Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable' rating to the proposed non-convertible debentures (NCDs) of Adani Road Stpl Limited (ARSL, part of the GRICL-STPL group). Adani Road Transport Ltd (ARTL, step-down subsidiary of Adani Enterprises Ltd [AEL]), through its 100% subsidiaries, Adani Road GRICL Ltd (ARGL, rated ‘CRISIL AA-/Stable’) and ARSL, is in the process of acquiring Macquarie Asia Infrastructure Fund’s (MAIF) 56.8% and 100.0% stakes in Gujarat Road Infrastructure Co. Ltd (GRICL) and Swarna Tollway Pvt. Ltd (STPL, rated ‘CRISIL AAA/Stable’), respectively. These four companies (ARSL, ARGL, STPL, and GRICL) are together referred to as the GRICL-STPL group.

 

The long stop date of April 30, 2023, as per the share purchase agreement (SPA), for concluding the acquisition has elapsed. The date has not been extended yet and discussions are ongoing. While all approvals for acquisition of STPL have been received, Government of Gujarat’s (GoG) approval for transfer of its shareholding in GRICL to ARGL is still awaited. Consequently, ARSL and ARGL are yet to acquire MAIF’s stake in STPL and GRICL respectively, and no debt has been availed by ARSL and ARGL as on date.

 

The rating continues to reflect moderate traffic potential of the GRICL-STPL group’s project stretches, with operational track record of over 15 years, and adequate debt protection metrics, supported by a tight escrow mechanism with a well-defined payment waterfall, creation of a six-month interest service reserve account (ISRA) and utilisation of entire surplus cash flow for prepayment. The rating also factors in availability of need based of support from Adani group and consequent strong financial flexibility, and managerial and operational expertise. These strengths are partially offset by susceptibility of toll revenue to variations in traffic volume or changes in tolling policy resulting in weakening of the debt protection metrics. The NCDs have a tenure of three years from the date of allotment with minimal amortisation, exposing the group to refinancing risk.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of the companies proposed to be acquired (or target companies), GRICL and STPL, and the acquiring entities (or bidding companies), ARGL and ARSL. This is because surplus cash flows at the target companies (post debt servicing and reserving in line with existing financial agreements) shall be utilised towards servicing the NCDs at the bidding companies. Additionally, the management has articulated a strong intent of ensuring fungibility of cash flows at the bidding companies for servicing the rated NCDs.

 

CRISIL Ratings has also used the group notch up framework to factor in available financial flexibilities, and strong managerial and operational support from being part of the Adani group. As part of draft financing agreements, AEL is the parent of the project and has provided a shortfall undertaking.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Moderate traffic potential of the project stretches, backed by operational track record: STPL road stretches traverse sections of National Highway (NH)-16 and NH-65, which connect Chennai to Kolkata, and the east coast to Pune, Maharashtra, respectively. The Tada-Nellore section in Andhra Pradesh (AP) on NH-16 provides connectivity for the ports in Chennai and Krishnapatnam to the rest of India and has no competing or alternate route. The road stretch also provides connectivity to tourist destinations, such as Tirupati and Pulikat Lake. NH-65 connects ports on the eastern coast of India to the rest of AP and Maharashtra. The road stretch between Nandigama and Vijayawada is the shortest stretch connecting Hyderabad to Vijayawada. These stretches have been operational since May 2004. Traffic is healthy with compound annual growth rate (CAGR) of 5.2% till March 2022. Good traffic movement between ports on NH-16 and connectivity to Vijayawada and Amravati will continue to support the traffic volume and toll revenue over the medium term.

 

GRICL stretches traverse via State Highway (SH)-41 and SH-87 in Gujarat, which connect Ahmedabad to Mehsana (AM), and Vadodara to Halol (VH), respectively. These stretches are in vicinity of major towns such as Ahmedabad, Vadodara and Godhra, attracting short-distance passenger traffic. Sectors like manufacturing, petroleum products, drug and pharmaceuticals, industrial goods are also major traffic generators on the SH-87 stretch as it acts as a connection between Maharashtra, South Gujarat and northern regions like Delhi-NCR (National Capital Region), Rajasthan, Haryana and Punjab. AM and VH have been operational since February 2003 and October 2000, respectively. While the traffic growth on the stretches is modest with CAGR of 2.8% in the last five years, there is potential for an extension in concession period; as per the concession agreement (CA), concession period is linked to assured return on investment (ROI) of 20%. Given the lower recovery rate, GRICL has requested GoG to extend the concession period till 2040. The project may be eligible for further extensions if the ROI threshold is not met.

 

• Adequate debt protection metrics and tight escrow mechanism, with a well-defined payment waterfall, creation of ISRA and mandatory prepayment of surplus cash flows: The average debt service coverage ratio (DSCR) is expected to remain adequate over the tenure of the debt. ARGL and ARSL would together raise NCDs worth Rs 1,500 for funding the acquisition of MAIF’s 56.8% stake in GRICL and 100% stake in STPL. The proposed NCDs will have a tenure of 3 years with nominal redemptions, thereby exposing the GRICL-STPL group to refinancing risk. While no incremental debt is allowed, other than specific event-based permitted indebtedness leading to incremental revenue streams, any material incremental debt availed by the bidding companies, will remain a key rating sensitivity factor.

 

The waterfall mechanism will ensure that the toll collections are first utilised for servicing debt obligations, payment of taxes, statutory dues, and other expenses at the target company level. Only surplus cash flows from GRICL and STPL will be available for upstreaming to their respective bidding companies i.e., ARGL and ARSL, and subsequently be utilised for servicing the rated NCDs. ARGL and ARSL will provide unconditional and irrevocable cross-guarantees for the redemption of the NCDs being raised by both the issuers and such cross guarantees shall continue to be in effect until permitted to be released by majority debenture holders. The structure also stipulates that surplus cash flows post meeting statutory dues and debt servicing obligations, shall be utilised towards mandatory prepayment of the NCDs.

 

Financial covenants in the term sheet, specify maintenance of minimum DSCR at 1.15 times and the same would be tested on a quarterly basis. Further, ISRA equivalent to interest obligation due for the next six months is also expected to be maintained throughout the debt tenure. Moreover, as per the provisional terms, AEL will provide a shortfall undertaking.

 

• Strong managerial and financial support being part of the Adani group: ARGL and ARSL are wholly owned subsidiaries of ARTL and step-down subsidiaries of AEL. ARTL is a platform established by the Adani group for development and management of road infrastructure assets. The Adani group is one of the largest business conglomerates in India and has a strong foothold in the infrastructure domain. Road sector is a key focus of the Adani group and the GRICL-STPL group forms an important part of the sector strategy. 

 

ARGL and ARSL are expected to benefit from synergies arising out of their association with the Adani group. As part of financing agreements, AEL is the parent, and has undertaken to meet any shortfall in the maintenance of the major maintenance reserve, interest servicing and existing tax liability and/or tax litigations present in the target companies. AEL will also fund debt repayments in case of termination of the projects. While the shortfall undertaking does not cover debt repayment in the normal course of business, it is expected to be minimal at about Rs 90 crore over the tenure of the NCDs. Additionally, long track record of the assets and sufficient visibility of cash flows will ensure adequate refinancing ability. Furthermore, the Adani group is expected to monitor cash flow on regular basis and ensure debt obligations are met on or before the due date.

 

CRISIL Ratings has taken note of report (dated May 6, 2023) submitted by Expert Committee constituted by Supreme Court of India and movement of Securities and Exchange Board of India (SEBI’s) investigation with regards to minimum public shareholding, disclosure of transactions with related parties in accordance with law and stock price manipulation.

 

Any adverse regulatory/ government action in the wake of earlier published Hindenburg Research report, emerging issues around corporate governance, ongoing investigations ordered by Supreme Court of India or a decline in group’s resource raising capabilities from banks and/or capital markets will be key monitorable.

 

Weaknesses

• Susceptibility to fluctuations in traffic volume or change in tolling policy: Toll collection is the only revenue source, and hence, any volatility because of factors such as toll leakage, competing routes, lack of timely increase in rates, fluctuation in inflation indices, seasonal variations in vehicular traffic, and susceptibility to economic downturns could adversely impact cash flow. Furthermore, any change in government policy such as demonetisation in November 2016 and more recently the nationwide lockdown, can impact the cash flow and debt protection metrics.

 

For STPL stretches, there are two alternate routes for traffic to connect between NH-16 and NH-65. However, the diversion from these routes is already reflected in the current traffic plying on the stretch. For GRICL stretches, there are no competing alternate routes at present resulting in traffic diversion. However, some diversion of commercial traffic of GRICL stretches is expected once the Delhi Mumbai Expressway (DME) and Western Dedicated Freight Corridor (WDFC) are operational. While the traffic diversion to DME and WDFC is expected to be limited, its impact on the traffic and toll revenue of GRICL will remain a monitorable.

 

• Exposure to refinancing risk: The NCDs have a tenure of 3 years with minimal redemptions. Further, there is a take-out option available at the end of 1 year from the date of allotment. This exposes the group to refinancing risk. The risk is mitigated by long tail period of about 7 years with possibility of extension, providing cash flow visibility and financial flexibility from being associated with the Adani group.

Liquidity: Strong

The average DSCR will remain adequate throughout debt tenure. Toll revenue is expected to remain healthy to meet repayment obligations at the project level i.e., outstanding debt of GRICL and STPL, as well as the scheduled redemption obligations of the NCDs raised by ARGL and ARSL. Further, ISRA equivalent to next six months of interest obligation will be maintained throughout the tenure of the NCDs. The NCDs are expected to have minimal redemption of around Rs 90 crore over the tenure of the debt, exposing the company to refinancing risk. Nevertheless, the same is mitigated by long tail period of about 7 years with possibility of extension providing cash flow visibility. Presence of shortfall undertaking from AEL, and synergies derived from being part of the Adani group also support financial flexibility.

Outlook: Stable

CRISIL Ratings believes that GRICL-STPL group will maintain adequate debt protection metrics over the medium term, driven by moderate traffic potential of stretches. Benefits from being part of the Adani group will also continue.  

Rating Sensitivity factors

Upward factors

• Traffic volume is 5% higher-than-expectations on a sustained basis, leading to material improvement in toll collections and debt protection metrics
• Substantial prepayment of debt and consequent improvement in debt service coverage indicators

 

Downward factors

• Change in support philosophy or deterioration in the credit risk profile of the Adani Group
• Traffic volume is 5% lower-than-expectations, leading to lower toll collections and weakening of debt protection metrics
• Drawing of material incremental debt without adequate improvement in cash flows impacting debt service coverage indicators

Unsupported ratings  - CRISIL AA-

Unsupported rating disclosure for ratings without ‘CE’ suffix, where the instruments are backed by specified support considerations, is in compliance with SEBI’s Operational Circular dated January 06, 2023.

About the Company

Incorporated on September 22, 2022, ARSL is a special purpose vehicle (SPV) formed for the purpose of acquisition of MAIF’s 100% stake in STPL. ARSL is a 100% subsidiary of ARTL.

About the Group

ARGL was incorporated on September 22, 2022, for acquisition of MAIF’s 56.8% stake in GRICL. ARGL is a 100% subsidiary of ARTL. ARGL is also evaluating to subsequently acquire IL&FS’s 26.8% stake in GRICL and ultimately have 83.6% shareholding.

 

GRICL is an SPV incorporated on June 2, 1999 for developing two state road projects in Gujarat, Ahmedabad-Mehsana (design length 51.6 kilometre [km]) and Vadodara-Halol (design length 31.7 km). The projects involved widening and strengthening the existing SH-41 between Ahmedabad and Mehasana and SH-87 between Vadodara and Halol on build, own, operate and transfer (BOOT) basis.

 

STPL was incorporated in 2001, and is a special-purpose vehicle of CIDB Inventures SDN BHD (CIDBI) for the implementation of a road project in AP on a build-operate-transfer (BOT) basis, pursuant to the concession agreement dated March 27, 2001. The agreement was entered into on a government-to-government basis between the governments of Malaysia and India, through CIDBI and NHAI, respectively. Investment companies of prominent Malaysian construction firms, IJM Corporation Berhad (IJM), WCT Engineering (WCT), Bumi Hiway Ventures (BHV) and MTD Capital (MTD) also subscribed to the share capital of STPL along with CIDBI.

 

In October 2013, IJM’s investment company acquired shares held by the investment companies of WCT, BHV and MTD. Subsequently, CIDBI and these other companies were holding 30% and 70% of STPL’s shareholding, respectively.

 

In October 2015, MAIF Investments India 3 Pte Ltd acquired 70% of the equity stake held by the investment companies in STPL, while the remaining 30% was acquired during fiscal 2019.

 

The project entailed designing, engineering, financing, constructing, developing, improving, rehabilitating and strengthening the existing two-lane road and widening to four lanes of (a) NH-16 from kilometre (km) 52.8 to km 163.6 on the Tada-Nellore section in AP and (b) NH-65 from km 217 to km 265 on the Nandigama-Ibrahimpatnam-Vijayawada section in AP; and (c) operation, maintenance and collection of fees on these sections of NH-16 and NH-65 on a BOT basis.

Key Financial Indicators

Particulars	Unit	2022	2021
Revenue	Rs crore	NA	NA
Profit after tax (PAT)	Rs crore	NA	NA
PAT margin	%	NA	NA
Adjusted gearing	Times	NA	NA
Interest coverage	Times	NA	NA

The company was incorporated on September 22, 2022

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	1,100	Complex	CRISIL AA-/Stable

*Proposed and yet to be placed