Detailed Rationale

CRISIL Ratings has placed its rating on the non convertible debentures and bank facilities of Delhi Metro Rail Corporation Ltd (DMRC) on ‘Rating Watch with Negative Implications’;

 

The rating action follows the recent Supreme Court order upholding the May 11, 2017, order of the Arbitration Tribunal in the dispute between DMRC and Delhi Airport Metro Express Pvt Ltd (DAMEPL) regarding termination of the concession agreement for running the airport metro line from New Delhi Railway Station to Dwarka Sector 21 via Indira Gandhi International Airport by DAMEPL. The airport metro line was commissioned in February 2011. DAMEPL issued a termination notice to DMRC in October 2012, citing technical issues and defects in construction, which formed part of DMRC’s scope of work. The order directs DMRC to make termination payment of Rs 2,782.33 crore, along with interest at an annualised rate of SBI PLR +2%. The final amount of liability and timing of payment (if applicable) are yet to be finalised. DMRC may take on more debt or support from its sponsors because of subdued cash flow and limited cash liquidity. The rating may be lowered if increase in debt liabilities adversely impact debt protection metrics.

 

DMRC’s cash flows have been hit by subdued passenger traffic over the past 18 months because of travel restrictions imposed by the Government and reduced travel preference of commuters. Other sources of revenue, such as lease, consultancy and other mass rapid transit system (MRTS) operations, remain subdued in comparison to the pre-pandemic levels. While restrictions have been relaxed to allow full seating capacity (with no standing passengers), passenger traffic remains low at 40-50% of the pre-Covid level. CRISIL Ratings expects the recovery to be gradual, with likely break-even for operational expenses only by the end of fiscal 2022 if there are no further Covid-linked passenger restrictions. Delay in revenue recovery may aggravate rating pressures.

 

The rating continues to factor in strong support from the Government of India (GoI) and Government of the National Capital Territory of Delhi (GNCTD). GoI has extended flexible long-tenure loans covering around 52% of the project cost. Delhi Metro is a critical lifeline for commuters in the National Capital Region (NCR) underlining its strategic importance to the government. Absence of external loans limits DMRC’s fixed obligations to only its sponsors.

 

CRISIL Ratings will engage with the management of DMRC and resolve the rating watch once clarity emerges on the liability amount, payment timeline (if applicable) and funding plan. Amidst this, recovery of revenue along with envisaged growth in passenger traffic associated with Phase IV of the Delhi Metro project will remain a key monitorable

Analytical Approach

CRISIL Ratings has considered the standalone view of DMRC and has factored in the financial flexibility available to the corporation from its sponsors

Key Rating Drivers & Detailed Description

Strengths

* Strong support from sponsors: GoI and GNCTD

GoI and GNCTD have provided significant support to DMRC since its inception. The debt for all three phases of the Delhi MRTS project is part of GoI's sovereign borrowing from Japan International Cooperation Agency (JICA), and has been provided to DMRC as a pass-through arrangement. The debt carries low interest and has a repayment structure of 20 years with moratorium of 10 years, which enhances the viability of the project. Both GoI and GNCTD bear the associated foreign currency risk on the loans from JICA. The sponsors have also extended interest-free subordinate loans to partially fund the project. As per the sanctioned order issued by the GoI, dividend should not be paid until the entire debt to JICA has been repaid, ensuring adequate liquidity from operating cash flow.

 

* Business risk profile to support cash flow recovery

DMRC had an operating network of more than 350 km in the NCR as of March 2021. Cash flow was stable pre-pandemic primarily because the metro is a convenient, comfortable, punctual and economic mode of transport, and hence has a strong competitive advantage within its catchment area. Although cash flow was impacted because of the pandemic in fiscal 2021, passenger traffic and revenue are likely to recover gradually, with break-even expected by the end of fiscal 2022 and normal growth by the fiscal 2024.

 

* Moderate financial risk profile

The financial risk profile should remain healthy, backed by expected stable and healthy cash flow and comfortable debt protection metrics over long term. Although growth in traffic and cash flow coverage is expected to be lower in fiscals 2022 and 2023, the impact is likely to be temporary and mitigated by the pass-through structure of the existing debt. Favourable funding and stable cash flow from Phases I, II and III of the metro will ensure healthy debt protection metrics over fiscals 2024 to 2030.

 

Although outflow towards the arbitration award for the Airport Express Line is still not fixed, CRISIL Ratings understands the outflow will be funded prudently and sponsors will likely provide support. However, with subdued cash flow and limited cash liquidity on the balance sheet, DMRC may resort to additional borrowings. DMRC’s rating may be lowered if increase in debt liabilities adversely impacts the debt protection metrics.

 

Weaknesses

* Exposure to project implementation risks

DMRC will be expanding the route by around 104 km in the next 2-4 years. As before, the project is likely to be funded through long-tenure, low-coupon debt and support from sponsors with nil foreign exchange risk. DMRC will, nonetheless, face implementation and offtake risks with respect to the project.

 

* Susceptibility to timely implementation of tariff revisions

DMRC's credit risk profile is susceptible to timely and adequate tariff increases over the life of its assets. Implementation of the last revision was completed in October 2017, which was delayed on account of hold-up in the formation of the fare fixation committee by GoI. Timely implementation of adequate tariff increases on a regular basis is critical for DMRC's credit risk profile, and can be a challenge given the socio-political implications of tariff revisions. Timely increase in tariffs, in line with rising operating costs and expected increase in revenue, will be a rating sensitivity factor.

Liquidity: Adequate

Cash accrual is expected to be low in fiscals 2022 and 2023. Unencumbered cash balance of around Rs 2,900 crore as on September 15, 2021, will cover existing aggregate debt obligation of around Rs 2,870 cr over balance period of fiscal 2022 and fiscal 2023. Capital expenditure is likely to be met through debt and infusion by sponsors. Liability arising from the airport line dispute is expected to be settled largely through additional external debt and sponsor support.

Rating Sensitivity Factors

Upward factors

* Higher-than-expected cash accrual and recovery in traffic growth

* Stronger support from sponsors leading to reduction in financial leverage

 

Downward factors

* Slower traffic recovery post Covid beyond fiscal 2022 or delay in revision of tariff

* Increase in financial leverage weakening the debt protection measures

* Weaker-than-expected or delayed support from the sponsors

About the Company

The Delhi Metro is being built and operated by DMRC, a state-owned company with equal equity participation from GoI and GNCTD. The project is under administrative control of the Ministry of Housing and Urban Affairs (MOH&UA). Besides constructing and operating Delhi Metro, DMRC is involved in the planning and implementation of metro rail, monorail, light rail and high-speed rail projects in India. It provides consultancy services to other metro projects in the country and overseas, and executes metro projects on turnkey basis.

 

The Delhi Metro has been planned in four phases with the fourth phase costing around Rs 45,000 crore. While Phases I, II and III are operational. Phase IV has six corridors of 104 km, of which three priority corridors of 65.1 km have been sanctioned by GoI and are under construction while the remaining three await sanction.

 

Airport Express Line

DMRC entered into a 30-year concession agreement with DAMEPL to finance, design, procure, install and commission all systems, and operate and maintain Airport Metro Express Line under a public-private partnership model. DAMEPL, a special purpose vehicle, is a consortium formed by Reliance Infrastructure Ltd (RInfra) and Construcciones y Auxiliar de Ferrocarriles, SA, Spain, with 95% and 5% stake, respectively. As part of viability gap funding, DMRC designed and constructed the Airport Express Line's basic civil structure at a cost of Rs 2,258 crore. The line was commissioned by DAMEPL on February 23, 2011, against the scheduled completion date of September 30, 2010. After a sequence of events, DAMEPL served a final notice of termination to DMRC on June 27, 2013, conveying that it intends to stop services on the airport line. While DMRC has taken over the Airport Express Line project with effect from July 1, 2013, litigation is ongoing with respect to liabilities of DAMEPL and DMRC.

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	Debentures#	NA	NA	NA	1800	NA	CRISIL AA+/Watch Negative
NA	Proposed long-term bank loan facility	NA	NA	NA	1800	NA	CRISIL AA+/Watch Negative

#Yet to be issued