Detailed Rationale

CRISIL Ratings has placed its 'CRISIL AA+' rating on the proposed non-convertible debentures (NCDs) and long term bank loan facility of DA Toll Road Private Limited (DATRPL) on 'Rating Watch with Developing Implications'.

 

The rating action follows instructions by the National Highways Authority of India (NHAI; 'CRISIL AAA/Stable') to the lenders of DATRPL to transfer toll collected on the stretch to a withheld account thereby restricting access to project cash flows. As per the settlement agreement signed by NHAI, sponsor - Cube Highways and Infrastructure III Pte Ltd (Cube Highways) and DATRPL, provisional commercial operation date (PCOD; completion of 6-laning) had to be achieved by January 2021. The same however had been delayed largely on account of the second pandemic wave and farmers’ protests resulting in the concessionaire applying for PCOD on July 28, 2021. However, PCOD was not granted as the recent heavy rains had resulted in waterlogging at multiple sections of the stretch deteriorating pavement condition and potholes emerging primarily on service roads. Action taken by NHAI was on account of the aforementioned reasons.

 

The current restriction on utilisation of the toll collections will be removed once the road is maintained to meet NHAI requirement (this largely involves overlaying the potholes and improving the drain system), which the management expects will be resolved by mid-October 2021. Cube Highways has committed to infuse funds of Rs 113 crore, in addition to Rs 36 crore available with DATRPL to meet debt obligation (Rs 57 crore) till October 2021 and for completion of pending construction/maintenance works that will enable achievement of PCOD.

 

The outstanding rating is on the proposed loan facilities of DATRPL, which are yet to be drawn down. Achievement of PCOD is a pre-disbursement condition for the rated facilities.

 

Completion of maintenance and pending works and reversal of NHAI action will be key monitorables for resolution of the rating watch.

 

CRISIL Ratings had, on August 19, 2021, assigned its 'CRISIL AA+/Stable' rating to the proposed Rs 1,000 crore NCDs of DATRPL.

 

The ratings continues to reflect the healthy traffic potential of DATRPL backed by its strategic location, strong debt protection metrics, and an experienced management team. These strengths are partially offset by susceptibility of toll revenue to volatility in traffic volume, alternate routes or change in tolling policy.

Analytical Approach

For arriving at the rating, CRISIL Ratings has taken a standalone view of the business and financial risk profiles of DATRPL.

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.

• 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 operationalization of the feeder routes connecting DATRPL to Madhya Pradesh. Hence, despite the pandemic, collection for fiscal 2021 remained flat at around Rs 298 crore.
• Collection was again impacted in April and May 2021 due to the second pandemic wave. Per day toll collection had dropped by 38% from March 2021 and has since recovered. While collection in August 2021 is lower than March 2021, the same is also attributable to seasonal variations. Sustenance of growth in toll revenue will however remain a key monitorable.

 

Strong debt protection metrics post PCOD, supported by healthy toll collection

As of July 2021, about 98.5% physical progress has been achieved and the company estimates additional cost of Rs 5 crore has to be incurred for maintenance of the road as per NHAI’s requirement. As per the management, PCOD is expected by mid-October 2021.

 

Toll collection is expected to improve in fiscal 2022 due to operationalisation of the new toll plaza upon receipt of PCOD. 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 December 2021. Any significant delay in completion of structure will remain a monitorable 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 190 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 the rated 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 (which will be restored by the time PCOD is achieved and PCOD is a pre-disbursement condition for the rated facilities) 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 six 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 and third major maintenance cycles (expected in fiscal 2029 and fiscal 2036).

 

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.

Liquidity: Superior

Given that toll collections are not available following NHAI’s instructions to the lenders to transfer the same to a withheld account, sponsor Cube Highways will be infusing funds required for achievement of PCOD and for debt servicing till October 2021.

 

However, liquidity of DATRPL will be superior once the project receives PCOD since funds in the withheld account will be sufficient for balance construction works required for final COD. As of July 31, 2021, about Rs 80 crore of works is required for completion of the structure required for final COD. The sponsor will also be maintaining Rs 70 crore working capital funds till the time entire construction is completed. Upon PCOD, DSCR levels will be healthy. Toll collections will be adequate to service debt obligation in fiscal 2022. Furthermore, a DSRA equivalent to six months of debt obligation will be maintained throughout the tenure of debt.

 

Terms of the proposed NCDs stipulate that the debenture holders can recall the debentures at the end of two years from the time of disbursement. In such a scenario, DATRPL would have to redeem/refinance the debentures within 105 days of demand. However, CRISIL Ratings takes comfort from the healthy financial flexibility of DATRPL and its sponsor.

Rating Sensitivity factors

Upward Factors

• Project receives PCOD thereby significantly reducing implementation risk
• Adequate toll collection (0-5% growth) upon operationalization of new toll plazas

 

Downward Factors

• More than 15-20% dip in collection once PCOD is achieved vis-a-vis pre-PCOD collection (adjusted for seasonality)
• Continued freeze on utilization of toll collections without adequate equity back up from the sponsor
• Additional debt contracted materially impacting debt servicing indicators

About the Company

DATRPL has a 26-year concession with NHAI for six-laning of existing 4-lane carriage way from km20.5 to km200.00 (project length of 179.5 km) between Delhi to Agra of NH-2 in Haryana/Uttar Pradesh, on a design, build, finance, operate and transfer- toll basis under the National Highways Development Project Phase V. The project received appointed date in October 2012.

 

DATRPL was initially promoted by Reliance Infrastructure Ltd (R-Infra). In March 2019, R-Infra signed a share purchase agreement with Cube Highways for sale of its entire stake in DATRPL. The deal was concluded on December 31, 2020.

 

The rating has been assigned to the proposed long term bank facility and NCDs of DATRPL which can be drawn down only post achievement of PCOD. In case the facility is not drawn down after PCOD has been achieved, CRISIL Ratings may withdraw the rating in line with its policy on withdrawal of ratings.

Key Financial Indicators

Particulars	Unit	2020	2019
Revenue*	Rs.Crore	354	548
Profit After Tax (PAT)	Rs.Crore	(37)	(1)
PAT Margin	%	(10.4)	(0.2)
Adjusted debt/adjusted networth	Times	2.42	2.21
Interest coverage	Times	1.32	1.61

*Includes construction income

Status of noncooperation with previous CRA

DATRPL had not cooperated with ICRA, which classified it as non-cooperative vide release dated July 22, 2020. This was prior to DATRPL’s acquisition by Cube Highways. The reason provided by ICRA Ratings is non-furnishing of information by DATRPL for monitoring of ratings. The rating was subsequently withdrawn vide release dated February 25, 2021.

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	Proposed Long Term Bank Loan Facility	NA	NA	NA	1,023.0	NA	CRISIL AA+/Watch Developing
NA	Non Convertible Debentures^	NA	NA	NA	1,000.0	Complex	CRISIL AA+/Watch Developing

^Yet to be placed