NEW DELHI (India CSR): India’s renewable energy, roads and real estate sectors are seeing varied trends. While renewable energy is witnessing accelerated adoption of storage-linked capacities, a sharper focus on monetisation is on the cards in the roads sector. On the other hand, premiumisation in residential real estate and influx of global capability centres (GCCs) in commercial real estate are driving realignment of offerings by developers.
Investment Growth Consistency
Amidst this, says Krishan Sitaraman, Chief Ratings Officer, Crisil Ratings, “What remains constant across these three sectors is the strong investment growth. Over this fiscal and next, investments may rise at ~15% annually, reaching ~Rs 17.5 lakh crore compared with ~Rs 13.3 lakh crore in the preceding two fiscals. While adapting to the new business dynamics will pose some challenges, credit profiles of Crisil-rated developers and projects would remain resilient.”
Renewable Capacity Expansion
In renewable energy, to address the intermittency of power supply, there is a transition towards hybrid or storage-backed capacities, which facilitates scheduling of power round-the-clock with greater confidence. Of the ~75 GW capacity to be added in this and next fiscal, hybrids will account for ~37%. A massive jump, considering hybrids accounted for ~14% of the capacity additions over the preceding two fiscals.
Road Sector Revitalisation
In roads, which have a significant multiplier effect on the economy, a pick-up in project awarding will be important to revitalise the sector’s growth. For the National Highways Authority of India (NHAI) to reach its previous highs of ~6,000 km per year of awards and execution, a substantial rise in private capital through acceleration in asset monetisation will be essential. We expect the share of monetisation in NHAI’s sources of funds to grow to ~18% in this fiscal and next, compared with ~14% in the preceding two fiscals. What lends confidence here is a monetisable asset base worth Rs 3.5–4 lakh crore.
Real Estate Momentum
In real estate, the residential segment is seeing demand normalise after rapid recovery seen following the pandemic. Revenue growth for developers is expected to remain steady at 10–12% this fiscal and next. With volume growth slated to rationalise, realisations will be supported by continuing demand for premium projects. Commercial real estate, too, will see steady net leasing growth of 7–9% this fiscal and next. As India continues to remain a cost-efficient market for GCCs and domestic sectors grow at a steady pace, annual net leasing demand is poised to cross 50 million square feet by fiscal 2027.
As these sectors transition to a new normal, they face an evolving set of challenges.
Renewable Transmission Concerns
In renewables, timely availability of evacuation infrastructure is critical. To be sure, a significant ramp-up in transmission capacity is underway with a total capital expenditure (capex) of ~Rs 1 lakh crore in this fiscal and next, twice of what was seen in the preceding two fiscals. These projects may face delays on account of right-of-way issues, delayed approvals or short supply of equipment such as transformers and high-voltage direct current components. Further, as renewable capacities typically take much less time to be set up, transmission capacity may fall short temporarily.
Road Monetisation Delays
In roads, monetisation has been a mixed bag in the past with ~35% of the total toll-operate-transfer bundles floated not being awarded. Possible delays in monetisation on account of approvals or mismatches in valuations, can lead to slowdown in sectoral growth.
Inventory Level Concerns
In residential real estate, new launches outpacing demand could ratchet up inventory levels. Inventory is expected to inch up to 2.9–3.1 years this fiscal after achieving a low of 2.7 years in fiscal 2024. This may increase the debt of some developers.
For all these sectors, geopolitical risks and their impact on investments in India will bear watching.
While such risks can pose growth challenges, the interesting part is that credit risk profiles are likely to be resilient across the renewables, roads and real estate sectors.
Strong Financial Foundations
Says Manish Gupta, Deputy Chief Ratings Officer, Crisil Ratings, “Robust operating performance over the past few fiscals and the consequent strong cash flows, have kept debt levels under control. Further, healthy investor interest, as evident from equity raise as well as asset monetisation, has enabled significant deleveraging of balance-sheets. Cumulatively ~Rs 2.1 lakh crore of equity capital has been deployed in these sectors over the past two fiscals driven by strong investor participation, supporting the credit profiles of developers and projects.”
Renewable Debt Stability
For renewables, while debt will grow given high capex intensity, resilient operating performance will result in stable net debt / Ebitda at ~7 times over this fiscal and next. Cash flow cover is also seen healthy, with average DSCR of 1.2–1.3 times.
Road Asset Strength
For operating toll road assets, steady cash flows have kept credit profiles strong and encouraged monetisation. That, along with prudent capital structure of these assets, will result in a healthy DSCR of 1.5–1.6 times over this fiscal and next. Road developers, too, have achieved significant deleveraging resulting in healthy expected total outside liabilities to tangible net worth ratio of 0.6–0.7 time this fiscal and next.
Real Estate Performance
In residential real estate, robust sales and collections, coupled with asset-light models (joint ventures and joint development), have strengthened balance sheets. The ratio of debt to cash flow from operations is expected to improve slightly to 1.1–1.3 times. The commercial real estate space should also see credit metrics improving as underscored by a strong DSCR of 1.9–2.0 times expected over this and next fiscal.
Institutional Structures Support
The emergence of infrastructure investment trusts and real estate investment trusts have also played a crucial role in strengthening credit profiles given their structural benefits such as pooling of cash flows, cap on leverage and strong regulatory guardrails. All in all, while investment growth in these three sectors may see some moderation if the risks play out materially, steady cash flows and healthy balance sheets should keep credit profiles resilient.
(India CSR)
