On the road to profitability

:Assetmonetisation, healthy order flows to support the credit profiles of road EPCcompanies; InvITs, asset sales can generate `72,000-crore over the next three fiscals.


Asset monetisationwill gather pace in the roads sector as road-building engineering, procurementand construction (EPC) companies pursue growth backed by the government’sthrust to the sector.

The healthy orderbook position of the road EPC companies, which stands at over three timesrevenue at present, is expected to improve further supported by new projectawarding momentum. Sale of operational road assets will help developers fundthis growth.

CRISIL Ratingsestimates total awarding of roads by the National Highways Authority of India(NHAI) and the Ministry of Road Transport and Highways1 this fiscal to be ~15 per cent higher on-year,which should help continue the buoyancy from last fiscal, when project awardshad increased 23 per cent to ~11,000 km.

Road EPC companiesare well-placed to tap this opportunity, shows an analysis of 17 large road EPCcompanies, which account for ~65 per cent of the sector’s revenue. Says Anuj Sethi, Senior Director, CRISILRatings, “Revenue of these large road EPC companies will increase a handsome~15 per cent this fiscal and sustain the strong growth trajectory over themedium term. This is backed by healthy order book, which is expected to remain3-3.5 times’ revenue over the medium term. These companies will focus on assetmonetisation, which will enable them to maintain their credit profiles whilescaling up.”

The assetmonetisation potential is supported by healthy investor interest either throughinvestment at asset level, or infrastructure investment trusts (InvITs). CRISILRatings has analysed 12,000 km of operational built-operate-transfer (BOT) roadassets of NHAI and private players to arrive at the future fund-raisingpotential.

Says Anand Kulkarni, Director, CRISIL Ratings, “We foresee monetisationpotential at ~`72,000-crore (enterprise value) for the NHAIand private developers, which can be realised through InvITs, private sale andtoll-operate-transfer models over the next three years. The capital so unlockedwill be available to accelerate awarding of projects under the NHAI’s ambitiousBharatmala Pariyojana, and support growth of road EPC companies.”

The resilience ofBOT-toll assets last fiscal renders them ripe for monetisation. After a weakfirst quarter, traffic rebounded well, which limited its de-growth to 4-5 percent last fiscal. Though the resurgence of the pandemic will have a bearing inthe first quarter of this fiscal as well, the forecast of better economicgrowth for the rest of the year will support recovery in traffic.

The expectation ofasset monetisation is also supported by the past performance of road EPCcompanies. Between fiscals 2016 and 2021, sale of assets to InvITs or toprivate equity funds helped unlock ~`80,000-croreof enterprise value for the sector (~`50,000-crorefor the road EPC companies analysed). Around 60 per cent of this was throughfour InvITs. The funds released strengthened their balance sheets.

The leverage(calculated as total outside liabilities to tangible net worth) of thesecompanies is estimated to have improved to 1.25 times as on March 31, 2021,from 1.87 times as on March 31, 2016, largely supported by asset monetisation. Thisis despite a healthy annual revenue growth of 12 per cent over these fivefiscals.

During thisperiod, NHAI awarding of projects was primarily through the EPC and hybridannuity model routes, where investments by developers is limited. That alsocurbed any ratcheting up of debt by these road EPC companies.

While creditprofiles of the road EPC companies will remain comfortable, the sustenance ineconomic activity amid the ferocious second wave of the pandemic will requireclose monitoring. Any prolonged impact on traffic would hinder the timelines ofasset monetisation in the near term.




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