Detailed Rationale

CRISIL Ratings has continued ratings on the bank facilities of Ashoka Highways Durg Limited (AHDL) on ‘Rating Watch with Developing Implications’.

 

The rating continues to reflect the impact of an announcement by Ashoka Buildcon Limited (ABL; ‘CRISIL AA-/CRISIL A1+/Stable’) on December 25, 2021 that Ashoka Concessions Limited (ACL; ‘CRISIL AA-(CE)/Stable’), a material subsidiary of ABL, has entered into share subscription and share purchase agreements (SPAs) with Galaxy Investments II Pte Ltd, an affiliate of Kohlberg Kravis Roberts & Co. LP (KKR), for sale of the entire share capital held in five subsidiaries of ACL i.e., ASBTL, Ashoka Highways (Durg) Limited (‘CRISIL BBB/Watch Developing’), Ashoka Highways (Bhandara) Limited (‘CRISIL BBB+/Watch Developing’), Ashoka Belgaum Dharwad Tollway Limited, and Ashoka Dhankuni Kharagpur Tollway Limited, for an aggregate consideration of Rs 1337 crore.

The proceeds from the sale would be utilised to provide an exit to Macquarie SBI Infrastructure Investments Pte Limited and SBI Macquarie Infrastructure Trust (SBI Macquarie), which together own 34% shareholding in ACL. Around Rs 1200 crore of the total consideration of Rs 1337 crore, would be utilised towards providing full exit to SBI Macquarie from ACL. The aggregate consideration will also include repayment of any shareholder loans held in these five subsidiaries. The deal is expected to be concluded by first half of this fiscal, (previously expected to be concluded by September 2022) subject to National Highways Authority of India (NHAI; ‘CRISIL AAA/Stable’) approval, lender consent and satisfaction of certain conditions precedent. The delay is majorly on account of approvals pending from the authorities end which is expected to be in place in the coming months. CRISIL Ratings has fully consolidated debt in subsidiaries guaranteed by ABL/ACL in its assessment. Such debt associated with five subsidiaries in concern is expected to come down post conclusion of the transaction.

The impairments due to the sale of the 5 BOT assets and from the exit provided to SBI Macquarie have already been accounted in the P&L statement of ABL and ACL in the previous fiscals and fiscal 2022 and on 1st October 2022, there will only be a balance sheet enter in the books. Any over runs or extra expenditure on the 5 BOT assets in fiscal 2023 and beyond will be reimbursed by KKR affiliate to ABL based on a back to back agreement with them.

CRISIL Ratings will monitor the progress on the transaction and will understand the stance of support from new sponsor and credit profile of new sponsor. The rating factors in support expected from the ultimate sponsor, ABL to meet any shortfall in the project. The watch shall be resolved once more clarity on these aspects is available.             

The rating continues to reflect AHDL’s moderate traffic potential and need-based support expected from the sponsor. These strengths are partially offset by modest debt protection metrics and susceptibility to fluctuations in traffic volume or change in tolling policy and interest rate.

Analytical Approach

CRISIL Ratings has factored in support expected from the ultimate sponsor, ABL to meet any shortfall in the project. Intercorporate loans from related parties and loans from shareholdershave been treated as debt. These loans are interest bearing and repayable on demand.

Key Rating Drivers & Detailed Description

Strengths:

Moderate traffic potential

The project’s toll collection is supported by extensive commercial traffic catering to steel industry given the proximity to Bhilai, which has major steel plants and Ashok Leyland factory.

 

Toll revenue rose by 20% to Rs. 110.68crore in fiscal 2023 over the previous fiscal. The recovery in toll collection is driven by improvement in traffic volume, given the pick-up in industrial activity, specifically in the steel sector and toll revision rate which was 7.36% (excluding in April 2021 due to COVID-19).

 

The project has been operational since February 2012 and witnessed moderate traffic movement over the years. Moderate traffic movement given proximity to Bhilai will continue to support traffic volume, and hence, revenue, over the medium term. The concession period may be extended to compensate for the loss during the nation-wide lockdown last fiscal. However, this will have a limited impact on the project cash flow.

 

Expected need-based support from the sponsors

AHDL benefits from the support of its sponsors: ABL, ACL and other group companies. The sponsor has a track record of supporting/maintaining its other road projects, which benefits the credit risk profile of AHDL. Support from the sponsors was demonstrated in the funding for the MMA in fiscal 2017, and support is likely to continue for the ongoing MMA as well. Need-based and timely support from the sponsors will remain a key rating sensitivity factor. CRISIL will understand the stance of support from new sponsor and will factor that during resolution of watch.

 

Weaknesses:

Modest debt protection metrics

Average debt service coverage ratio (DSCR) is expected to remain modest at close to 1 time over the tenure of the debt. This is primarily due to high leverage of the asset with total debt-to-toll collection ratio of 3.35 times (excluding promoter loans). Furthermore, AHDL also availed incremental debt of Rs 29 crore under the Emergency Credit Line Guarantee Scheme in June 2021 to partly fund the ongoing MMA. The second MMA has been completed during last fiscal F Y 2022-23  , with the total outlay of close to Rs 78.53 crore. The debt service reserve account (DSRA) of around Rs 17.89 crore in the form of bank guarantee (BG) and additional DSRA of Rs ~2.43 Crore in form of authorised investment – fixed deposit against availed ECLGS facility (equivalent to three months of debt obligation) maintained supports the debt protection metrics.

 

Susceptibility to fluctuations in traffic volume or change in tolling policy and interest rate

Toll collection is the only source of revenue for AHDL and depends on increase in toll rate and traffic growth. Increase in toll rate depends on the wholesale price index (WPI), which is volatile. Traffic growth is susceptible to toll leakages, seasonal variations in vehicular traffic, and economic downturns. As commercial vehicles constitute a major portion of traffic on the company’s road stretch, traffic volume will remain vulnerable to economic slowdown. Furthermore, any change in government policy―such as the demonetisation of high-value currency notes in November 2016 and more recently the nationwide lockdown to control the pandemic―can adversely impact cash flow and debt protection metrics. Additionally, the debt contracted for the project (both term loans as well as non-convertible debentures) has a floating interest/coupon rate. Although cash flow will be able to absorb the impact of fluctuations in interest rates and toll collections partially, these remain rating sensitivity factors.

Liquidity: Adequate

DSCRis expected to average around 1.0 time over the tenure of the debt. It is expected to remain under pressure during MMA years (fiscals 2022 and 2023). Nevertheless, support is expected from ABL or its group companies to meet any shortfall in the project. Liquidity is also supported by unencumbered cash and equivalent of Rs 0.6 crore as on March 31, 2023. The project also maintains DSRA of around Rs 17.89 crore in the form of a BG and 2.43 Crore DSRA.

Rating Sensitivity factors

Upward factors

• Improvement in toll collection resulting in revenue growth of more than 10% year-on-year on a sustained basis
• Significant reduction in debt leading to improvement in debt protection metrics

 

Downward factors

• Decline in toll revenue by more than 5% year-on-year on a sustained basis
• Delay in support or change in stance of support from the parent or change in credit risk profile of parent
• Draw down of any incremental debt

About the Company

AHDL was set up in 2007 by ABL and Infrastructure Development Finance Company for construction, widening, operations and maintenance of an 82.6-kilometre (km) stretch on National Highway 6 (from 322.40 km to 405.00 km), from the end of the Durg bypass in Chhattisgarh to the Maharashtra border, on a build, operate, transfer (BOT) basis. Tolling on the project commenced on February 20, 2012.

About the Group

ABL's business comprises a) BOT road projects, b) engineering, procurement, and construction (EPC) projects, c) collection of toll on roads and bridges owned and constructed by third parties and d) manufacture of ready-mix concrete. The Ashoka group has a portfolio of 25 BOT and hybrid annuity projects. In the EPC division, ABL constructs roads and bridges for its own BOT projects and for third parties. It also executes EPC projects in the power distribution space.

Any other information: Not applicable