Want to invest in toll road operators? Here’s why you should

Road traffic has shot up significantly in the first half of this fiscal year, logging a high growth of around 27% year-on-year, partly due to a weak base of last fiscal year and in part because of less stringent restrictions which didn’t disrupt supply chain during the second wave of the Covid-19 pandemic compared with the first one.

However, this was followed by a sharp reversal of fortunes. The heavy and prolonged monsoons as well as supply chain disruptions, linked to semiconductor chips and container shortages, impacted the traffic performance. As a result, traffic sank around 8% between September 2021 and January 2022.

This is likely to pull down road traffic growth to 7-9% this fiscal year.

But prospects for the coming year look promising as steady traffic growth of 5-7% along with a significant hike in toll rates is projected to boost revenue of toll road operators.

The toll rate hike is linked to inflation based on the wholesale price index (WPI), which has remained high at over 10% in the first 10 months of FY22. Consequently, toll rate hikes are expected in the range of 8-10% for the next fiscal, according to rating agency CRISIL.

This will translate into a healthy 14-16% revenue growth for toll road operators. “This will be better than current fiscal revenue growth estimate of 11-13%. Rising coverage of FASTag and, hence, lower leakages will continue to support overall toll collections for operators,” CRISIL said.

On the flip side, the adequate balance sheet liquidity, will continue to support the toll road players’ credit profiles, the rating agency said based on a study of 18 toll road assets in seven states.

According to Saina S Kathawala, Associate Director, CRISIL Ratings, the credit profiles of toll-road players are likely to remain strong, and their debt-servicing ability has not deteriorated materially due to lower-than-expected traffic volumes.

“The average debt-service coverage ratio of the CRISIL Ratings sample is likely to be adequate at 1.7 times and 1.5 times in the current and next fiscals, respectively, which is broadly in line with our earlier projections. Besides, liquidity is supported by around 3-6 months of debt-service reserve, supporting their credit profiles,” Kathawala said.