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Traffic growth halves, makes highway projects unviable

As less trucks ply, the growth has come down to 2-3% last year.

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A significant slowdown in traffic growth in the past couple of years is lowering toll collection and making highway projects across the country unviable, according to Crisil Research.

Base traffic (the first year of operations) on many highways has been well below estimates of National Highways Authority of India (NHAI), as per the firm's analysis. Adding to the highway developers' woes are cost overruns incurred on the projects.

Its analysis of 15 national highways showed that traffic growth, in passenger car unit terms, slowed to about 3-4% in fiscal 2012 and 2-3% in 2013, compared with 7-8% in between fiscals 2007 and 2011.

Prasad Koparkar, senior director - industry and customised research, Crisil Research, said this is primarily because commercial vehicles traffic, which account for over three-fourth of total traffic, hard-braked, growing at just 2-3% in fiscal 2012 and just 1% in 2013.

"On the other hand, passenger vehicle traffic grew at a healthy 15% in the last two years. Our estimate is that overall traffic growth has remained weak in the current fiscal and will continue to languish around 3-5% over the next 12 months. Typically, a 1% drop in traffic growth over the concession period can result in 0.75%-1% decline in project returns," said Koparkar.

Crisil said in the case of six national highway stretches, base traffic was lower by a significant 20% to 40% compared with the NHAI estimates. Things turn grimmer because the six projects are significantly delayed and are seeing an average cost overrun of about 23%. The delays are largely due to land acquisition and clearance issues.

Rahul Prithiani, director - industry research, Crisil Research, said calculations of many road developers have gone awry. "Our analysis shows five out of six projects have an average debt service coverage ratio (DSCR) of less than one in the first five years of operations. This means, if there is no additional capital infusion, developers will find it difficult to service loans. Also, project returns today are in the 8% to 14% range – less than half the 22% to 26% arrived at based on NHAI's traffic and cost estimates," said Prithiani.

Manish Kayal, assistant vice-president - infrastructure solutions group, Centrum Capital Ltd, said with the purchasing managers' index (PMI) just managing to remain above 50 mark after touching all-time low of 47 in mid-2013, the activity has taken a hit due to continuing inactivity in economic activity in India.

Centrum expects this scenario to continue for a year at least. Kayal said the viability of build-operate-transfer projects bagged on aggressive terms in the past couple of years will continue to witness stress in the high interest rate environment and sponsors funding to pay lenders obligation.

"Delays in translating announcements into concrete, on-the-ground actions are diluting their efficacy. Moreover, there is no unanimity of thought among various agencies in resolving issues, leading to contradictory positions and sub-optimal solutions," India Ratings' analysts Chintan Lakhani, Sriram Parthasarathy and Venkataraman Rajaraman said in a recent report.

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