Cost overruns, slow traffic growth impact highway projects viability: CRISIL

Cost overruns and delays in projects coupled with significant slowdown in traffic growth has severely impacted viability of highways projects, a Crisil report said.

Crisil Research report is based on analysis of 15 national highway stretches.

"Project returns today are in the 8-14% range - less than half the 22-26% arrived at based on NHAI's traffic and cost estimates," Crisil said in a statement.

It said its analysis showed a significant slowdown in traffic growth over the past couple of years.

In addition, base traffic (in the first year of operations) on many highways has been well below estimates made by the National Highways Authority of India (NHAI).

"Add cost overruns, and what you get is severely strained financial viability of highway projects," it said.

Traffic growth in passenger car unit (PCU) terms slowed to about 3-4% in fiscal 2012 and 2-3% in 2013, compared with 7-8% in between fiscals 2007 and 2011, it said.

"This is primarily because commercial vehicles traffic, which account for over three-fourths of total traffic, hard-braked, growing at just 2-3% in fiscal 2012 and by one% in 2013. On the other hand, passenger vehicle traffic grew a healthy 15% in the two years," the report said.

It added that overall traffic growth has remained weak in the current fiscal and will continue to languish around 3-5% over the next 12 months.

"Typically, a 100 bps drop in traffic growth over the concession period can result in a 75-100 bps decline in project returns," said Prasad Koparkar, Senior Director - Industry and Customised Research, Crisil Research.

But traffic growth is not the only problem for developers, it said adding, in case of six national highway stretches, base traffic has been lower by a significant 20-40% compared with NHAI estimates.

Things turn grimmer because the six projects are significantly delayed and are seeing an average cost overrun of about 23%, it said, adding, the delays are largely due to land acquisition and clearance issues.

"Clearly the calculations of many road developers have gone awry. Our analysis shows 5 out of 6 projects have an average debt service coverage ratio (DSCR) of less than one in the first five years of operations. This means, if there is no additional capital infusion, developers will find it difficult to service loans," it stressed.

Also, project returns today are in the 8-14% range - less than half the 22-26% arrived at based on NHAI's traffic and cost estimates," said Rahul Prithiani, Director - Industry Research, Crisil Research.