Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-(CE)Stable’ rating on the Rs 150 crore non-convertible debentures (NCDs) of Ashoka Concessions Ltd (ACL). CRISIL Ratings has also withdrawn its rating on the Rs 50 crore NCDs of ACL on redemption of these NCDs and based on the company’s request. The withdrawal is in line with CRISIL Ratings’ policy on withdrawal of its rating.

 

The rating continues to factors in the unconditional and irrevocable corporate guarantee extended by the parent, ABL. The guarantee covers the principal, interest, and other monies payable towards the rated NCDs in a timely manner.

 

ABL is supported by strong order book, diversified revenue mix, strong execution capabilities and comfortable financial risk profile. ABL reported revenue of Rs. 6,372 crore in fiscal 2023, a 47% on year growth, driven by healthy execution in the engineering, procurement and construction (EPC) segment. Revenue is expected to grow at 8-10% in fiscal 2024 driven by strengthened order book of Rs 16,920 crore as on June 30,2023. Operating margin is likely moderate to 8-9% in fiscal 2024 and are expected to be 9 -11% in the medium term, owing to higher inflation, execution of projects with lower margins obtained during covid, and delay in right of way (ROW) in some projects. ABL reported revenue of Rs 1,500 crore in Q1 fiscal 2024, while EBITDA margins moderated to 4.8% during the same period due to provisioning of Rs. 56 crore recognized for its EPC work on NTPC solar power plant. 

 

Additionally, financial flexibility of ABL draws comfort from the expected asset monetisation. The group has signed SPAs for sale of GVR Chennai ORR, the Jaora Nayagaon road project and the Unison Environ project with different purchasers and these transactions are expected to conclude during fiscal 2024.

 

The financial risk profile of ABL remains healthy, with sufficient cash accrual and moderate debt levels. Networth should improve to Rs 3,300-3,400 crore, while gearing is expected at around 0.50-0.55 time by March 31, 2024. Net cash accrual to adjusted debt (NCAAD) and adjusted interest coverage are estimated at 0.20-0.25 time and 4.5-5 times, respectively, in fiscal 2024. Any expected support by ABL to ASBTL during its operations has also been loaded as debt on ABL’s balance sheet.

 

However, any adverse movement in ABL’s credit risk profile and non-adherence to the payment mechanism will remain key rating sensitivity factors.

Analytical Approach

CRISIL Ratings has applied its criteria on rating instruments backed by guarantees. The ‘CE’ suffix indicates credit enhancement by way of extension of an unconditional and irrevocable corporate guarantee by ABL. The guarantee covers the payment structure that is designed to ensure full and time-bound payment to the debenture holders.

 

While looking at the unsupported rating, CRISIL Ratings considers the standalone business and financial risk profile of ACL and moderately consolidates its SPVs. Previously, Ashoka Sabmalpur Baragarh Tollway Pvt Ltd (ASBTPL), was being fully consolidated with ACL. However, the analytical approach has changed and the SPV is no more fully consolidated with ACL, as ACL will no longer extend corporate guarantee for ASBTPL’s bank facilities.

 

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:

Unconditional and irrevocable corporate guarantee extended by ABL

The NCDs of Rs 150 crore are backed by an unconditional and irrevocable corporate guarantee from ABL. The guarantee covers all the debt obligation of the NCDs in a timely manner. ACL shall ensure that the redemption amount or amounts due or any other payment due as per the debenture trust deed shall be deposited in the debenture holders’ account three calendar days prior to the interest payment date or redemption date (deposit date). If ACL fails to deposit the redemption amount or the interest or any other amounts due, on or prior to the deposit date, the debenture trustee shall on the same day issue a demand notice to ABL, requiring it to deposit the amount on or before one calendar day prior to the redemption date or interest payment date. ABL undertakes that it shall unconditionally and irrevocably pay on demand to the debenture trustee such amount stated in the demand notice, without any demur or protest and without any set off or lien on or before one calendar day prior to the redemption date or interest payment date, as the case may be. Furthermore, if any date of deposit of payment of redemption amounts and interest amounts due falls on a day that is not a business day, the deposit must be made on the immediately preceding business day. Also, the guarantee is continuing and covers the entire facility.

 

For the NCDs, in case of rating downgrade events of the guarantor or issuer, payment notice of 33 days is given and the payment mechanism for event of default other than rating downgrade or payment default (of interest/redemption amount on the due date) includes an acceleration notice with a payment timeline of 5 days.

 

Established track record of ABL in executing engineering, procurement, construction (EPC) contracts and build-operate-transfer (BOT) road projects

Experience of over two decades in the EPC business and established relationships with state government departments, NHAI, and the Ministry of Road Transport and Highways should continue to support the business.

 

ABL was one of the early entrants in BOT road projects in India and won its first project in 1997. Along with ACL, it currently has 23 such projects. 18 of these assets are operational and four are under construction. Over 11,800 lane kilometres (km) have been constructed so far and nine projects have been completed and successfully handed over.

 

Of the portfolio of 25 projects, ACL houses 13 (six BOT toll and seven HAM) projects. Out of the total 11 HAM projects with the group, seven are in the operational stage (including 5 that have received the provisional completion certificate) and four are under construction. Few under-construction HAM projects had ROW issues, but these are expected to be completed on time, given the strong track record of the EPC contractor and six months of extension provided due to the Covid-19 pandemic. Nonetheless, progress of HAM projects will remain a key monitorable.

 

The orderbook of ABL has evolved over time. The company has shifted its focus from bidding for BOT and HAM projects to EPC projects. ABL aims to become an all-sector EPC player over the medium term. The company has been engaged in the roads, power transmission and distribution (T&D) business for 10 years, railways for five years and buildings for one year. It has recently entered into sewage, smart infrastructure and solar projects. Power T&D projects received recently will enable the company to report a healthy increase in scale of operations.

 

Strong project execution capabilities of ABL are reflected in successful completion of projects within the scheduled time and budgeted cost. The strong in-house EPC division undertakes all project implementation for the BOT/HAM road projects. The group also manufactures readymade concrete and high-grade bitumen, which supports operating efficiency.

 

Robust order book of ABL providing strong revenue visibility

The company has an order book worth around Rs 16,920 crore as on June 30, 2023. Order book to sales ratio estimated at 2.6 times, will help the company achieve strong revenue growth over the medium term, as these orders are to be executed over the next three years. The roads segment accounted for majority of the orders (around 52%), followed by power T&D (25%), railways (10%) and buildings (14%). Within the road segment, HAM and EPC account for 12% and 39%, respectively.

 

Sound financial risk profile of ABL

Financial risk profile is strong, marked by a healthy networth of nearly Rs 3,366 crore and adjusted gearing of around 0.59 time as on March 31, 2023. Networth should improve to Rs 3,500-3,700 crore, while gearing is expected to be in the range of 0.50-0.55 time by March 31, 2024. ABL follows a conservative financial policy and hence, the capital structure has remained healthy over the years. Adjusted debt (CRISIL Ratings has fully consolidated debt in subsidiaries guaranteed by ABL/ACL in its assessment) increased to Rs 1,979 crore as on March 31, 2023, from Rs 1,107 crore, a year ago. This was because of an increase in interest-bearing mobilisation advances, led by growth in the orderbook and utilisation of working capital limits. Total outside liabilities to adjusted networth (TOL/ANW) ratio stood at 1.12 time on March 31, 2023. NCAAD and adjusted interest coverage ratios are estimated at 0.2-0.25 time and 4.0-4.5 times, respectively, in fiscal 2024. Any expected support by ABL to ASBTL during its operations has also been loaded as debt on ABL’s balance sheet.

 

About 50% of ABL’s networth is locked in investments made in the underlying BOT and HAM portfolios. Further, the company is expected to invest around Rs 800 crore over fiscals 2024 to 2026, towards its equity commitment in the ongoing HAM projects, and also extend funding support to cover cash flow mismatches in the underlying SPVs (including Ashoka Sambalpur Baragarh Tollway Ltd). Internal accrual will fund the incremental working capital requirement and support growth of ABL.

 

ABL has been infusing the entire equity commitment towards HAM projects under ACL, including the share of SBI Macquarie. ACL has raised Rs 200 crore till now, used to pay off unsecured loans from ABL.

 

In fiscal 2023, ABL recorded a reversal of impairment of Rs 367 crore due to cancellation of sale transaction of 5 BOT assets of ACL, due to an increase in ACL’s valuation mainly on account of increased cash flow in its HAM projects and growth in toll collection by 22% in the toll assets. However, these adjustments will not have any impact on the future credit profile of ABL and ACL as they are non-cash adjustments.

 

ACL is also at an advanced stage of discussion for monetising its toll assets. The company has signed SPAs with National Investment and Infrastructure Fund Ltd (NIIF) for sale of the GVR Ashoka Chennai Outer Ring Road for Rs 686 crore in fiscal 2024 and sale of Jaora Nayagaon Toll Road project. Another SPA has been signed for the sale of UEPL with Mahanagar Gas Ltd. All these transactions are expected to conclude in fiscal 2024, and will support the financial and business risk profile of ABL.

 

Weakness: 

Working capital-intensive operations of ABL

ABL has an inherently large working capital requirement , given the high dependence on state and central government authorities for receipt of payments. Further, in the power T&D segment, 20% of the payment is received only once the project is operationalised, which usually takes two years. Also, 10% of the contract value is withheld as retention money until the expiry of the warranty period and this may stretch upto five years.

 

Working capital cycle has been healthy over the years, with gross current assets of around 185 days as on March 31, 2023 (199 days as on March 31, 2022).

 

Susceptibility to intense competition and cyclicality in the construction industry for ABL

Around 57% of outstanding orders as on March 31, 2023, comprised projects from roads and highways, and the remaining from the power T&D, railways and commercial gas distribution. Although the company executes road projects across various modes (BOT/EPC/HAM), revenue remains susceptible to changes in government regulations and the prevailing economic conditions. Limited diversity in revenue streams expose the company to intense competition and cyclicality inherent in the construction industry.

 

Operating margin was around 9.9% during fiscal 2023, but has moderated from levels seen during the same period of the previous fiscal. This was due to higher inflation and delay in ROW, leading to suboptimal utilisation of fixed cost.  The margin is projected at 9.5-11% over the medium term.             

Liquidity: Strong

Liquidity is supported by ABL’s healthy cash accrual, highly unutilised bank limit and moderate cash and equivalents of ABL. Expected cash accrual of Rs 450-550 crore per annum over the medium term, should suffice to cover the maturing debt of around Rs 100 crore per annum over fiscals 2023 to 2025. Utilisation of the fund-based bank limit was low at 25% during the 12 months through February 2023. The company primarily uses non-fund-based facilities to cover its working capital requirement. Utilisation of these facilities averaged 67% for the 12 months through February 2023. Furthermore, an established relationship with suppliers ensures a long credit period and hence, lower dependence on own funds. Unencumbered cash and equivalents stood at Rs 231 crore as on 30th June 2023.

Outlook: Stable

The rating of ACL is based on that of the guarantor, ABL. The ratings will remain sensitive to any change in CRISIL Ratings’ credit view on ABL.

 

CRISIL Ratings believes the business risk profile of ABL will remain healthy over the medium term, driven by moderate growth in revenue, in turn led by strong outstanding orders and execution capabilities. The financial risk profile should also be comfortable, marked by healthy capital structure and debt protection metrics.

Rating Sensitivity Factors

Upward Factors

• Substantial growth in revenue and better operating margin leading to increase in net cash accrual of Rs 500-550 crore of ABL
• Sustained improvement in financial risk profile of ABL, supported by steady working capital cycle and enhanced debt metrics

 

Downward Factors

• Moderation in operating performance or stretch in working capital cycle leading to sustained weakening in TOL/ANW ratio to 1.5 times or more for ABL
• Delay in project implementation or weaker performance of operational projects, increasing the need for debt funding support; or any debt taken on to provide SBI Macquarie an exit from ACL leading to strained debt metrics of ABL

Adequacy of credit enhancement structure

The rating on NCDs centrally factor in the unconditional and irrevocable corporate guarantee extended by the parent, ABL. The guarantee covers all the debt obligations of the NCDs in a timely manner. ACL shall ensure that the redemption amount or amounts due or any other payment due as per the debenture trust deed shall be deposited in the debenture holders’ account three calendar days prior to the interest payment date or redemption date (deposit date). If ACL fails to deposit the redemption amount or the interest or any other amounts due, on or prior to the deposit date, then the debenture trustee shall on the same day issue a demand notice to ABL, requiring it to deposit the amount on or before one calendar day prior to the redemption date or interest payment date. ABL undertakes that it shall unconditionally and irrevocably pay on demand to the debenture trustee such amount stated in the demand notice, without any demur or protest and without any set off or lien on or before one calendar day prior to the redemption date or interest payment date, as the case may be. Furthermore, the guarantee is continuing and covers the entire facility.

 

CRISIL Ratings has fully consolidated the business and financial risk profiles of the borrower and the ABL. The financials of the borrower, including the entire guaranteed debt, are loaded on the guarantor. CRISIL Ratings believes that guarantor will be able to fully service guaranteed debt obligation in timely manner even under a stress scenario, where the cash flows in the subsidiary may not be suffice to meet the debt obligation.

Unsupported ratings: CRISIL A

CRISIL Ratings has introduced the 'CE' suffix for instruments having explicit credit enhancement feature in compliance with the circular of the Securities and Exchange Board of India dated June 13, 2019.

Key drivers for unsupported ratings

• ASTBL’s DSCR has improved to above 1 time with refinancing of project loan and elongation of the repayment schedule by 10 years
• Debt of ASTBL is no more guaranteed by ACL
• The portfolio of ACL remains well-diversified with a healthy mix of BOT toll and HAM projects
• Moderate implementation risk of the under-construction HAM projects given the low funding risk and strong EPC contractor in the form of ABL
• No additional debt to be contracted in ACL except the guaranteed debt by ABL, thereby supporting moderate financial risk profile
• Support from ABL to ACL continues in case of cash flow mismatches or for meeting equity commitments and support requirements for underlying projects in ACL

About the Company

ACL was set up in November 2011 as a subsidiary of ABL, where six BOT projects were transferred to the former. SBI Macquarie also infused Rs 800 crore (39% stake at the time of entry), and ACL acted as an exclusive BOT project developer for both ABL and SBI Macquarie. Out of 11 HAM projects awarded to ABL, seven were housed under ACL.

About the Guarantor

ABL, incorporated in 1993, engineered and constructed residential, commercial, industrial, and institutional buildings until 1997. The company won its first BOT project in 1997. Currently, operations comprise BOT and EPC road projects, EPC power T&D projects, collection of toll on roads and bridges owned and constructed by third parties, and manufacturing of ready-mix concrete. The company also ventured into the commercial gas distribution business in 2016 by winning its first order to build and operate a gas distribution network in Ratnagiri district, Maharashtra. Additionally, the company entered into executing smart city construction projects in 2016.

 

ABL is listed on both the Bombay Stock Exchange and the National Stock Exchange. It has significant experience in executing road projects across India and has constructed more than 12,000 lane km till date. This is also reflected in its outstanding BOT/HAM portfolio of 23 projects (including ACL assets). In the EPC division, ABL constructs roads and bridges for its own BOT projects as well as for third parties. It also executes EPC projects in the power distribution space for various state governments.

Key Financial Indicators of ACL: adjusted by CRISIL Ratings

Financials as on/for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	113	66
Profit after tax (PAT)	Rs crore	97	-470
PAT margin	%	86	-707
Adjusted debt/adjusted networth	Times	1.29	1.24
Interest coverage	Times	0.79	0.29

PAT is high in fiscal 2023 due to the Rs 103 crore reversal of impairments, and low in fiscal 2022 due to impairment of Rs 400 crore

 

Key financial indicators of ABL:- CRISIL Ratings-adjusted

Financials as on / for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	6478	4591
PAT	Rs crore	671	-309
PAT margin	%	10.4	(6.7)
Adjusted debt/adjusted networth	Times	0.59	0.41
Interest coverage	Times	4.54	5.88

PAT is high in fiscal 2023 due to the Rs 349 crore of reversal of impairments, and low in fiscal 2022 due to impairment of Rs 770 crore

List of covenants for Rs 150 crore NCD

• ABL to have management control of ACL
• Current promoters of ABL to hold at least 45% of the equity share capital in ACL and have management control of the company

 

Financial covenants for ABL

• Fundbased standalone debt and corporate guarantees (including bank guarantees issued for major MMR account, debt service reserve account [DSRA] and disputed claims) shall not exceed Rs 1,800 crore during the tenure of NCD. 
• Ratio of fund-based standalone debt (excluding shortfall undertaking but including all corporate guarantee [including bank guarantees issued for MMR account, DSRA and disputed claims] given by guarantor) to earnings before interest, taxes, depreciation, and amortisation shall not exceed 3.0 times.
• Fund-based standalone debt (including all corporate guarantees, bank guarantees issued for MMR account, DSRA and disputed claims, all types of shortfall/sponsor undertaking given to lenders by promoter but excluding letter of comfort) shall not exceed Rs 7,500 crore in fiscal 2022, Rs 8,500 crore in fiscal 2023 and Rs 9,500 crore in fiscal 2024.
• The bank guarantees, letter of credit, standby letter of credit and any NFB borrowings at all times will be capped at 125% of total turnover of the preceding yearly audited financials.
• Interest cost of the guarantor not to exceed 3.5% of its total revenue.
• Guarantor networth cannot be less than the latest audited networth, except in case of reduction of networth due to exit offered to private equity investors.
• Guarantor should achieve positive PAT on an annual basis throughout the tenor of the debentures, except in case of negative PAT due to reduction resulting from exit offered to private equity investors.

 

Financial covenants for ACL

• Fund-based standalone debt not to exceed Rs 300 crore

Any other information: Not applicable