Road sector in India continues to face multiple challenges in the form of execution impediments, financing constraints, optimistic traffic estimates and stressed financial position of the developers. Several projects have faced delays in execution mainly on account of delayed land acquisition, removal of encroachments, shifting of utilities, receipt of approvals and environment clearances. In addition, the actual traffic in many operational toll road projects has turned out to be significantly lower than the traffic estimates. Consequently, lenders have increased caution while funding fresh projects, especially in those cases where the bidding is perceived to be very aggressive. In addition, overall creditworthiness of road developers have deteriorated due to their leveraged balance sheet and strained profitability.
ICRA in a release said weak capital markets and stressed valuations have made raising equity capital extremely difficult for most developers. As a result, participation in the road projects offered by National Highways Authority of India (NHAI) over the last few months has been muted. While subdued competition is positive for the sector which was not too long ago witnessing irrational bidding, the sharp decline in the private sector participation across the board implies reduced risk appetite of the developers and increasing difficulty in facing financial closures.
Over the last few years, NHAI has been awarding projects only under the Public-Private Partnership (PPP) mode, in comparison to item-rate contracts which were awarded earlier. The road contractors which were earlier engaged in executing projects on item rate or Engineering, Procurement and Construction (EPC) contract basis struggled to maintain their order-book and many opted to enter then PPP space by undertaking projects on build-operate-transfer (BOT) mode. Since BOT projects require long term fund infusion, and the capital markets have not been conducive for raising funds, several players had resorted to external borrowings to meet their equity commitments in various Special Purpose Vehicles (SPV) floated to develop the projects thus resulting in double leveraging and increase in overall indebtedness at the group level.
Moreover, elongated working capital cycle in core construction businesses of many entities has also strained their liquidity position and further increased their dependence on borrowed funds. The operating margins of several road contractors also witnessed pressure because of rising commodity prices (for fixed-price contracts) and idling of capacities as execution could not begin on many new projects.
Rohit Inamdar, Senior Vice-President and Co-Head, Corporate Ratings, ICRA said,“Many projects which were awarded over the last one-two years faced difficulty in achieving financial closure closure due to aggressive bidding, and uncertainty on land acquisition, approvals etc. The lenders have also become cautious on groups which have over leveraged themselves. Further, the execution on many of the projects remained slow primarily because of delays in land acquisition, clearances, and financial closure. Projects that had the requisite approvals and funding reported healthy execution.”
In case of many toll-based road projects which commenced operations, the actual tolled traffic during initial period was significantly lower than the initially estimated traffic. This coupled with higher interest burden had resulted in stress on debt servicing capability and project return indicators. However, projects with established traffic continued to perform well as the impact of higher interest burden was compensated by higher revenues in case of inflation-linked toll rates.
