“ Asset Monetization, Healthy Order Flow to Support Credit Profiles of Highway EPC Companies ”, Auto News, ET Auto
Mumbai: Asset monetization will accelerate in the road sector as engineering, procurement and road construction companies continue to grow supported by the government’s push into the sector.
The good position of the EPC road companies’ order book, which currently represents more than 3 times turnover, should improve further, supported by the dynamic of new projects allocation.
The sale of operational road assets will help developers finance this growth.
CRISIL Rating estimates that the total route allocation by the National Highways Authority of India (NHAI) and the Ministry of Road Transport and Highways is 15% higher year-on-year, which should help maintain momentum relative to the last year when the allocations increased by 23% to 11,000 km.
EPC road companies are well positioned to seize this opportunity, shows an analysis of 17 large EPC road companies, which account for 65 percent of the sector’s revenue.
Anuj Sethi, Senior Director of CRISIL Ratings, said: “The revenues of these large EPC road companies will increase by 15% this fiscal year and support the strong growth trajectory in the medium term. This is supported by a healthy order book, which is is expected to remain 3 to 3.5 times revenue over the medium term. These companies will focus on monetizing assets, which will allow them to maintain their credit profiles while increasing their level. “
The potential for asset monetization is supported by healthy investor interest, either through asset-level investments or through infrastructure investment funds (InvITs).
CRISIL Ratings analyzed 12,000 km of operational BOT (BOT) road assets from NHAI and private actors to determine future fundraising potential.
Anand Kulkarni, Director of CRISIL Ratings, said: “We anticipate monetization potential of Rs 72,000 crore (enterprise value) for NHAI and private developers, which can be achieved through InvITs, private sales and toll-operate-transfer models over the next three years. The capital released will be available to accelerate the award of projects under NHAI’s ambitious Bharatmala Pariyojana and support the growth of EPC road companies. “
The resilience of BOT toll assets in the last fiscal year makes them ripe for monetization. After a weak first quarter, traffic rebounded well, limiting its decline to 4-5 percent last year.
While the resurgence of the pandemic is also having an impact in the first quarter of this fiscal year, expectations of better economic growth for the rest of the year will support the resumption of traffic.
The anticipation of asset monetization is also supported by the past performance of EPC road companies.
Between the finances of 2016 and 2021, the sale of assets to InvITs or to private equity funds made it possible to unlock Rs 80,000 crore of enterprise value for the sector (Rs 50,000 crore for the road of the EPC companies analyzed ).
About 60% of this amount was achieved through four InvITs. The funds released have strengthened their balance sheets.
The leverage effect (calculated as the total of external liabilities to tangible net worth) of these companies is estimated to have improved to 1.25 times as of March 31, 2021, compared to 1.87 times as of March 31, 2016 , largely supported by the monetization of assets.
This is despite a healthy 12 percent annual revenue growth against these five finances.
During this period, the attribution of projects by the NHAI was done mainly through the EPC and hybrid annuity models, where the investments of the promoters are limited. It has also held back any increase in the debt of these EPC road companies.
While the credit profiles of road EPC companies will remain comfortable, sustaining economic activity amid the fierce second wave of the pandemic will require close monitoring.
Any prolonged impact on traffic would hamper short-term asset monetization times.