Sunday, November 20, 2016

Demonetisation to hurt toll-road operators in short term

An expected decline in road traffic and the exemption of road tolls following the withdrawal of high-value banknotes may pose short-term cash flow concerns for toll road operators, companies and analysts said. 
While the government plans to compensate these companies for their toll loss, there would likely be short-term pain as traffic plunges on account of low economic activity, they said. 
Demonetisation could drag down 2017-18 gross domestic product (GDP) growth to 5.8%, an Ambit Capital report on Friday said.  
The exemption on toll collection could result in cash flow constraints for road projects for interest payments at the end of the month, said K. Ramchand, managing director at IL&FS Transportation Networks Ltd (ITNL), which owns and operates multiple toll-based projects and collects an average of Rs1.7 crore in tolls every day.
The cash flow impact would be serious wherever the revenue of road projects is linked to the repayment of  loans, said Jayant Mhaiskar, managing director of MEP Infra Developers Ltd. “As far as the compensation is concerned, the concession agreements are fairly well-scripted or well-documented in terms of how the compensation is given,” he said. MEP Infra operates 30 toll plazas on national highways and has an average daily toll collection of about Rs4.5-5 crore. Mhaiskar said it is yet to be seen how traffic growth will be impacted. 
The government on Thursday extended the exemption on toll collection to all vehicles across national highways till 24 November to ensure smooth flow of traffic after withdrawing Rs500 and Rs1,000 notes on the evening of 8 November.
To be sure, executives at least three road companies that Mint spoke said they have received some form of communication from the ministry of road transport and highways and the National Highways Authority of India (NHAI) assuring compensation. Under the concession agreement for road projects, companies need to apply for compensation against such losses under the change in law provision. The government could also compensate by extending the concession by a corresponding number of days. 
In case of cash compensation, anything less than 100% will be a negative for toll-based road projects, said Ashish Agarwal, director (infrastructure) at Equirus Capital Pvt. Ltd, an investment bank. “It is getting more clear that trade is going to be lower in the next quarter and traffic is in direct correlation to trade. Traffic in the third quarter would definitely get impacted,” he said. 
Road projects had seen a traffic growth of about 6% in fiscal 2016 and an equivalent growth in the first half of the current fiscal year, but this is likely to slow down in the second half, said Shubham Jain, vice-president at ratings agency Icra Ltd. Overall traffic growth at the end of the current fiscal may be just about 3%, he said.
“More than the amount, as a rating agency, we are more concerned about the actual timing of the release of payments. Because toll road companies are operating at very thin cushion in terms of debt servicing and these companies have to make interest payments on a monthly basis, and debt repayments on monthly or quarterly basis,” Jain said. 
Even beyond this exemption period, overall toll revenue in this fiscal year may be lower than what the companies would have expected before 8 November, he said. 
Last week, Icra said in a report that loss of toll revenue for around 115 NHAI toll projects operated by private sector firms could be Rs460 crore for the 10-day period between 9 and 18 November. Other industry estimates suggest a toll revenue loss of Rs55 crore per day for NHAI’s projects. 
“ICRA expects that the NHAI may opt for cash compensation, instead of extension of concession, considering the developers’ financial stress. Nevertheless, there is significant uncertainty regarding the quantum, mode and timing of such compensations,” the Icra report last week said. 
The government could reimburse companies for the loss of toll income calculated either on the basis of their October average or the average of first eight days of November, Ramchand of ITNL said. “The government could pay 75% immediately and the rest over time, but there is no formal decision on this,” he said. 
“NHAI has communicated that it will pay an interim amount to toll operators and will also compensate the remaining. It is not yet decided whether NHAI will compensate on the basis of October’s toll income or an average for first week of November,” said Vasistha Patel, executive director at Sadbhav Infrastructure Projects Ltd. 
NHAI chairman Raghav Chandra did not respond to an email sent on Friday seeking comment. 
India has the world’s second largest road network of about 4.8 million kilometres but national and state highways constitute a small percentage of that network. 

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