Traffic growth moderation may have implications for toll road entities

Road traffic growth moderation in financial year 2024-25 (FY25) is likely to impact the revenue growth of toll road entities, as implied traffic growth for toll road companies is set to moderate to 4 per cent in FY25 from 5 per cent in FY24, according to rating firm ICRA.

 

Toll collection growth is expected to slow down to 5-8 per cent in FY25 from 10 per cent in FY24.

 

“Most entities saw a bump in their toll collections a couple of years back because of the healthy wholesale price index (WPI)-related growth. That has helped them. The moderation in traffic in the current year, because of both toll and traffic-related aspects, is likely to result in a reduction in the toll collection. But this may not have any material impact in the near-to-medium term since it is only for FY25,” said Vinay Kumar G, vice-president and sector head of corporate ratings, ICRA.

 

Toll rates on highways in India are annually revised considering the WPI. A higher WPI generally leads to a higher increase in toll rates, boosting toll revenue for road operators to account for rising costs. The provisional February WPI number was 2.38 per cent over February, 2024.

 

Some factors behind the traffic moderation include sluggish economic activity, delayed toll rate increases resulting from elections, traffic diversion caused by new infrastructure projects, mining restrictions, and a potential shift in traffic to alternative modes of transportation, according to Vishal Kotecha, director, India Ratings & Research.

 

Real gross domestic product (GDP) has been estimated to grow by 6.4 per cent in FY25 as compared to the growth rate of 8.2 per cent in the provisional estimate of GDP for FY24.

 

Schemes like the Dedicated Freight Corridor (DFC) and the PM GatiShakti National Master Plan have prompted the construction of new roadways across the country. Any slowdown in the global economy may impact port-bound traffic in India. 

 

Moreover, a slowdown in the growth of automobile sales and consumption is also being attributed to traffic moderation. In FY25, automobile sales growth slowed to 6 per cent.

 

“The toll revenue growth was hampered on account of deferment in the annual revision of the toll fee, which came into effect on 1st June 2024 instead of 1st April 2024, impacting revenue in the first quarter of the financial year. Further, moderate economic growth, inflationary pressures and rising fuel prices have also been attributed to the traffic slowdown,” said Hemal N Thakkar, senior practice leader & director – Crisil Intelligence.

 

ICRA estimates road construction under the Ministry of Road, Transport and Highways (MoRTH) to remain around 10,000-10,500 km in FY25 amid a slowdown in the pace of road construction. This is mainly due to the shrinking order book of road developers, the model code of conduct due to elections, and the extended monsoons in the first half of FY25.

 

“Not only are new road corridors coming up, but alternative modes of transport are also likely to have impacts. On a long-term basis, we expect to have a 4-5 per cent traffic growth rate in general for India. But wherever there are diversions, it can also go down by 100-150 basis points (bps),” said Gaurav Chandna, executive director and joint CEO, Highways Infrastructure Trust, an infrastructure investment trust (InvIT) that operates 27 toll plazas across nine states with a 4,700 km portfolio.

 

Further, historically, commercial vehicles, which pay higher toll rates, account for 65-75 per cent of the road traffic. A large part of toll revenues depend on how the commercial traffic performs, which in turn relies on India’s industrial growth. According to a report by Bank of Baroda, India’s industrial growth is estimated to slow down at 6.2 per cent in FY25.

 

“Given all the global uncertainties, including tariffs, conflicts, wars, and other global disruptions, sometimes there has been a little bit of slowdown in industrial growth and consumer growth volumes. That also affects some traffic,” said Bhavik Damodar, partner, Deloitte India.

 

According to Manish Satnaliwala, CEO, Capital Infra Trust, the risks are that the roads have a very long-term concession agreement, and there is the possibility of parallel roads coming up that can dent the volume growth. Traffic directly impacts revenues apart from certain major events and parallel roads.

 

However, the industry experts also say that the moderation is limited to particular road stretches. Moreover, they are banking on increased traffic activity in certain regions like Prayagraj in Uttar Pradesh due to the Maha Kumbh Mela.

 

“If you take stretches connecting to Prayagraj, because of the Kumbh, they would have seen a massive uptick in activity. Some other stretches may have seen a decrease in activity. It’ll have average effects. It's not possible to quantify and say that the earnings of the companies may go down because traffic growth has gone down. It's going to be more about stretch to stretch,” said Damodar.

 

Danny Samuel, CEO of Roadstar Investment Managers, said, “This (the moderation) is asset specific. Generally, we have seen good growth happening over the last year. However, going forward, growth will slowly start moderating along with GDP with more roads and expressways being developed. We can see the growth and shift of traffic patterns happening all across India. But specific to assets, there will always be some risk factors because of some expressway coming up or some pattern shift.”

 

According to Maulesh Desai, director, CARE Ratings, the overall revenue of toll road entities is also a function of other factors like the realisation and cost structure. The traffic volume may not necessarily translate into the company’s performance.

 

In FY26, the central government has targeted the construction of 10,000 km of highways across the country. The industry leaders have expressed a positive perspective over toll revenues powered by a toll hike and improved consumption and industrial activity.

 

Recently, the National Highways Authority of India (NHAI) increased toll charges by an average of 4-5 per cent on highway sections across the country.

 

“I hold a more optimistic outlook. The introduction of FASTag has reduced inefficiencies, and the government’s plans for a GPS-based tolling system will further enhance transparency. With improved road infrastructure and the rise in commuting, including the adoption of electric vehicles, road traffic is only poised to grow,” said Sanjay Dutt, MD and CEO of Tata Realty & Infrastructure.