Capital outlay on roads, renewables seen rising ~35% in this and next fiscals to Rs ~13 lakh cr, backed by strong execution pace – EQ
Conducive policy milieu, healthy leverage, strong investor interest to keep credit profiles stable
The pace of construction of roads and capacity addition in renewables is seen increasing 25% (refer to chart 1 in annexure) and 33% (refer to chart 2 in annexure), respectively, over the current and next fiscals. This bodes well for the economy, given the high multiplier effect of road development and the critical role renewable energy can play in achieving India’s energy transition.
The growth is expected to sustain over the medium term, supported by conducive policies, strong investor interest and healthy financial profiles, leading to stable credit quality of companies in the CRISIL Ratings portfolio in both sectors.
Says Gurpreet Chhatwal, Managing Director, CRISIL Ratings, “The pace of execution of renewable energy projects is set to increase 33% to ~20 GW per annum over current and next fiscals (~15 GW per annum in the past two fiscals) supported by a healthy executable pipeline of ~50 GW of projects as on March 31, 2023. Similarly, road construction is set to accelerate 25% to 12,500-13,0002 km per year over the current and next fiscals on continued healthy awarding of projects and step up in execution by road construction players.”
A supportive policy environment adds its own spurs. For instance, steps such as late payment surcharge has helped keep dues from discoms to renewable generators in check3. In roads, the introduction of the hybrid annuity model (HAM) has speeded up execution and drawn in investments. Further, initiatives such as Atmanirbhar Bharat, forbearance during the pandemic, and emergence of infrastructure investment trusts (InvITs) have afforded a fillip to both sectors.
Says Manish Gupta, Senior Director and Deputy Chief Ratings Officer, “Investor interest has been encouraging, with Rs 75,000-80,000 crore raised through equity and asset monetisation in the past two fiscals in both sectors. Continued focus on asset monetisation and equity raising, along with healthy cash flows will keep the capital structure balanced in both sectors. So, despite higher capital outlays, rated renewables4 and road5 entities should have a healthy average debt service cushion of 1.2-1.3 times over the tenure of debt on their balance sheets, which supports their credit profiles.”
But challenges remain such as risks of aggressive bidding and execution by new entrants. Rationalisation in bidding strategies will be crucial to sustain profitability and maintaining quality.
In the milieu, timely asset monetisation will remain important in the roads sector as InvITs continue to grow.
For renewables, if geopolitical developments affect supply chains, it may impact the internal rate of return and pose a risk to our estimates.
Annexure
Chart 1: Pace of road construction set to improve
Note: National highway numbers include those under MoRTH, NHAI and National Highways & Infrastructure Development Corporation Ltd (NHIDCL).
Source: NHAI, MoRTH, CRISIL Ratings and CRISIL Research
Chart 2: Power sector capacity addition (GW)
About CRISIL Ratings Limited (A subsidiary of CRISIL Limited)
CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
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About CRISIL Limited
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