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Graphic by Prajakta Patil/Mint
Graphic by Prajakta Patil/Mint

Traffic growth key to ease financial stress of toll roads

Lower-than-forecast growth in toll rates and traffic is hurting the revenue and profitability of operational road projects

Construction firms, mainly those involved in road projects, are facing problems at every stage. Contrary to common belief that, once commissioned, road projects offer safe returns to developers, there are many risks such as lower-than-forecast growth in toll rates and traffic.

In the last one year, the government has made attempts to revive stalled projects either by way of stepping up “stuck" clearances or offering a one-time capital infusion to revive those with funds constraints. But what about the ones which are operational and struggling for cash flows?

Over the last 18 months, traffic growth stumbled slightly as a result of the economic slowdown. In some regions, traffic through toll roads did not pick up due to presence of alternative routes. Meanwhile, as predicted, low rate of inflation and a declining trend in wholesale price index (WPI) weighed down on the toll rates. Both these factors together have kept revenue growth of road projects subdued.

In its recent report on problems faced by road projects, Crisil Ltd highlights that of the 80 build-operate-transfer (BOT) operational projects under the National Highways Authority of India (NHAI), around 40% face “operational risk". In other words, revenue growth is insufficient to cover costs fully. Even where operating margins were robust, cost overruns and delays during the construction period have resulted in higher interest costs, hurting net profit growth.

With huge outstanding debt, Crisil points out that at least 37% growth in toll revenue is needed to ease the challenge of rising debt and interest costs that is eroding profitability of operating projects.

Meanwhile, the outstanding debt of projects under construction is anyways know to be high. Data analysis by Mint of 51 infrastructure firms (turnkey construction firms) shows that interest cover over the last eight quarters fell steeply—from 1.3 in the quarter ended June 2013 to 0.6 in the latest June quarter.

Indeed, NHAI has eased the exit clause for developers, but most of this is for new orders. For existing projects, only a strong economic revival and higher movement of goods can boost traffic growth on roads to boost revenue and profitability.

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