Undoubtedly, a slowing economy is bound to reduce movement of goods and shrink road toll collections. So, with India’s gross domestic product growth slowing considerably to 5% in Q1 FY20 from 8% in the year-ago quarter, the fall in growth rates of road tolls is not surprising.
Rating agency Icra Ltd forecasts a flat or marginal increase of 4.5% in FY20 traffic and toll collection growth over the previous year for its sample of 35 special purpose vehicles for road projects. This is worse than in FY19 when traffic and toll rates grew at 2.4% and 6%, respectively.
What’s rather worrisome is the timing of the slowdown. Recent news reports said the National Highways Authority of India may revise the BOT (build-operate-transfer) model, which will be used perhaps for road tenders from FY21.
In its present form, BOT project cash flows and the ability to service interest cost hinge mainly on toll collections. So, falling growth rates will deter companies from bidding for BOT road projects.
Further, even the revenue streams of road construction companies such as IRB Infrastructure Developers Ltd, Sadbhav Engineering Ltd and Ashoka Buildcon Ltd, which have significant exposure to BOT projects, may be dented.
Compounding the problem is the revision in axle load norms in July 2018, permitting medium and heavy commercial vehicles to carry 15-20% more freight. This too dampens toll collections.
Finally, these factors hurt the road construction firms’ ability to service interest payments and debt through operating cash flows. Data analysis of some of these firms shows that the interest coverage ratio (Ebitda/interest outgo) has dipped over the last 12-18 months, despite falling interest rates. Ebitda is earnings before interest, taxes, depreciation and amortization.
Icra says that while the slowdown has not hurt the ratings of road construction companies under its coverage, the debt service coverage ratio could be impacted by 5-10 basis points for FY20.
If the slowdown persists beyond Q4 FY20, there could be material deterioration in the debt coverage metrics, necessitating some rating changes. This would be a setback to road sector progress as was perhaps experienced a decade ago.