Curtailed movement of people and goods, and suspension of tolling across the country from March 25, 2020, will lead to a 1,250 basis points (bps) de-growth in traffic, and 850 bps de-growth in toll revenues of highway operators, an analysis by CRISIL shows.
That would follow near-zero growth in traffic in fiscal 2020 because of slowing economic growth, revision in axle load norms, and the Covid-19 pandemic-driven lockdown that began in late March.
In contrast, fiscals 2016 to 2019 saw 8.5% compound annual growth rate in traffic, and 12% in toll revenue.
Says Sachin Gupta, Senior Director-CRISIL Ratings, “Our calculations for this fiscal assumes 90% loss of traffic in April (when tolling was suspended for 19 days), and 40% loss in May as the lockdown would continue in many parts of the country. Traffic is unlikely to fully rebound immediately thereafter. Our base-case assumption is that it will reach normal levels only by October. And if the impact prolongs, there would be an even more severe impact on traffic.”
The revenue de-growth of around 850 bps assumes a toll rate hike of around 400 bps. Compensation from the National Highways Authority of India (NHAI) for the period when tolling was suspended would be a mitigating factor.
Developers may claim compensation under the political force majeure clause. During demonetisation, too, the government had suspended tolling. The NHAI had then recompensed operations and maintenance expenses and interest cost, which covered ~55% of the revenue loss.
A similar compensation this fiscal would reduce toll revenue de-growth to 550 bps. Developers are also likely to seek an extension of concession period, but that won’t support immediate cash flows.
The sharp slowdown of traffic and the resultant impact on project cash flows will have a material impact on the credit metrics of these projects – despite compensation from the NHAI.
Says Sushmita Majumdar, Director-CRISIL Ratings, “Of the 30 toll road projects that CRISIL analysed, four will have a debt service coverage ratio of less than 1 time despite liquidity available in the form of debt service reserve account and the 3-month moratorium announced by the RBI. That’s because of traffic de-growth expected, and major maintenance due this fiscal. So these projects will be relying on financial support from their sponsors.”
Sponsors of most of these highway projects will be in a position to offer financial support and thus help sustain the credit profiles of operators in the near term, despite the pressure on traffic growth. The average standalone gearing of these sponsors is ~0.5 time, which affords headroom to borrow and provide support.
A traffic rebound in the second half of this fiscal would be the key monitorable. Any prolonged impact of Covid-19 on traffic growth would lead to a material impact on the debt servicing ability of projects, and adversely affect credit profiles of highway operators.