Slowdown in traffic to persist

Written by Shubhra Tandon | Updated: Dec 11 2013, 09:09am hrs
Policy hurdles along with slowing growth in the countrys gross domestic product (GDP) have led to a fall in toll collections on Indias roads in the second quarter ended September 2013. With the National Highway Authority of India (NHAI) not coming out with any new projects for bidding in the last nine months, road developers now feel visibility on road construction is also going bleak. Indias largest road construction company, IRB Infrastructure Developers Ltds chairman and managing director, Virendra D. Mhaiskar tells Shubhra Tandon of FE that sluggish business environment is not going to go away anytime soon, and challenges lie ahead for road developers. Excerpts from the interview:

What is your sense on the current toll collections and traffic

Our sense is that toll collection always has some co-relation with the GDP growth rate, and with a slowing GDP you will see toll revenues also falling. At present, 0.8 is the co-relation to GDP growth. So, at 5% GDP growth, toll traffic growth is somewhere in the range of 4-6%, depending on which area the project is and other factors. But the co-relation always works. In a falling GDP scenario, we will certainly have pressure on the traffic growth for some time to come.

What sort of challenges does this pose for you given that revenues will come under pressure

It will depend on what estimation one has worked when one has bid for the project. If someone has worked on a 8-10% traffic assumption then it will pose a huge challenge, because then you are 30%-40% below your estimated numbers. But if you have worked on reasonable 5-6% traffic growth assumptions, there is a possibility that some hedging is available because of a higher inflation number. In our Bharuch-Surat and Surat-Dahisar projects, for example, we have tariff policy linked to inflation. So, to an extent lower traffic growth has been compensated by higher tariff. But that may not be enough, if your projections are very high in the earlier concession tenor.

How is it going for IRB in terms of traffic growth

We have also seen the impact of slowdown. But our two large projects, Mumbai-Pune and Surat-Dahisar, contribute almost 60-70% of our total revenues. These have witnessed around 5% odd traffic increase, so it is fine to that extent. In the smaller projects, which are more in the interiors and are state projects, we have witnessed a negative growth in some.

When do you see this situation reversing

When we witnessed high growth rates, the jump (in traffic and collections) was not in one go. Similarly, the slowdown is not going to go away in a hurry. Our sense is that growth will come back over the next one to two years. We are probably at the bottom of the trough. But a recovery depend on government efforts, revival in investment cycle, actual movement of goods happening and actual mining starting. In mining, for example, despite the Supreme Court lifting the mining ban on Class A and B mines almost a year ago, mining has not commenced.

So more pain is expected for road developers in the near future

Certainly, more difficult times are expected. It all depends on whether NHAI will come out with new projects which can give us visibility on the construction side. On the existing projects, I think 5% toll collections growth, and 6-7% tariff growth is something one can work on for the next one to two years. An overall revenue growth of 10%-11% looks doable as against 12-14% earlier.