A significant hike in toll rate stemming from elevated inflation, and healthy traffic growth on national highways will help toll road operators grow revenue by a significant 16-18% in fiscal 2023.

Toll revenue growth will remain strong in fiscal 2024 as well, but lower at 9-11%, riding on above average traffic growth.

The robust toll collections, along with the adequate balance sheet liquidity, will continue to support the credit profiles of toll road operators, a Crisil Ratings study of 49 toll road assets across 14 states showed.

Says Anand Kulkarni, Director, Crisil Ratings, “The revenue of toll road operators will soar in fiscal 2023, driven by high toll rate hike of ~10.5%, which is linked to inflation based on the Wholesale Price Index (WPI)¹. The traffic growth at 5-7% will also remain healthy, albeit on a low base of fiscal 2022. This resilience in traffic growth will be on the back of economic activity led commercial traffic, and strong personal mobility, supported by leisure and business travel.”

In fiscal 2024, traffic growth is expected to taper to 4-6%, but will remain higher than the 4-year compound annual growth rate of 2-3% seen through fiscal 2022. Traffic growth is closely linked to real gross domestic product growth, which is expected to decline to 6%² in fiscal 2024 from 7%³ in fiscal 2023.

Further, with WPI inflation printing lower at 4.95% for December 2022, next fiscal will see a toll rate hike of ~5%. Consequently, toll revenue is expected to grow 9-11% for fiscal 2024.

The sector has faced multiple headwinds since fiscal 2018, such as the impact of goods and services tax (GST) implementation, change in axle load norms for commercial vehicles, restrictions due to the pandemic, and supply chain disruptions, affecting the movement of traffic. These factors combined, limited traffic growth to 2-3% between fiscals 2018 and 2022.

Toll roads are preferred by investors looking to pool road assets together under infrastructure investment trusts (InvITs) to generate healthy returns and benefit from inflation hedging. Therefore, toll roads account for ~70% assets held under road sector InvITs.⁴

Inflation hedging has played out well in the recent past when the input costs had gone up for players in fiscal 2022. Significant revenue growth cushioned the impact of higher maintenance costs for toll road operators.

Says Saina Kathawala, Associate Director, Crisil Ratings, “The credit profiles of toll road players have remained strong in fiscal 2023 and will sustain in fiscal 2024, helped by healthy toll revenue growth. Average debt service coverage ratios will be strong at 1.6-1.7 times. Moreover, liquidity will remain comfortable, supported by debt service reserve of 3-6 months.”

The Crisil Ratings sample set represents a stronger asset pool with traffic volume growing at a healthy rate.

Any unforeseen weakening of economic environment and its impact on commercial traffic performance will bear watching over the medium term.

¹ For projects awarded post 2008, the toll rate hike is applicable at 3% fixed hike plus 40% 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 2023
⁴ For detailed insights on roads sector InvITs, please refer to Crisil Ratings press release - https://www.crisilratings.com/en/home/newsroom/press-releases/2022/12/road-invits-improve-the-credit-quality-of-rs-46000-crore-debt.html