Rating agency Ind-Ra has revised the outlook for road sector to stable-to-negative from stable for the remaining part of 2019-20 fiscal, due to subdued funding climate, economic growth-led deceleration in traffic volumes and uncertainty on the bidding model.

The weakening of financing sentiment and a sharp rise in land acquisition costs exert pressure on the central budget and could compel the government to rethink the bidding model, India Ratings and Research (Ind-Ra) said in a statement on Monday.

“Simultaneously, developers’ order book to revenue multiple slipped to a four-year low due to absence of new bidding, leading to lower revenue visibility,” it said.

Construction activities are expected to plateau in 2019-20 due to dismal project awards in 2019 and delayed appointed date due to the land acquisition issues.

The ambitious ‘Bharatmala Pariyojana’ is likely to see 55 per cent cost overrun and awarding activity to be completed not before 2023-24.

Road and Highway Ministry’s efforts to offer opportunities through new models such as toll-operate-transfer and rejuvenated build-operate-transfer would garner participation, contingent on addressing issues in earlier concession arrangement.

“Ind-Ra has revised the outlook on toll road projects to stable-to-negative from stable for the remainder of FY20, driven by heightened risk in prediction of traffic growth due to deceleration in economic growth,” it said. “With nearly 60 per cent of Ind-Ra’s portfolio likely to undertake major maintenance in FY20-FY21, adequacy of reserve would be a test for some of the projects.”

Absent reserves and lack of sponsor support will not only risk the project performance but also impair debt servicing, it added. “Majority of toll assets have a stable outlook and Ind-Ra does not expect any challenges in major maintenance funding for projects in ‘A’ category and above,” it added.

Ind-Ra said it has maintained stable outlook for annuity-based and hybrid annuity model (HAM) projects for the remaining fiscal. “Timely and steady annuities support annuity projects; however, increased tax obligations due to the application of Indian accounting standards created ambiguity in exact assessment of cash flow for certain projects, impacting debt service coverage ratio,” it said.

The agency has undertaken rating actions on annuity projects where tax implications are significant, it said.

Ind-Ra said it expects rating upgrade in HAM projects on the back of steady construction progress and likely project completion on or before schedule.

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