Roads: Robust awarding to keep revenue in fast lane, says CRISIL analysis

Awarding of road projects by the National Highways Authority of India (NHAI) continues to be robust this financial year (FY22), with the hybrid annuity model (HAM) accounting for 50 per cent of the 1,900 km awarded in the first half.

CRISIL expects 4,500-5,000 km to be awarded in FY22, of which 45-55 per cent should be under the HAM mode, another 40-45 per cent under the engineering, procurement and construction (EPC) mode, and less than 5 per cent under the build-operate-transfer (BOT)-toll mode. 

In FY23, CRISIL expects NHAI to award 4,000-4,500 km, given the strong pipeline of projects under Bharatmala and the National Infrastructure Pipeline. 

The robust awards, coupled with the government’s sharp focus on clearing land acquisition issues and ensuring swift payments, bode well for NHAI’s execution target of 4,300-4,600 km of roads this financial year and another 4,500-5,000 km in the next.

Further, the National Monetisation Pipeline (NMP) unveiled recently provides a blueprint for NHAI to raise Rs 1.6 trillion via road asset monetisation over the next 4-5 years. Successful monetisation via the NMP could address 15-18 per cent of NHAI’s funding requirement for this financial year and the next, and help maintain the rapid pace of infrastructure development.

Given the high order books and speedy construction, revenue of large road EPC companies is expected to rebound 15 per cent in FY22 after growing a modest 5 per cent last year. Revenue rose 37 per cent in H1 of FY22 on the low base of last year. 

However, operating profitability, or the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin, is expected to moderate 100-150 basis points (bps) to 14 per cent this year due to higher input costs and intensifying competition.

Next year, CRISIL expects revenue of road EPC players to grow 10-12 per cent and margin to remain range bound at 13.5-14 per cent. 

Overall, the credit profiles of road EPC companies will remain stable, supported by healthy order books, well-managed balance sheets, prudent working capital management and steady cash accruals. Key credit metrics — total outside liabilities to networth and interest coverage ratios — are expected to improve to 1.2 times and 3.8 times, respectively, this year and remain at almost similar levels in the next.