High inflation positive for credit quality of toll roads says CRISIL

 | June 23,2011 06:14 pm IST

The revenues of operational toll-road projects stand to benefit from the prevailing high-inflationary environment, given that revisions in toll rates are linked to movements in inflation indices, and traffic growth is relatively inelastic. This high revenue growth, coupled with low operating costs for toll roads will, therefore, enhance the cash accruals and debt repayment capacity of toll roads, and can positively impact ratings for toll road projects in the short term.

At the same time, however, the consumers should be prepared to pay higher toll charges.


CRISIL has analysed the impact of the current inflationary environment on revenues of 21 toll road projects that are already in operation – Cumulative toll revenue for these projects stood at around Rs.10 billion for 2010-11 (refers to financial year, April 1 to March 31). Says Mr. Pawan Agrawal, Director – CRISIL Ratings, “CRISIL believes that revenues for these road projects will grow by 20 per cent in the current year 2011-12. This growth will be contributed almost equally by revisions in toll rates and an expected rise in traffic volumes based on our estimates of nearly 8 per cent growth in Indian economy”. Road sector’s concession agreements allow for the increase in toll rates to be
linked to movements in inflation indices during the year, and the inflation rate has averaged at 9.5 per cent in the past 12 months. Further, the growth in traffic on India’s roads so far has been largely inelastic, primarily on account of monopolistic features of roads (given the paucity of quality alternative roads), and its close linkage with economic activity. Road traffic should, therefore, continue to grow at nearly 10 per cent in 2011-12.


Such strong revenue growth will augment the debt service coverage capacity of toll road projects, considering that the operating expenses for toll roads remain low. Expenses for toll roads are primarily related to maintenance and upgrade, and generally range between 25 and 30 per cent of revenues.


Despite a positive outlook in the near term, the toll road projects inherently remain exposed to certain long-term risks. First, any slowdown in economic activity can adversely impact traffic growth, given the close inter-dependence. Second, so far the increases in toll rates have largely been absorbed by the users – any large and sustained increases in toll rates may increase road-users’ resistance to paying toll. Third, an increasing interest rate environment can put pressure on the cash flows of roads, given that most infrastructure projects are usually highly leveraged.


CRISIL believes that the while the first two risks are generic to the sector, toll road developers can mitigate the risk of rising interest rates by contracting debt at fixed interest rates. “Tapping the debt capital markets can provide operational road projects with an effective avenue to refinance their variable rate bank loans, with long-tenure, fixed-rate bonds”, adds Mr. Agrawal.