A significant reduction in mobility in the second half of this fiscal will restrict growth in toll road traffic on national highways to a moderate 7-9% for the full year despite a low base of last fiscal.

Next fiscal, adequate traffic growth of 5-7% along with significant hike in toll rates will boost revenue of toll road operators.

Toll-rate hike is linked to inflation based on the wholesale price index (WPI)¹, which has remained high at over 10% in the first 10 months of fiscal 2022. Consequently, toll rate hikes are expected in the range of 8-10% for the next fiscal. This, along with the adequate balance sheet liquidity, will continue to support the players’ credit profiles.

A Crisil Ratings study of 18 toll road assets in seven states indicates as much.

Says Anand Kulkarni, Director, Crisil Ratings, “At 7-9%, road traffic growth this fiscal will be lower than our earlier estimate of 10-12%, given the impact of prolonged monsoons and shortage of containers, which led to delays in shipping of goods. Additionally, passenger traffic, where recovery was already fragile, was affected further by the Omicron-led third wave of Covid-19.”

In the first half of this fiscal, traffic had logged a high growth of ~27% on-year, partly due to a weak base of last fiscal and in part because of less stringent restrictions which didn’t disrupt supply chain during the second wave, as compared with the first one.

Starting September, however, there was a reversal of fortunes. Heavy and prolonged monsoons as well as supply chain disruptions, linked to semi-conductor chips and container shortages, impacted the traffic performance. As a result, traffic declined ~8% on-year between September 2021 and January 2022.

That said, the sector has been resilient through the pandemic. The same is reflected in decline in traffic being limited to a better-than-expected 4-5% last fiscal despite stringent restrictions. Further, swift return to normalcy post the second wave – in around two months, compared with six months during the first wave – underline the resilience.

Next fiscal, traffic growth will remain adequate at 5-7% considering linkage to the macroeconomic environment. Historically, the traffic growth has remained closely linked to real GDP growth which is expected to be 7.8%² next fiscal against 9.2%³ in the current one. Additionally, 8-10% higher toll rates – due to higher WPI inflation – will translate into a healthy 14-16% revenue growth for toll road operators. This will be better than current fiscal revenue growth estimate of 11-13%. Rising coverage of FASTag and, hence, lower leakages will continue to support overall toll collections for operators.

Says Saina S Kathawala, Associate Director, Crisil Ratings, “The credit profiles of toll-road players are expected to remain strong, and their debt-servicing ability has not deteriorated materially due to lower-than-expected traffic volumes. The average debt-service coverage ratio of the Crisil Ratings sample is likely to be adequate at 1.7 times and 1.5 times in the current and next fiscals, respectively, which is broadly in line with our earlier projections. Besides, liquidity is supported by around 3-6 months of debt-service reserve, supporting their credit profiles.”

It should be noted, however, that the sample set represents a comparatively healthier asset pool. Issues such as weakening of asset-specific traffic drivers or weak liquidity position may impact assets differently. Going forward any unforeseen weakening of economic environment and its impact on commercial-traffic performance will bear watching.

¹ For projects awarded post 2008, the toll rate hike is applicable at 3% fixed hike plus 40% of WPI. For projects awarded prior to 2008, the toll rate hike is 100% linked with WPI.
² Crisil Research estimate
³ Advanced estimate for fiscal 2022