven by the counterparty profile and the payment profile of counterparties. Idiosyncratic risk in the electric bus sector could be a pain point.
The Stable outlook for the infrastructure sector reflects anticipated stable operating performance for most projects, long-term revenue visibility under concession agreements and power purchase agreements (PPAs), and expected improvements in cargo and traffic volumes. Positive factors include growth in electricity demand, leading to higher utilisation of thermal assets, and increasing traffic volumes at airports. Key monitorables include maintaining adequate internal liquidity and receiving timely payments from counterparties. Additionally, the potential impact of rising interest rates due to proposed increases in provisioning norms on borrowing costs remains a concern for projects with thin debt coverage.
RATING OUTLOOK
Stable Outlook for Energy Infrastructure: Ind-Ra expects the power demand to remain strong in FY25, with improved economic activity and above-normal temperatures expected during the ongoing summer season. The agency expects the same to be about 7% yoy in FY25. The country has added aggregate capacity of around 26GW in FY24, the highest since FY16, largely contributed by solar and thermal. Following the introduction of LPS Rules 2022, receivables in solar, wind and thermal plants in Ind-Ra’s portfolio have reduced significantly, with payments against the current bills being received within 90 days from majority of the discoms. Improvements in liquidity, demonstrated adoption of LPS Rules 2022 and sustained timely payment receipts are positives for energy sector ratings. Internal liquidity compared to the strength and diversification of counterparties is a key rating factor for all generation assets.Continued Stable Outlook for Solar Power Projects, Outlook Revised to Stable for Wind: Solar projects continue to have stable operations, adequate debt service coverage and comfortable internal liquidity. The capacity addition continued to be strong in FY24 at about 15GW (FY23:12.8GW; FY22:13.9GW). Though the fall in module prices during FY24 is a positive for under-construction projects, they face procurement and pricing risk because of the re-imposition of Approved List of Module Manufacturers effective April 2024, in addition to implementation risks. Wind projects have performed better during FY24, though continue to be marred by generation variability. The net capacity addition in the sector also witnessed traction with 3.3GW added during FY24 (FY23: 2.3GW; FY22: 1.1GW). The revision in Outlook to Stable for wind projects for FY25 reflects a moderate improvement in generation, comfortable debt coverages to withstand a moderate amount of stress on generation and the presence of adequate liquidity.
Outlook Revised to Stable for Thermal Power Projects: The Outlook revision is based on an improvement in the electricity demand, healthy plant load factors (PLFs), improved traction in capacity addition, high revenue visibility through PPAs, the presence of coal cost pass-through feature in imported coal-based PPAs. Thermal power plants’ PLFs have increased in the past three years (FY24: 69%; FY23: 64%; FY22: 59%) and the agency expects PLFs to remain healthy at 70% in FY25. Adequate liquidity and working capital limits are critical to manage increase in costs or some delay in receivables.
Continued Stable Outlook for Transmission (availability-based) Projects: Ind-Ra expects transmission projects to have stable operations, comfortable revenue collections and adequate liquidity in FY25. Revenue visibility through contracts and regulations continues to support the ratings. Counterparty risk exposure to generation entities or renewable park developers for under construction assets till the commissioning of the such renewable assets and receivable trend of intrastate assets are key monitorables.
Continued Stable Outlook for Toll Roads: Toll roads are backed by the economic growth expectation and adequate coverages. Ind-Ra expects a moderation in toll collection growth in the range of 6%-7% in FY25 compared to double-digit growth seen in FY23 and FY24. Impact of traffic from new roads is a key monitorable.
Continued Stable Outlook for Annuity Roads: The agency has maintained a Stable rating Outlook on projects based on hybrid annuity model for FY25. This is because of sustained high competition, significant chunk of projects won by a new sponsor in either under-construction or pre-appointment date stage, persisting land-related issues and lower awarding activity in FY24 and 1HFY25. All these factors could cause developers to aggressively bid for projects leading to a build-up of stress in the sector.
Outlook Positive for Airports: The continued Positive Outlook for airports is based on steady traffic growth and improving non-aero revenues. Ind-Ra expects the prevailing high leverage ratio for rated operating airports to taper down in the next two to three years, post the implementation of a new tariff order. Ind-Ra expects the overall growth in passenger traffic at 10%-12%, driven by an improvement in regional connectivity in India post the introduction of UDAN scheme and robust passenger growth in metro airports. The government’s focus towards the development of greenfield airports has become a driving force of growth, facilitating the addition of significant capacities. The government has so far accorded in-principal approval for setting up 21 greenfield airports, of which 12 airports have been operationalised. The development of these greenfield airports is expected to cater to the increased demand for air travel in many cities.
Continued Stable Outlook for Sea Ports: Ind-Ra has maintained a Stable rating Outlook for sea ports for FY25, supported by a moderate demand in external trade. There was no material impact of the Red Sea crisis on Indian trade between November 2023-March 2024, as alternative routes such as Cape of Good Hope or even land routes were explored to circumvent the impacted transit route. Ind-Ra expects merchandise exports and imports growth to remain stable in FY25. The agency expects the cargo volume growth (major and non-major ports) to remain close to 7% yoy with expected throughput at Indian sea ports cumulative of 1,645MTPA in FY25.
Outlook Stable for Electric Buses: The rating outlook follows adequate delivery track record, sponsor support and operational track record post commissioning. Debtor days are comfortable for Ind-Ra rated entities, though with some instances interim delays. The ratings will be driven by the counterparty profile and the payment profile of counterparties. Idiosyncratic risk in the electric bus sector could be a pain point.
