Future looks positively bright for roads and renewables sectors

Things are significantly looking up when it comes to roads and renewables sectors in India. The pace of construction of roads and capacity addition in renewables has been increasing by 25 per cent and 33 per cent, respectively, over the current and next fiscals. The combined capital outlay on the two has been rising by nearly 35 per cent in this and next fiscals to close to Rs 13 lakh crore, backed by strong execution pace, conducive policy milieu, healthy leverage and strong investor interest to keep credit profiles stable. This is a good augury given the high multiplier effect of road development and the critical role renewable energy can play in achieving India’s energy transition. The latest study by CRISIL Ratings indicates that the growth momentum in the two sectors is likely to sustain over the medium term due to pro-industry policies, among other factors.

One has to keep in mind that a supportive policy environment adds its own spurs. For instance, steps like late payment surcharge have helped keep dues from discoms to renewable generators in check. In roads, the introduction of the hybrid annuity model (HAM) has expedited 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. It is from this perspective that one has to look at certain pertinent facts. And the fact is that the pace of execution of renewable energy projects is set to increase 33 per cent to nearly 20 GW per annum over current and next fiscals (nearly 15 GW per annum in the past two fiscals) supported by a healthy executable pipeline of close to 50 GW of projects as on March 31, 2023. Similarly, road construction is set to accelerate 25 per cent to 12,500-13,0002 km per year over the current and next fiscals on continued healthy awarding of projects and step up execution by players involved in road construction projects.

From the investors’ perspective also, their interest has been encouraging with Rs 75,000-80,000 crore having been raised through equity and asset monetisation in the past two fiscals in both sectors- roads and renewables. Continued focus on asset monetisation and raising equity, along with healthy cash flows, will keep the capital structure balanced in both sectors. On that count, despite higher capital outlays, rated renewables and road construction 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 individual credit profiles. While these do sound good and positive, one should not forget that there are many more challenges up ahead. Analysts like CRISIL point out that challenges such as risks of aggressive bidding and execution by new entrants still remain. 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. Similarly, for renewables, on its part, if geopolitical developments affect supply chains, it may impact the internal rate of return and pose a risk to all estimates, projections and presumptions.