Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA- (CE) /Stable’ rating on the bank facilities of Ashoka Sambalpur Baragarh Tollway Limited (ASBTL).

 

The rating continues to reflect the strength of unconditional and irrevocable corporate guarantee provided by the ultimate parent, ABL. The guarantee covers all rated bank facilities of ASBTL. Additionally, CRISIL Ratings understands that ABL is also likely to monitor the cash flows of ASBTL to ensure that all debt obligations are met on the due date.

 

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 order book of Rs 14,795 crore as on Sept 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 3,093 crore in H1 fiscal 2024, while EBITDA margins moderated to 6.9% 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 (UEPL) project with different purchasers. UEPL transaction has been closed at a final equity consideration of Rs. 562 crore, out of which the company has received Rs.287 Crore for its 51% stake in the SPV and the other 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

The ratings are based on the criteria for rating instruments, backed by guarantees. The (CE) suffix reflects the payment structure designed to ensure full and time-bound payment to lenders, backed by the corporate guarantee from ABL.

 

To arrive at the unsupported rating, CRISIL Ratings has notched up the standalone rating based on the expectation of strong support from the parent, ABL, both on an ongoing basis and in case of distress.

 

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, and undertaking, provided by ABL

ABL has extended an unconditional and irrevocable guarantee to meet all debt obligation of ASBTL in a timely manner. This includes a payment mechanism, which ensures full and time-bound payments to the lenders. ABL shall monitor if ABSTL has made all the necessary payments on the due date. In the event of any failure on part of ABSTL in repaying the same to the lenders on due date, on occurrence of an event of default or failure by ABL to provide the Guaranteed Financial Support, the Lenders/Security Trustee shall within 10 Business Days of such an event, invoke this guarantee by raising a demand notice upon the Guarantor. Upon such an invocation, ABL will irrevocably and unconditionally agree and guarantee the due payment within 3 business days. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the Loan.

 

Any non-adherence to the payment mechanism will remain key rating sensitivity factors.

 

• ABL’s established track record of executing EPC contracts and 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 23 projects which includes (09 – BOT, 03 – Annuity, 11- HAM Projects), ACL houses 13 (six BOT toll and seven HAM) projects. Out of the total 11 HAM projects with the group, nine are in the operational stage (including 6 that have received the provisional completion certificate) and two 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 14,795 crore as on Sept 30, 2023. Order book to sales ratio estimated at ~2.5 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 44%), followed by power T&D (41%), railways (9%) and buildings (6%). Within the road segment, HAM and EPC account for 9% and 35%, respectively.

 

• Comfortable 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 250 crore till now by way of NCD with outstanding of 150 Crore as on Sep-2023, 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. UEPL transaction has been closed at a final equity consideration of Rs. 562 crore, out of which the company has received Rs.287 Crore for its 51% stake in the SPV and the other transactions are expected to conclude during fiscal 2024.

 

Weaknesses:

• Large working capital requirement 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 44% of outstanding orders as on September 30, 2023, comprised projects from roads and highways, and the remaining from the power T&D, railways and commercial gas distribution, etc. 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 232 crore as on 30th Sep 2023.

Outlook: Stable

The rating of ASBTL 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:

• ABL’s substantial growth in revenue and better operating margin leading to increase in net cash accrual of Rs 500-550 crore
• 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

ABL has extended an unconditional and irrevocable guarantee to meet all debt obligation of ASBTL in a timely manner. This includes a payment mechanism, which ensures full and time-bound payments to the lenders.

 

As per the payment mechanism, the guarantor, ABL, shall monitor if the borrower, ASBTL, has made all the necessary payments on the due dates.  In the event of any failure on part of ASBTL in repaying the same to the Bank on due date and/or on occurrence of an Event of Default, such an event, invoke this guarantee by raising a demand notice upon the Guarantor

 

Upon such an invocation, ABL will irrevocably and unconditionally agree and guarantee the due payment within 3 Business Days. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the loan.

 

A lender monitored payment mechanism is in place to ensure timely payment of obligations on the rated facilities. The payment mechanism provides adequate timeline for the guarantor to make full and timely payments in case of a default or delay by the borrower (ASBTL).

 

CRISIL Ratings has fully consolidated the business and financial risk profiles of the borrower and ABL. 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 BBB-

CRISIL has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has considered the standalone business and financial risk profiles of ASBTL and has factored in the extent of support available to the company from ABL and ACL.

 

• Average debt protection metrics post refinancing of loan with elongated tenor for repayment
• Susceptibility of toll revenue to volatility in traffic volume and wholesale-price index
• Support from sponsor to the project in case of cash flow mismatches

About the Company

ASBTL is an SPV of ACL, set up to undertake construction, conversion to four lanes, operations and maintenance (O&M) work of the Sambalpur-Baragarh stretch of National Highway (NH)-6 (from 0 to 88 kilometre) in Odisha under the National Highways Development Project (NHDP) Phase III on a BOT basis. The concession period for the project is 30 years (including 30 months for construction) with an annual premium payout of Rs 2.05 crore (due in fiscal 2023) to NHAI with a 5% increment each year.

 

The project cost of Rs 1,142 crore was funded through a term loan of Rs 810 crore, equity of Rs 167 crore, and zero-interest shareholder loan of Rs 167 crore. The company had received provisional completion certificate and commenced tolling in October 2014. It received full completion certificate and started tolling on the complete stretch from June 2016.

About the parent, ACL

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 ultimate parent, ABL

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 tolls 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 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 National Stock Exchange. It has significant experience in executing road projects across India and has constructed more than 11,800 lane km till date. This is also reflected in its outstanding BOT/HAM portfolio of 23 projects (including ACL assets) as on fiscal 2022. 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.

 

ABL set up ACL as a subsidiary in November 2011, and transferred six BOT projects to it. 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.

Key Financial Indicators for ASBTL (CRISIL Ratings adjusted)

Financials as on / for the period ended March 31		2023	2022
Revenue	Rs crore	98	79
Profit after tax (PAT)	Rs crore	(62)	(67)
PAT margin	%	(63.2)	(84.3)
Adjusted debt/adjusted networth	Times	4.09	3.98
Interest coverage	Times	0.49	0.44

 

Financial indicators for the guarantor, ABL (CRISIL Ratings adjusted)

Financials as on / for the period ended March 31		2023	2022
Revenue	Rs crore	6,478	4,591
Profit after tax	Rs crore	671	-309
PAT margin	%	10.4	-6.7
Adjusted debt/adjusted net worth	Times	0.59	0.41
Interest coverage	Times	4.54	5.88

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

List of covenants

The material covenants of the instruments are as follows:

• During the life of the facility, the guarantor and borrower shall adhere to all covenants and undertakings standard to financing of such nature. The borrower shall maintain the  financial covenants that DSCR shall be maintained at 1.10 times or higher

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 Level	Rating assigned with outlook
NA	Term Loan	NA	NA	Mar-2038	700	NA	CRISIL AA- (CE) /Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
ASBTL	Full	ABL has extended an unconditional and irrevocable corporate guarantee to ASBTL to support the project over the tenure of the loan. Therefore, ABL has been fully consolidated with ASBTL.