India Ratings & Research (Ind-Ra) has revised its outlook on the construction sector as well as companies to stable from negative for FY16. The sector is likely to witness a turnaround due to a pick-up in execution and order inflow on improved economic growth of 6.5% in FY16, according to Ind-Ra's expectations.

The credit metrics of companies which have tied up their funding plans, either through equity and asset sales or through corporate debt restructuring (CDR) will improve in FY16. However, companies which are yet to sort out their liquidity issues will see further deterioration and could opt for CDR, possibly by FYE15, due to the regulatory forbearance available to banks regarding lower provisioning for such debt till Mar. 31, 2015.

Execution is likely to improve in FY16 due to improved liquidity. However, it will also depend on the materialisation of the government's efforts to resolve the issues facing projects. The government has indicated its intent to resolve issues in various sectors such as fuel availability and off-take risks for the power sector, viability issues for the road sector and land availability and delays in approvals and clearances for all infrastructure and industrial sectors.

Order inflow is likely to pick-up in FY16, as economic growth prospects improve and industrial and infrastructure projects are launched. However, this will require a determined push by the government to explore the resources to fund infrastructure projects and eliminate the bottlenecks in execution.

Margins are likely to improve for companies which have liquidity for execution, as absorption of overheads improves, and due to the easing of commodity prices. Margins are also likely to improve due to the higher-margin orders won during the past 1-1.5 years, when the competitive pressures reduced leading to rational bidding.

Ind-Ra believes companies will be cautious in bidding for projects under the public-private partnership (PPP) model in FY16 due to the issues faced in execution and operation of such projects in the past. Better understanding of risks due to lower economic growth as well as restrictions placed on the companies by their boards or under their borrowing arrangements with banks will curb aggressive bidding. Given the limited award of projects under the PPP model in the last year, the pressure for additional funding is likely to ease.

Most of the Ind-Ra rated companies in the sector have stable outlooks. Given the expected turn-around in the sector, Ind-Ra rated companies are not likely to see further downward pressure on their ratings with a few exceptions.