Healthy Order Flows To Support Credit Profiles Of Road EPC Companies

Asset monetisation will gather pace in the roads sector as road-building engineering, procurement and construction (EPC) companies pursue growth backed by the government's thrust to the sector, CRISIL has stated.

The healthy order book position of the road EPC companies, which stands at over 3 times revenue at present, is expected to improve further supported by new project awarding momentum. Sale of operational road assets will help developers fund this growth.

CRISIL Ratings estimates total awarding of roads by the National Highways Authority of India (NHAI) and the Ministry of Road Transport and Highways this fiscal to be 15% higher on-year, which should help continue the buoyancy from last fiscal, when project awards had increased 23% to 11,000 km.

Road EPC companies are well-placed to tap this opportunity, shows an analysis of 17 large road EPC companies, which account for 65% of the sector's revenue.

Says Anuj Sethi, Senior Director, CRISIL Ratings, "Revenue of these large road EPC companies will increase a handsome ~15% this fiscal and sustain the strong growth trajectory over the medium term. This is backed by healthy order book, which is expected to remain 3-3.5 times' revenue over the medium term. These companies will focus on asset monetisation, which will enable them to maintain their credit profiles while scaling up."

The asset monetisation potential is supported by healthy investor interest either through investment at asset level, or infrastructure investment trusts (InvITs).

CRISIL Ratings has analysed 12,000 km of operational built-operate-transfer (BOT) road assets of NHAI and private players to arrive at the future fund-raising potential.

Says Anand Kulkarni, Director, CRISIL Ratings, "We foresee monetisation potential at Rs 72,000 crore (enterprise value) for the NHAI and private developers, which can be realised through InvITs, private sale and toll-operate-transfer models over the next three years. The capital so unlocked will be available to accelerate awarding of projects under the NHAI's ambitious Bharatmala Pariyojana, and support growth of road EPC companies."

The resilience of BOT-toll assets last fiscal renders them ripe for monetisation. After a weak first quarter, traffic rebounded well, which limited its de-growth to 4-5% last fiscal. Though the resurgence of the pandemic will have a bearing in the first quarter of this fiscal as well, the forecast of better economic growth for the rest of the year will support recovery in traffic.

The expectation of asset monetisation is also supported by the past performance of road EPC companies. Between fiscals 2016 and 2021, sale of assets to InvITs or to private equity funds helped unlock ~Rs 80,000 crore of enterprise value for the sector (~Rs 50,000 crore for the road EPC companies analysed). Around 60% of this was through four InvITs. The funds released strengthened their balance sheets.

The leverage (calculated as total outside liabilities to tangible net worth) of these companies is estimated to have improved to 1.25 times as on March 31, 2021, from 1.87 times as on March 31, 2016, largely supported by asset monetisation. This is despite a healthy annual revenue growth of 12% over these five fiscals. During this period, NHAI awarding of projects was primarily through the EPC and hybrid annuity model routes, where investments by developers is limited. That also curbed any ratcheting up of debt by these road EPC companies.