Rating Rationale

Key Rating Drivers & Detailed Description

Strengths

* Healthy traffic potential of project, backed by strategic location

The project is a part of the Golden Quadrilateral connecting Delhi with Kolkata and also the North-South Corridor connecting Delhi with Cochin and Kanyakumari. The stretch has strong traffic potential as it connects Agra, Delhi, Mathura and Vrindavan, all of which are major tourist and religious destinations. Moreover, major industrial and commercial centres are at the northern end of stretch viz Okhla, Badarpur, Saidabad, Faridabad, Ballabhgarh and Palwal. The stretch caters to diverse industries such as automobile, electronics and textiles. The Indian Oil Refinery at Mathura and the largest inland port & container transhipment terminal in India at Badarpur called ICD Tughlakabad are also along the project stretch. Thus, DATRPL has a distinct industrial character with a large share of traffic movements being goods vehicles serving these industries - commercial traffic accounts for over 70% of total traffic on DATRPL.

Owing to the presence of major industrial centres around the project, about 75% of the traffic on the stretch is captive i.e. either the origin, destination or both lie along the project stretch thereby reducing the risk of traffic diversion. Also, annual toll rate escalation has a 3% fixed component and depends 40% on the wholesale price index (WPI), which limits complete dependence on WPI, thereby supporting revenue.

The project is under construction, however tolling is ongoing since its appointed date (October 2012) as it is a four to six laning project and hence has an operational track record of over eight years. Toll collection was however muted until fiscal 2017 because of the ongoing construction on DATRPL and also on a feeder route connecting DATRPL to Madhya Pradesh. Collection, however, improved significantly fiscal 2018 onwards with a 20% compound annual growth between fiscals 2018 and 2020 due to the following factors:

Completion of significant portion of construction on DATRPL by fiscal 2017
Opening of feeder routes (Eastern Peripheral Expressway and Kundli Manesar Palwal Expressway) in fiscal 2019
Opening up of the feeder stretches to Madhya Pradesh October 2018 onwards, which were being four laned

Toll collections were impacted with the onset of pandemic.

COVID Collection on the stretch was suspended from March 27, 2020, until April 19, 2020, on account of the nationwide lockdown imposed to curb the ongoing Covid-19 pandemic.
Since the easing of lockdown measures last year, traffic had seen a healthy revival. Toll collection rose to 69% in May 2020, and thereafter reached 125% in November 2020 (compared with collection in May 2019 and November 2019, respectively)
Toll collections were impacted by the farmers’ protests from December 2020 onwards which then normalized again in mid-February 2021. Strong recovery and growth in traffic post easing of lockdown measures (in fiscal 2021) were supported by the continuous diversion of traffic from national highway (NH)-8 onto DATRPL due to the operationalisation of the feeder routes connecting DATRPL to Madhya Pradesh. Hence, despite the pandemic, collection for fiscal 2021 remained flat at around Rs 298 crore.
However, collection was again impacted in April and May 2021 due to the second pandemic wave. While there has been a 45% drop in traffic in May 2021 (compared to March 2021) as the Delhi region was heavily affected by the second pandemic wave, recovery has been witnessed in the first two weeks of June 2021 post easing of lockdown. Toll collection is expected to normalise by the time PCOD is achieved in July 2021 (which is a pre-disbursement condition to the rated debt). Sustenance of growth in toll revenue will however remain a key monitorable.

* Strong debt protection metrics, supported by healthy toll collection

As per the settlement agreement signed between National Highways Authority of India (NHAI; 'CRISIL AAA/Stable'), Cube Highways and Infrastructure III Pte Ltd (Cube Highways) and DATRPL, provisional commercial operation date (PCOD; completion of 6-laning) has to be achieved by January 2021. As of April 2021, about 96% physical progress has been achieved. As per the company’s estimates, PCOD will be achieved by July 2021 (delayed from earlier estimates of March 2021 largely due to the second pandemic wave) and hence has applied to NHAI for an extension. While some portion of land required for 6 laning is yet to be handed over and clarity around de-scoping or de-linking of the same is awaited, there is no construction risk linked with receipt of PCOD given that achievement of the same is a pre-disbursement condition to the rated proposed bank loan facilities.

Toll collection is expected to increase significantly in fiscal 2022 due to operationalisation of the new toll plaza upon receipt of PCOD (expected by July 2021). The stretch currently has two toll plazas, on achieving PCOD it will have three toll plazas - one of the existing plazas (at kilometre (km) 74) would be dismantled and two plazas (at km46 and km94) will come up to capture currently un-tolled traffic. Also, higher toll rates at km46 will be applicable upon completion of a structure (final COD) expected by November 2021 (delayed from earlier estimates of September 2021 largely due to the second pandemic wave). Any significant delay in completion of structure is a rating sensitivity factor given that toll collection is to improve post final COD (due to higher toll rate at km46). Implementation risk linked with receipt of final COD is mitigated by the presence of a reputed engineering procurement and construction contractor with strong technical capabilities. Also, all land and approvals required for the structure are in place.

Further, the first major maintenance is expected to commence in fiscal 2022 and will be funded partially through debt (Rs 120 crore debt is expected to be sanctioned against expected cost of Rs 240 crore). However, actual quantum of debt available for this purpose is contingent on collection in the trailing 90 days prior to drawdown. Any shortfall in debt to fund the maintenance over and above available debt will be covered by the sponsor, Cube Highways, in line with its sponsor support undertaking.

Debt protection metrics should remain strong over the tenure of debt, given the adequate cushion in cash flow and steady growth in toll revenue. Any significantly higher traffic diversion or violation due to non-acceptance of the new toll plaza or unwillingness to pay the higher toll are rating sensitivity factors.

* Experienced management team

The sponsor, Cube Highways, has an efficient team of professionals for managing routine toll plaza affairs and maintenance of the road. Senior management consists of a veteran traffic consultant who has experience of over three decades in conducting traffic studies at prominent stretches, a professional with considerable expertise in toll management and officials with sound understanding of the technical specifications and advanced methods of operations and maintenance (O&M) to proactively tackle the maintenance of road projects. They are supported by experienced finance and legal teams. The sponsor uses advanced road-testing mechanisms to prioritise maintenance work based on the life-cycle cost of the assets.

Advanced technology and extensive experience of the management will help in stringent monitoring of toll operations, effective maintenance and avoidance of structural damage to the road.

* Tight escrow mechanism with well-defined payment waterfall

A waterfall mechanism ensures toll collection will be escrowed and used to meet the principal and interest obligation after payment of taxes, statutory dues and O&M expenses. Moreover, a debt service reserve account (DSRA) equivalent to three months of debt obligation will be maintained for the entire tenure of the loan. Furthermore, the proposed structure stipulates that if the debt service coverage ratio (DSCR) drops below 1.2 times, the surplus generated by the asset will be trapped, and the DSCR will be checked quarterly for the trailing 12 months. It also specifies the creation and reinstatement of a major maintenance reserve account for the second major maintenance cycle (expected in fiscal 2028).

Weaknesses

* Presence of alternate routes

Delhi and Agra are connected by two roads- DATRPL and Yamuna Expressway (YE). The YE is a 6-lane expressway connecting Agra and Noida and has been operational since fiscal 2013. While YE is a faster route compared to DATRPL, risk of traffic diversion from DATRPL to YE is expected to be low since

Toll rates on YE will be 1.5 times that of DATRPL even after implementation of high toll rates on one of DATRPL’s toll plazas. This gap may however reduce going forward
75% of the traffic on DATRPL is captive and hence likelihood of diversion to YE in low; the balance non-captive traffic connects to DATRPL through a feeder route bypassing the toll plaza (km46) where toll rates will increase upon final COD and hence toll rates for the non-captive traffic will be continue to be considerably lower if it chooses DATRPL
The non-captive commercial traffic originating outside of Delhi will have to make additional payment in the form of National Green Tribunal (NGT) tax and Municipal Corporation of Delhi (MCD) tax to enter Noida to take the YE, while these taxes are not payable for entry into DATRPL. Also, while YE is faster, it is significantly faster only for passenger vehicles while the difference is not very significant for commercial vehicles. Thus, most of the traffic on YE is passenger driven while that on DATRPL is dominated by commercial vehicles

While DATRPL is expected to remain the preferred route for commercial vehicles, changes in government policies such as removal of the NGT and MCD taxes on commercial vehicles and development of feeder routes to YE (which can result in non-payment of these taxes) could impact the traffic on DATRPL.

Other alternate routes such as the Delhi Mumbai Expressway, Ganga Expressway are expected to be commissioned over the next 3-4 years that can impact traffic volumes on DATRPL. Though diversion risk is limited at present, it remains key a monitorable.

* Susceptibility of toll revenue to volatility in traffic volume or change in tolling policy

Toll collection, the only source of revenue, is susceptible to volatility in traffic volume because of toll leakages, lack of timely increase in toll rates, fluctuation in WPI-linked inflation, seasonal variation in traffic and economic downturns. Furthermore, any change in government policy such as demonetisation in November 2016 and, more recently, the pandemic-induced lockdown, can impact cash flow and debt protection metrics.

In the case of DATRPL, two new toll plazas will become operational upon receipt of PCOD and toll rate on one of these toll plazas will increase by around 1.7 times upon receipt of final COD. Users’ acceptance of the new toll plazas (especially the one with higher toll rates) and the extent of violation traffic and diversion due to increase in toll rates are key monitorables for this asset. Also, abolishment of the NGT and MCD taxes on commercial vehicles entering the national capital region can adversely impact traffic on DATRPL.