India Infrastructure: Recovery Won't Be Quick - Airports worst hit; resilient power segment faces high receivables risk - S&P Global
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India Infrastructure: Abhishek Dangra
Senior Director
Recovery Won’t Be Quick
Infrastructure Ratings
Nov. 23, 2020
Airports worst hit; resilient power segment faces high receivables riskWhy 2021 Will Still Be Challenging
– The hit to the India infrastructure sector from COVID will still be felt in 2021 even amid an economic recovery following
lockdown
– Credit risks are rising because of increasing debt levels and a weakening of counterparties
– Refinancing remains difficult for speculative grade-rated issuers
– Airports: Recovery is unlikely before 2024; high capex and regulatory delays will amplify refinancing risks
– Power: The segment will be operationally resilient, but significant overdue receivables are downside risks
– Ports: A recovery is likely to be gradual and varied after a moderate deterioration
– Roads: A steep fall has been followed by a sharp recovery; giving confidence that traffic risk will subside
2Wide Disparity Among Sectors From COVID Hit
Power: Resilient Operating Performance...
Power Demand Is Back Above Pre-COVID Levels And Likely To Sustain Recovery
2020 2019 % change
– Fixed tariff/ regulated returns will
3500 10
support stable operating cash flows
3000 5
– Demand recovery appears sustainable
Average daily power demand (MU)
0 with three consecutive months of
2500
demand growth (y-o-y)
(5)
– Renewables will maintain favorable
% change
2000
(10) supply position, protecting revenues
1500
(15)
1000
(20)
500 (25)
0 (30)
Feb. (pre-COVID lockdown) April (full lockdown) Sept. (post lockdown)
Period
MU--Mil. units. Source: Power System Operation Corp. Ltd., Mercom.
4…But Overdue Receivables Will Drag Cash Flows And Ratings
Overdue Receivables Likely To Remain Main Weakness For Indian Power Industry
Sharp increase in overdue receivables
Receivables Disbursed relief loans
– Massive increase in overdue
1,400
receivables post-March indicates
1,200 severe impact on already weak
distribution companies (discom)
Overdue receivables (bil. INR)
1,000
800 – Liquidity relief loan will alleviate some
pressure, but will not fix structural
600
problems
400
– Weaker states’ ability to support weak
200 discoms will add to the strain
0
(200)
(400)
Up to March 2020 Apr-Sept. 2020 (addition) As of Sept. 2020
Period
bil.--Billion. INR--Indian rupee. Source: PRAAPTI.
5Airports: Good Assets, Weak Cash Flows
Full Recovery In Air Traffic Unlikely Before 2024
Domestic traffic still reeling post-COVID; international traffic at a standstill
Passengers (mil.) PLF %
– Air traffic will recover to pre-COVID
30 100
levels only by 2024, lowering revenues
90
25 – Profitability will come under pressure,
80
with limited operating levers and high
fixed costs
Passenger load factor§
70
20
Passengers (mil.)
60
– Heavy capex, regulatory delays can
15 50 further increase leverage and
40 refinancing risks
10
30
20
5
10
0 0
Jan-Feb. (pre-covid) Mar*-May (during lockdown) Jun-Sept. (post lockdown)
Period
Mil.--Million. *Lockdown from 14-March to 30-May. Source: Department General of Civil Aviation, Livemint, §PLF represents last reported period’s PLF.
6Ports & Roads: Lower Impact, Individual Asset Cash Flows Key To
Credit Impact
– Port cargo will fall moderately (in line with ~10% global levels and global financial crisis experience); recovery should be in tandem with GDP
– Annuity road projects insulated from traffic risk – NHAI payments on time, build-operate-transfer project cash flow risk from suspension of
tolls and lower traffic
Ports More Resilient, But Affected By Global Trade Headwinds Sharp Recovery Following Steep Fall In Road Traffic
12 major ports' volume in India National highway traffic estimates
2020 2019 120
100
Total cargo (MT) 80
Traffic (%)
Segment
60
40
-16.9% from 2019
Container volumes ('00000 TEU)
20
0
0 100 200 300 400 500 Pre-COVID During lockdown Post lockdown (Sept. 2020)
Volumes Period
MT--Metric ton. TEU--Twenty-foot equivalent units. Source: Port Trust of India, Business Line. Source: National Highways Authority of India, EconomicTimes.
7Elevated Refinancing Risks For Speculative-Grade Credits
– Sharp credit differentiation with banks lending selectively to stronger corporates.
– Ample liquidity and low interest rates help access cheap funding for investment grade; it’s difficult for speculative grade.
– Lower-rated companies will find it more difficult to issue foreign-currency bonds, due to a Reserve Bank of India cap of Libor + 450 bps
– Offshore orphan SPVs (pricing cap doesn’t apply) are back in vogue, but have inherent structural risk in absence of full hedging or mitigants
Low LIBOR Limits Refinancing Ability For Speculative-Grade Credits
Indian central bank's pricing cap at Libor + 450 bps
US0006M Index MIFORIM6 Index
7
6
5
4
Rate
3
2
1
0
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20
Index mid-price
Source: Bloomberg.
8Watch Points For Rating Trajectory
Power
– Working capital changes in 2021, net off receipts under liquidity package
– Higher capex than 2020
– Debt-to-EBITDA above 6x, FFO-to-debt below 8%-9%
Airports
– Regulatory order: More than one-year delay or tariff levels 10% lower than previous expectations
– Capex inflexibility and high interest/debt burden with limited EBITDA interest coverage headroom
– Limited alternatives for upcoming maturities in 2021/2022, putting liquidity under pressure
Ports
– More than 10% drop in cargo/container volumes
– Underperformance to India’s GDP growth and global trade growth levels
9Our View On COVID-19
S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic.
Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are
promising, but this is merely the first step toward a return to social and economic normality; equally critical is the
widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in
assessing the economic and credit implications associated with the pandemic (see our research here:
www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
10Related Research
– Research Update: NHPC Ltd. Outlook Revised To Negative; 'BBB-' Rating Affirmed, Oct. 22, 2020
– Research Update: Adani Transmission Ltd. Issue Rating Affirmed At 'BBB-' On Expectation Of Stronger Financial
Discipline, Sept. 15, 2020
– Research Update: Adani Electricity Mumbai Ltd. 'BBB-' Ratings Affirmed On Resilient Operating Performance; Outlook
Stable, Aug. 4, 2020
– Research Update: GMR Hyderabad International Airport Ratings Lowered To 'BB-' On Slow Traffic Recovery; Outlook
Negative, July 24, 2020
– Research Update: Delhi International Airport Downgraded To 'B+' On Slow Recovery In Traffic, Remains On CreditWatch
Negative, July 6, 2020
– India-ASEAN Infrastructure: Sovereign Strains Add To Lockdown Pain, April 27, 2020
11Analytical Contact
Abhishek Dangra
Senior Director
+65-6216-1121
abhishek.dangra@spglobal.com
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