Deleveraging, improved operational performance show early signs of revival in infrastructure

Early signs of a revival of the infrastructure sector are evident with the improvement in the financial profile of players. Although many infrastructure players are still struggling with their highly leveraged balance sheets, infrastructure companies with exposure to the airport and the highway sectors have started witnessing an improvement in their operational and financial performance. As per ICRA’s sample study of infrastructure companies across segments, the aggregate debt at a standalone level as of March 2017 had increased only marginally from Mar-2016, while at the consolidated level there was a 12 per cent YoY decline in debt from Rs 1.58 lakh crore to Rs 1.39 lakh crore, primarily due to divestment of stake in subsidiaries or projects. The debt level indicates that borrowings have peaked and the companies are now focussed on deleveraging. With improved balance sheet, an improvement in operational performance will help improve the credit metrics of entities. According to Shubham Jain, Vice President and Sector-Head, Corporate Ratings, ICRA: “While it is still early to comment on whether the tough phase for infrastructure companies is over, things have certainly started improving. We have seen deleveraging, and focus on execution as the drivers of this improvement. Infrastructure segments like airports and highways have been outperforming with improved operational performance supported by healthy traffic growth in both the segments.” A major push from the government on roads and urban infrastructure segments has helped construction companies improve their order book position. The ICRA sample of construction companies witnessed improvement in order inflows over the last couple of years with a major push coming from segments like roads, metro and urban infrastructure. Currently, the order book position of most construction companies stands at over three times their last reported annual revenues. According to the three-year action agenda devised by the NITI Aayog, the total capital development expenditure is projected to increase to Rs 2427 billion in 2018-19 (up by 19 per cent) and further to Rs 3,585 billion in 2019-20 (up by 48 per cent). This will further help strengthen the order inflow for the construction sector. The opportunities for the construction sector remain robust. The recently approved Bharatmala Pariyojana has the potential to transform the road sector in India and provide significant opportunities for construction companies. Similarly, on the Railways, the work on the first bullet train project of India is likely to start as the project funding has been tied up. The Rs 1,080-billion project will be funded by a Rs 880-billion soft loan corpus from Japan and will provide a sizeable opportunity for the large construction players. Similarly, a few projects involving interlinking of rivers are also expected to be taken up over the next few quarters. However, funding issues continue to be a challenge. With the banks grappling with high NPAs, the banking credit to infrastructure and construction sectors has been on a gradual decline. However, a part of this is also due to the increased share of NBFCs, and the corporate bond market (for higher rated entities). The issuances in the corporate bond market by infrastructure players have shown a strong traction over the last 15-18 months. On the alternate funding avenues, Jain adds: “Alternate funding avenues like Infrastructure Debt Funds (IDF), Infrastructure Investment Trusts (InvITs) have not picked up after initial issuances. The weak market response to the listed InvITs and pending clarity on tax liability arising at the time of transfer of assets to the InvIT has made other prospective InvIT issuers put their plans on hold. As InvITs are more of a fixed-income type instrument, investor interest is expected to come primarily from the institutional investors.”