Infrastructure investment trusts (InvITs) in the roads sector have enhanced the credit quality¹ of around Rs 46,000 crore debt till now, aided by regulatory guardrails and structural benefits.

A Crisil Ratings study of nine roads sector InvITs indicates as much.

Since 2016, 19 InvITs have been registered in India. These include 11 from the roads sector of which, nine have been floated or set to be floated soon.

These nine comprise ~94 road assets valued over Rs 1.1 lakh crore. Toll roads account for ~70% of this, while annuity, annuity plus toll, and hybrid annuity models comprise 13%, 11% and 6%, respectively.

Historically, credit profiles of toll roads had seen challenges such as high leverage, long delays in construction and lower-than-expected traffic. InvITs have addressed many of these problems.

Says Mohit Makhija, Senior Director, Crisil Ratings, “The InvIT structure benefits from a cap on leverage and on under-construction assets, insulating it from the risks of high leverage and delays in project completion. As of date, consolidated leverage of the nine InvITs remains comfortable, with a debt to asset value of ~40%. Additionally, pooling of diversified assets mitigates the concentration and geopolitical risks that standalone assets are vulnerable to. These factors have helped improve credit quality of ~Rs 46,000 crore of debt taken over by InvITs.”

The strength was reflected in the resilient performance of toll roads during the pandemic and the healthy median track record of eight years for the projects under InvITs. A strong counterparty — the National Highways Authority of India — is also a positive for a majority of the projects.

All these factors augur well for global investors looking at Indian infrastructure opportunities.

Additionally, toll road assets also offer protection from inflation² and offer long-term opportunities to piggyback India’s economic growth. Consequently, toll roads will likely remain the preferred route for those looking to invest in road assets in future.

Says Anand Kulkarni, Director, Crisil Ratings, “InvITs have provided an avenue for road developers to monetise assets, as reflected in ~8,700 km of roads already placed under such trusts. These InvITs have attracted capital from large global private equities and pension funds. We expect additional assets of Rs 25,000-30,000 crore to come under InvITs over the next 1-2 years, either through inorganic growth by existing players or through new InvITs being set up.”

Traffic growth, which is linked to economic activity, will be a monitorable as the fundamental performance of the underlying assets remains the core driver of InvIT performance.

¹ Credit quality refers to the ability of assets to generate cash flows to service debt obligations. It is reflected in credit rating
² Toll rate hike in NHAI toll roads is linked to inflation based on the wholesale price index (WPI). For projects awarded post 2008, the toll rate hike is applicable at 3% fixed hike plus 40% of WPI. For projects awarded before 2008, the toll rate hike is 100% linked with WPI.