Sizeable equity commitments in under-construction projects and rising working capital requirement will increase the debt burden of road developers, though revenue growth will also be high in the next two fiscals driven by strong awarding and execution, together with significant budgetary allocation to the sector.
All the same, with the leverage level low at present, developers have headroom to borrow, which would keep their credit risk profiles stable. Asset monetisation will be crucial to rein in debt at comfortable levels.
A Crisil Ratings analysis of 18 engineering, procurement and construction (EPC) players, constituting 70% of the sector revenue, indicates as much.
Says Mohit Makhija, senior director, Crisil Ratings, said, “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.”
Says Anand Kulkarni, director, Crisil Ratings, said, “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.”
