Inflation: Toll roads to get higher credit rating, rates

At a time when a stubbornly high inflation is giving sleepless nights to government, RBI and policymakers, making deeper holes into everyone's pockets, it has a positive impact on one sector - tolled roads according to leading research and rating agency Crisil which says the price rise increases the credit quality of such motorways.

According to a Crisil Ratings' report on toll roads which analyses the impact of the high inflationary environment on revenues of the 21 operational toll roads, their cumulative toll revenue stood at around Rs1,000 crore last fiscal and says the same will grow by 20 per cent this fiscal, while road traffic is slated to login in a 10 per cent growth.

"Crisil believes that revenues for these toll road projects will grow by 20 per cent this fiscal. 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 GDP growth," Crisil Ratings director Pawan Agrawal said in the report.

Inflation has been remaining unacceptably high since last year and is again reached closer to the dreaded double-digit level in May when it rose to 9.06 per cent (up from 8.66 per cent in April), while food inflation after a brief pose is looking up again with the latest number standing at 9.13 per cent for the week ended June 11.

Adding more fuel to fire was the last Friday's steep hike in diesel, kerosene and cooking gas prices, which would put immense pressure on headline and food inflation numbers.

As inflation remained highly above the comfort level of RBI, since March last year, it has upped its key rates ten times in a row, with the latest round being on its mid-quarter review on June 16, when it jacked up the short-term lending and borrowing rates by 25 basis points each to 7.5 and 6.5 per cent respectively.

Citing the reason for this projection, Agarwal says, "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 the movements in inflation indices, and traffic growth is relatively inelastic."

The report goes on to add that this high revenue growth, coupled with low operating costs for toll roads will enhance the cash accruals and debt repayment capacity of the toll road projects, and can thus positively impact their ratings in the short-term.

The report also warns that motorists should be prepared to pay higher toll charges this fiscal, as toll rates are aligned to inflation.

The concession agreements in the road sector 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.

The report notes that growth in road traffic so far has been largely inelastic, primarily due to the monopolistic features of tolled roads and their close linkage with economic activity. Road traffic should, therefore, continue to grow at nearly 10 per cent this fiscal.

The report adds that 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.

However, Crisil notes that despite a positive outlook in the near-term, the toll road projects inherently remain exposed to certain long-term risks.

For one, the report says any slowdown in economic activities can adversely impact traffic growth, given the close inter-dependence. Secondly, any large and sustained hike in toll rates may increase road-users' resistance to paying toll.

Thirdly, the rising interest rates can put pressure on the cash flows of roads, given that most infrastructure projects are usually highly leveraged.

While the first two risks are generic, the toll road developers can mitigate the risk of rising interest rates by contracting debt at fixed interest rates, says the report.

"Tapping the debt capital markets can provide operational roads with an effective avenue to refinance their variable rate bank loans, with long-tenure, fixed-rate bonds," adds Agrawal.