Lockdown hits infra firms as execution stalls, toll revenue dips

The lockdown has dealt a big blow to infrastructure firms that were already facing dwindling order flows since FY18. Stalled project execution and toll collections in roads put steady revenue growth seen in last few quarters at risk.

Brokerage firms estimate a flat or marginal drop in infra developers’ revenue in Q4 because only the last week was affected by the lockdown.

But the pain will worsen in FY21. Even if the lockdown is eased or completely lifted by 3 May, it would take time for economic activity to resume, traffic to ply to pre-lockdown levels and tolling to ramp up.

A study by Crisil Ratings estimates a 12.5% drop in traffic and 8.5% fall in toll revenue for FY21. This is even after assuming a 4% rise in toll rates and improved economic activity by October.

Some may argue that in this scenario, BOT (build-operate-toll) projects are compensated for cost overruns by the force majeure clause. However, in the past (demonetization), compensation for operation and maintenance costs, and the interest costs accounted for 50-55% of the revenue loss. Besides, this comes with a lag.

Meanwhile, EPC (engineering, procurement and construction) projects that are still under way get only a time extension. Therefore, analysts estimate that revenue of infra firms will drop by 8-10% in FY21 from a year ago, especially for those with higher exposure to roads.

The problem extends beyond lockdown for infra firms given the challenge of mobilizing migrant workers. “Working capital may escalate leading to hurdles in execution ramp-up post lifting of the lockdown,” said a report by Motilal Oswal Financial Services Ltd. It further noted that leverage was already on the rise due to increasing exposure towards HAM (hybrid annuity model) projects, thus raising balance-sheet risk for road developers.

Also, a shift in government focus from infrastructure to social sector due to the covid-19 crisis may slow the pace of awards. This is bad news for the sector as after peaking in FY18 at around 7,400km, orders have fallen to 2,222km in FY19 and about 3,000km (industry estimates) in FY20.

With so many hurdles to recovery, investors would witness weak revenue and profitability at least for three-four quarters. Stock prices, which tumbled since January when the pandemic broke out, are unlikely to reverse in a hurry.