Source: CRISIL Ratings
Says Mohit Makhija, Senior Director, CRISIL Ratings, “Total equity commitment towards under- construction public private partnership (PPP) projects is estimated at over Rs 21,000 crore by fiscal 2025. Further, the working capital requirements are expected to increase with expected strong revenue growth of 10-15% over the next two fiscals and rollback of liquidity support provisions under the Atmanirbhar Bharat package. Accruals will fund ~45% of these incremental outflows, while the balance is expected to be funded through asset monetisation and debt. Consequently, debt of the sample set is expected to inch up to ~Rs 30,000 crore as of March 2025 from ~Rs 17,000 crore as of March 2022.” (Annexure)
Projects awarded through the hybrid annuity model (HAM) route typically form a large share of National Highways Authority of India (NHAI’s) total awards. These projects require 12-15% of project cost to be funded through equity.
Additionally, working capital requirements are expected to rise with strong revenue growth expected over the medium term, reflected in healthy order book to revenue ratio of ~3.0 times. Further, the Government had taken various steps under the Atmanirbhar package1 to mitigate the impact of Covid-19. The scheme is set to expire on March 31, 2023, unless extended. This may further add to the overall working capital requirements.
On the other hand, execution of aggressively bid contracts awarded during the last two to three years will keep operating profitability constrained at 12-13% over the next two fiscals, compared with 14-15% in the past. Profitability is estimated to fall ~150 basis points this fiscal, impacted by high input prices. Improvement in net cash accrual, hence, is expected to be limited.
Says Anand Kulkarni, Director, CRISIL Ratings, “Besides internal accruals, the road contractors will have to rely on other funding sources such as asset monetisation, equity raise or incremental debt to bridge the funding requirement. Current low leverage (as reflected in total outside liabilities to tangible net worth, or TOL/TNW, ratio of ~1 time as on March 31, 2022) will ensure headroom to borrow without any material impact on the credit risk profiles of players. Even after factoring in the increase in debt from current levels, the ratio is expected to remain comfortable below 1.2 times.”
It is to be noted that the analysis factors in sale of assets of ~Rs 10,500 crore2, of which ~Rs 5,500 crore has already been announced.To be sure, the players have shown track record of deleveraging in the past through asset monetisation and equity raise which has resulted in improvement in the TOL/TNW ratio from over 1.6 times in the pre-pandemic period to ~1 time at present. Going forward, while interest coverage ratio is likely to moderate from over 3.5 times with thinning margin and rising finance cost, it will remain satisfactory at ~3 times.
The ability of the players to efficiently execute projects and improve profitability as well as incremental asset monetisation will remain key monitorables over the medium term.
