But infra deficit is too large
India is making progress at scaling up its infrastructure, but still has a long way to go before it can close the sizable deficit between supply and demand, according to an article that S&P Global Ratings released 30 July 2018.
“India’s infrastructure deficit is simply too large to eliminate any time soon,” said S&P Global Ratings credit analyst Abhishek Dangra in the article “India’s Infrastructure Marathon: Why Steady Growth Can’t Close The Supply Gap”.
“Infrastructure takes time to build, and perhaps more so in India than for many other countries,” he pointed out.
The Indian government estimates infrastructure investment of US$4.5 trillion will be needed through 2040.
Project delays and cost overruns are attributable to complex land acquisitions and environmental issues. And in all democracies, societal considerations play a part, too, said the article.
The country’s progress at scaling up its infrastructure is shown in its decreasing power deficits, high passenger growth for airports, rising renewable capacity, and large metro train projects in progress.
The government is leading the buildup in view of growing urbanization.
“We believe the power sector is moving towards equilibrium in demand and supply from a deficit situation. However, fortunes will vary for thermal and renewables,” said Dangra.
“No more new thermal power capacity is required until 2027, other than for projects already under construction; while renewables will continue their strong growth based on competitive tariffs.”
Capital expenditure (capex) will remain high for Indian infrastructure players across sectors, according to the article.
However, leverage trends vary. Rated utilities will likely maintain elevated capex, but the commissioning of new capacities and regulated returns on investment should increase earnings.
As a result, the article expects the segment to deleverage.
Renewables will likely continue to incur significant growth capex and maintain weaker credit metrics, with an average ratio of funds from operations to debt of below 9%.
The infrastructure sector has high correlation with the overall economic environment.
Macroeconomic roadblocks could strain the government’s budget or reduce project returns for the private sector.
These risks include currency weakness, global trade protectionism, and rising inflationary strains that could push up interest rates.
Elections scheduled for 2019 could also fuel political and policy uncertainty, according to the article.
“The intensity and duration of macro shocks will be key to their overall impact,” said Dangra. “We still believe that India’s economic growth opportunities and the viability of projects should continue to attract capital.”
Regulations significantly affect cash flows and consequently investor interest.
Under their long-established framework, regulated utilities have full pass-through of costs and benefit from a stable framework for over two decades.
Other sectors lack a long track record or an established framework; for instance, airports face long delays in implementation of tariffs and ambiguity in tariff components.
Investors generally prefer sectors where regulations (like regulated utilities) or growth prospects (airports and renewables) provide greater visibility on cash flows.
For other sectors like railways (including bullet trains), government spending and government-to-government loans may remain the key source of funding. fiinews.com
