When high inflation helps toll revenues

A high inflation scenario may not be so bad if you are a road developer in India as toll revenue is expected to grow at 17-20% rate over the next one year, experts say.

While the revision in toll rates is linked to rise in inflation indices, an increase in traffic too will contribute to the rise in revenue.
“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% of revenues,” Pawan Agrawal and Sudip Sural of Crisil Ratings said in a note.

Crisil reviewed 21 toll roads with a cumulative toll collection of Rs1,000 crore. The note said that road traffic in India will grow 10% in 2011-12, considering the Indian economy is growing at 8%.

The risk to this strong growth, however, exists in a possible economic slowdown which may affect traffic; also a high interest rate scenario may lead to cash flows slowing for road projects as most projects are highly leveraged, Crisil said.

Experts said the projects which were awarded before 2008 have a 100% dependence of toll rate revision on inflation movement.

“But for projects awarded after 2009 it’s a fixed rate of 3% plus 40% of inflation. If inflation is at 6%, then it’s 3% plus 2.4%,” said Virendra D Mhaiskar, chairman & managing director, IRB Infrastructure Developers.

Mhaiskar expects toll revision growth to be between 17% and 18%. IRB has 16 highway projects, of which it tolls 10. Last fiscal it collected Rs832 crore toll compared to Rs730 crore in 2009-10.

Though not everyone is so optimistic about the numbers. “A 20% growth in toll rate and a 10% growth in road traffic seem to be very ambitious. We would say 7% growth would be a cap on toll revision as the traffic growth is not evenly distributed across the country,” says Manish Kumar, analyst with SBICAP Securities.
SBICAP Securities expects to see growth in the road sector with ample work opportunities after the government announced its plans to build more than 7,000 kilometres of roads over the next one year.