India Ratings today downgraded the outlook of domestic construction sector to 'Negative' due to challenges faced in the execution of projects on account of delays in environment clearances and other issues.

India Ratings and Research, a Fitch Group company, said it has revised the outlook on Indian construction companies to 'Negative' for 2013 from 'Stable' last year.

"This is due to continuing challenges in order execution which have resulted in stretched working capital," it said.

The liquidity and financial leverage has been "adversely affected" in many construction companies that have ventured into Build-Operate-Transfer projects due to challenges in raising equity, the India Ratings report said.

Observing that construction companies have 'strong' order books, it said, "India Ratings continues to be concerned about continuing slow project execution.

"Delays are seen in the commencement of execution of new projects due to delays in obtaining forest, environment and various other clearances from the government."

Land acquisition issues also interrupt both commencement of new projects and completion of ongoing projects, it said.

Construction companies are finding it increasingly difficult to raise equity and prefer to borrow from parental companies to fund equity requirements of BOT projects,

adversely impacting the parents' credit profiles, the report said, adding, "This is likely to continue in the medium term."

The report said construction companies which have not ventured into Build-Operate-Transfer projects, would be in a better position and can 'withstand' working capital pressuresdespite this negative environment.

India Ratings expects companies which have been able to generate equity to fund investment in BOT projects to continue to have stable credit profiles.

The outlook could be revised back to "stable" in the event of a successful governmental push to speed up execution of projects through policy action, it added.