Recovery of India’s infra sector post-covid will be slow and mixed

The country’s aviation sector will be the last to recover, but while the power segment has proved resilient, significant delays in receivables are worrying, S&P Global Ratings says.

The year 2021 will be challenging for India’s infrastructure sector as it tries to recover from the impact of covid-19, according to a report from S&P Global Ratings, with the pace and degree of recovery varying significantly among sub-sectors.

Among the more resilient is power, which has shown strength in operating performance as fixed tariff/regulated returns support stable operating cashflows, according to the report.

“The power sector in India generally enjoys long-term fixed tariffs for renewables, full cost pass-through for regulated utilities, and availability-based payments for the transmission sector,” Abhishek Dangra, a senior director at S&P Global Ratings, told Infrastructure Investor. “These factors help insulate many power companies from demand risk.”

However, a massive increase in overdue receivables, which rose from 957 billion rupees ($13 billion; €10.7 billion) in March to 1.27 trillion rupees in September, shows a severe impact on already weak distribution companies. Dangra said state government-guaranteed liquidity relief loans, which amounted to 235 billion rupees from April to September, will not fix ‘structural problems’ in the country’s power industry.

“Distribution companies’ weak financial health has been a key structural weakness for decades due to excess leverage, and the high technical and commercial losses impacting profitability,” Dangra said. “Weak distribution companies, in turn, have delayed payments to generation and transmission companies, resulting in elevated working capital requirements and creating cashflow uncertainty. The pandemic has further increased liquidity pressure for these companies.”

Renewables are expected to maintain a favourable supply position as they enjoy priority-dispatch status in India under local laws and power purchase agreements, with all renewable generation going first toward meeting demand, he added.

“Under India’s aspirational plans, renewables will account for 40 percent of the generation mix by 2030; this will help protect the renewable players, even if demand falls by up to 60 percent,” Dangra explained. “As a result, our view is that renewable players are insulated from revenue losses, even in cases of the most extreme demand shocks.”

Transportation

Recovery in ports is likely to be gradual after a moderate deterioration, the report noted. Cargo volume at 12 major ports in India has dropped slightly from 405.2 metric tons in 2019 to 354.8 metric tons in 2020, a roughly 12 percent drop that is in line with global levels. Recovery is expected to be in tandem with GDP, the ratings agency said in its report.

The roads sector has seen a sharp recovery in terms of traffic. After declining 25 percent from March to May when the country went into lockdown, it jumped 114 percent from June to September when restrictions were lifted.

Airports, which were hit the hardest, as was the case all over the world, are not expected to fully recover before 2024, according to the report.

Even though airports operate under a regulatory asset-base model, significant regulatory delays in timely tariff setting and disputes on tariff levels often result in sharp changes in tariffs, Dangra noted. This results in significant cash flow volatility for airports and reducing predictability of cashflows, he added.

In overall infrastructure, credit risks are rising because of increasing debt levels and a weakening of counterparties, while refinancing remains difficult for speculative grade-rated issuers, Dangra explained.

“Due to a sharp drop in LIBOR levels and an increase in credit spreads, this means that some of these issuers cannot get international funds at interest costs within the Reserve Bank of India ceiling. As a consequence, they have to rely on domestic banks, which have significant liquidity but have become very selective in lending due to their high aversion to risk. This increases the refinancing risk in the immediate aftermath of covid-19’s impact on sectors like airports,” he said.