Interview | India's road sector withstands second wave, pre-COVID toll revenue in few months, says CRISIL's Jagannarayan Padmanabhan

Road operators have been able to withstand the second wave of COVID-19 and the lockdowns, as toll collections and their balance sheets remain strong, Jagannarayan Padmanabhan, Director, Transport and Logistics at CRISIL said.

In an interview with Moneycontrol, he said toll collection was likely to rise to pre-COVID levels in the next few months and the government is expected to give a greater push to asset monetization plans.

However, the aviation sector will suffer until the first quarter of FY 24 and the valuations of Air India may take a hit as the value of its international bilateral slots may have taken a hit, he said.

Edited excerpts:

Last year, CRISIL estimated that roads and highways sectors will see toll revenue losses in the range of Rs 3,700 crores from March to June due to COVID-19 and lockdowns. What is the initial data saying for FY22?

This year (FY 22) it is difficult to estimate because lockdowns are happening on a piecemeal basis and across states unlike last year when it was declared across India.

But my sense is that I don't see a big loss in terms of toll revenues. The whole FASTag implementation has happened (since February 2021) and now it covers more than 95% of toll revenues, so that led to a bump up in revenues. It helps in stopping leakage of revenues, and in the pump up of the collection. And once that got stabilized, then this whole state-wise second wave lockdown happened. So that's not giving us any kind of directional comfort that we can come up with a particular number for revenue loss.

There may not be a huge dip as far as toll collection is concerned, in fact, we could see a kind of an uptick in comparison to 2020 and certainly even to 2019 levels. Hence, I feel there's no meaningful loss (in toll collection due to the outbreak of the second wave of COVID-19).

But if you look at the FASTag toll collection data, collection has fallen from Rs 3,000 crores in March, to Rs 2,100 crores in May. How do you see toll collection panning out in the coming months?

I would expect the FASTag collection to kind of stabilize and increase because many places where lockdowns had been imposed have bought a bit more relaxed kind of setup or in places it has been removed depending upon the district rates.

For example, Maharashtra has adopted that kind of model, Delhi has opened ups and Uttar Pradesh has also opened up. What I understand from the ground, look at places like Chennai, and Kolkata. It's not a strict lockdown. Movement of both passenger and commercial vehicles is happening quite freely.

The only probably dip would be from the public transport including buses and trucks and (that segment) had a lower share in the total FASTag collections anyway.

The NHAI has delayed plans to launch its InvIT twice already this year due to the second wave. Do you think the second wave has hir investor interest in the government’s road monetization plans?

Certainly, that has been pushed back by a quarter or so, in terms of the timeline that they had talked about. So that's because the priority both at the personal and the corporate level, the priority has become the safety of their employees and families.

I think, in a way NHAI was prudent to push its InvIT launch by about a quarter, to say that let stability come through and let there be sanctity to what we have put across, because otherwise any investor will say that ‘okay, you have said this should be the traffic, but this is the traffic’.

It is better that we have some level of recouping of traffic and those stretches planned and then bring the product out to the market for subscription, plus the NHAI InvIT is one of the larger InvIT coming in from the public sector and much awaited by the investing public as well.

The second part of it is that any kind of asset monetization initiative is directional and a trend that is being taken up by the government. It is not to be viewed as just a one-off exercise. So (delay of) a quarter or two is not going to make that much of an impact considering the longer duration of the concession for which it is going to be put up for us.

So, the answer to your question will be that COVID-19 doesn't have a great impact, as the investor appetite is still there in the road sector and road assets because the government is continuing to make capital expenditure in the sector. And have made it very clear that in the next three years to five years also, this is going to continue.

So, I think all that ties up well and there is enough investor interest, even when the pandemic was there, a fair amount of interest was there in the secondary market for infra road assets. So, going forward that will continue to be there and we should see a fair amount of subscription in this particular (InvIT). I am also very bullish about that.

Considering that COVID-91 has hit India’s road sector for two years in a row now, do you think that this will have an effect on the government’s plans to raise around Rs 85,000 crores by FY25 by monetizing 6,000 km of road assets?

Our view is that not only roads, but you will also see a significant amount of monetization of assets across sectors. The expectation is that close to 5-7 percent of the national infra pipeline need is going to be funded through the monetization program.

So, if that is going to be the case, the moment the larger issue of health safety gets addressed, and sufficiently under control, the government will kind of double up its speed and in fact double down and go and push for monetization across sectors not only in the road sector. So I'm quite hopeful that a meaningful portion of the target that has been set will be implemented in the next five years.

Given that vaccination in India is progressing slowly, do you think labor shortages will continue to be a constraint for road companies?

No, no, I don't. Even today, there has not been any secular trend that will show that there has been a labor shortage so to speak. That's not what I'm hearing from the ground. So I differ from what you are saying as a question, that there is a labor shortage.

Yeah, I think if you were to dissect the whole vaccine rollout, and where is that getting consumed, there is vaccine available in the hinterlands and the government is educating people to come and take the vaccine.

It's not as much as the vaccine shortage in the hinterland. It is hesitancy in getting vaccinated and issues around that education part is what is currently a challenge that the government is facing.

Further, the issue surrounding the migration of labor is more to do with the continuity of work and lack of availability of work due to lockdowns.

Many experts are predicting a third wave of COVID-19. How would that impact the road sector?

The good or the bad part of it is that typical monsoon months are low on road construction anyways. I am not an expert to comment on when this third wave will come or how long will it last, but we are at the start of the monsoon season and this will go up until Diwali and a bit post-Diwali as well.

And historically the monsoon season has been a time when construction activity is on this lower side. So I am hopeful that we will be by then hopefully out of it in the month of October-November.

The second wave has caused a dip in road construction in the past two months. What has been the effect of the same on the financial health of private operators and construction companies? And do you expect a drop in participation from private operators in road projects as they cope with financial constraints?

No, no, I don't think so. Last year also in the midst of the pandemic, there were at least 8 to 10 bidders for each of the project. There is enough appetite in the market for people to bid for these projects.

And I think because of the provisions made in the Budget for 2021-22 and the government wanting to pay off their contractors across all sectors, coupled with the rigorous follow up by NHAI for completion of projects and putting them on track. EPC road contractors have been pretty much okay, as far as a credit profile is concerned.

Aviation 

What are the expectations of revenue losses for both airlines and airport operators in the last few months?

The aviation sector will continue to face difficulty. I think for international air travel to recoup we will have to wait till FY23 and probably even stretch that up to FY24 for full operations to be up and running.

Domestic (air travel) also will have an impact. In fact, the third wave of COVID-19 will have a larger impact on the uncertainty around the aviation sector as compared to all other transport sectors.

Domestic air traffic may rise back to around 60-80 percent levels soon after lockdowns are lifted because there could be people who want some level of leisure time after lockdowns, but this will go through a bit of a cycle.

What I'm expecting is that (domestic air traffic may) initially recoup to 80 percent, then there could be a slight taper and may fall back to around 60 percent of pre-COVID levels. And then business travel will start. So that's probably the recovery (process that) will happen. Even for that, I think it will be the first quarter of FY23 by when 80% of the domestic travel will come through.

Since June 1, the government has once again lowered the cap on capacity utilization to 50 percent for domestic flights, and has increased the cap on prices of domestic flights. Until when when do you expect these caps to prevail?

So (the caps) will continue for some time. However, the percentage of the cap will be tweaked by the government from time to time. There will be only a gradual movement towards relaxing and they will be there till the end of this year.

Smaller players like SpiceJet, GoFirst, Air Asia India have lost market share in the past two months, because they have been forced to operate at low capacity to reduce the cash burn. Do you see this trend to continue?

The dominance of Indigo continues to be there in the skies. And they (IndiGo) are aggressive in terms of their future plans as well. So, they are taking on board other airlines and branching out to Tier-II and Tier-III locations as part of their overall expansion strategy, and hence, that is having an impact with the other airlines.

With the cap on capacity utilization and with various other restrictions in place, the cash burn for some of the other airlines is higher. Certainly, Indigo maintaining a market share of 55% plus for the next three quarters is a given.

Do you think the disruption in the aviation sector will have an impact on the valuation of Air India?

The losses which were there with Air India and the consequent pump-up of money by the government has only continued to increase in the last six quarters from the time when the pandemic broke out.

Furthermore, with limited operations in the international market due to COVID-19, the valuation of the airline’s bilateral slots which are there in the international market will also be impacted from the time the initial RFQ (Request for quotation) was released by the government.

The overall outlook for the aviation market is also quite dim for the next at least a quarter or so, which will also have a rub off on the overall attractiveness of the sales which is happening.

Similarly, given the slowdown and passenger traffic in the last two months, what effect do you think that will have on the next round of airport privatization?

The biggest thing in the next round of airport privatization will be the structure. So there is interest in that market, for airport assets. What is the valuation that you will get? That's something that is debatable but I think that it is a saleable product.

Whether the number of bidders will it be as high as it was in the last period of time? That's something which is debatable whether all participants who were there the last time will continue to bid in this time.

The government may get lower valuations for its assets because you will have to make some assumptions on the future traffic of all of these airports.

So I think that is something which will be debatable depending upon the bidder and what is being put across by the government.