Road construction is likely to witness a substantial ramp-up in the current financial year on the back of healthy pipeline of projects, and enhanced capital outlay by the government, according to rating agency ICRA. The agency expects execution activity in FY2024 to grow by 16%-21% to 12,000 km-12,500 km with the government’s focus on project completions, ahead of the general elections next year.

Addressing a webinar on road sector, Vinay Kumar G, Sector Head, Corporate Ratings, ICRA, said the road construction was impacted in the first half of FY2022-23 due to elevated commodity prices as well as prolonged monsoon in some parts of the country.“The situation improved in H2 FY2023 with road construction witnessing a YoY growth of 2%, thereby containing the overall decline at 1% in FY2023 (to 10,331 km from 10,457 km in FY2022).”

The construction in the current financial year is likely to spring back on account of a strong project pipeline, the agency believes. “The project pipeline remains strong at 55,000 km under various stages of execution. This, along with focus on project completions ahead of general elections, is expected to boost execution to 12,000-12,500 km in FY2024,” Kumar added.  

"With the model code of conduct in place during Q4 FY2024 (Q4 typically accounts for 50-60% of awards in a year), ahead of the general elections, the awarding activity is likely to be impacted in FY2024 and the overall awards are expected to decline to 9,000-9,500 km from 12,375 km in FY2023. The EPC will continue to remain the mainstay of awarding, accounting for 70-75% of awards in FY2024. The BOT-Toll awards accounted for less than 5% of the orders in the last five years, and its share is expected to remain at similar levels in FY2024," he added.

On the funding models the agency said while the bid competitive intensity remained high for EPC projects, the trend caught up with the HAM projects as well in FY2023 as 40% of the hybrid annuity model (HAM) went at a discount to the authority bid price. The median premium declined from above 20% levels during FY2019 to FY2021 to 15% in FY2022 and 4% in FY2023, it said.

ICRA projects the toll collection growth to be 6%-9% in FY2024, primarily supported by a 4%-5% growth in traffic. "In the backdrop of easing WPI inflation, the inflation-linked toll hike is relatively modest at 1.3%-5% in FY2024. Consequently, the toll collection growth in FY2024 is estimated at 6%-9%, primarily supported by 4%-5% growth in traffic. Despite the moderation in toll collection growth, lower outflow towards O&M and major-maintenance expense on account of recent moderation in key commodity prices, especially bitumen, should support the debt coverage metrics for BOT toll road assets. ICRA’s outlook on toll roads for FY2024 is Stable," Kumar added.

Follow us on Facebook, Twitter, YouTube & Instagram to never miss an update from Fortune India. To buy a copy, visit Amazon.