Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long-term bank loan facility of Edapally to Kodungallur Highway Private Limited (EKHPL; a hybrid annuity project of Oriental group) at ‘CRISIL A/Stable’.

 

The project has achieved 19.30% of cumulative physical progress as of September 2023 against a targeted progress of 26.75% and is expected to be completed within the stipulated timeline of April 25, 2025. In terms of funding the project, the company has already received three full milestone payments from National Highways Authority of India (NHAI; rated ‘CRISIL AAA/Stable’) totaling Rs. 229.08 crores (excluding escalation costs and GST) (out of total Rs. 742.5 crores), infused Rs. 116.26 crores from promoters (Rs. 29.09 crores in equity and Rs. 87.17 crores in unsecured loans) out of a total planned infusion of Rs. 232.5 crores and has drawn a debt of Rs. 50.01 crores post achievement of ~20% physical progress as of November 2023 (total sanctioned debt is Rs. 930 crores including mobilisation advance BG as sub limit).

 

The rating factors in inherent benefits that EKHPL derives from Hybrid Annuity Model (HAM) such as adequate right-of-way (ROW) and approvals, provisions for change of scope and provisional COD, inflation indexation of construction, operations & maintenance (O&M) costs as per the concession agreement. The rating also reflects low funding risk as entire debt is already tied up and expected operational and financial support from the sponsors i.e. Oriental Structural Engineers Private Limited (OSEPL; rated CRISIL AA/Stable/CRISIL A1+) & Oriental Tollways Private Limited (OTPL). These strengths are partially offset by exposure to implementation risk, given the project is under construction.

Analytical Approach

CRISIL Ratings has notched up EKHPL’s standalone rating, based on the expectation of strong support from its sponsors, OSEPL & OTPL, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

Inherent benefits of HAM and receipt of majority ROW:

Benefits of HAM include minimum 80% of ROW assured on the appointed date (AD) and cost escalation assurance provided by the NHAI due to inflation in the construction stage in the form of Price Index Multiple (PIM) on Grant during construction period] and operational stage (on O&M Cost payable by NHAI during operation period). HAM also allows for issuance of the provisional commercial operations date (PCOD) upon completion of construction on 100% of the land made available to the concessionaire up to 182 days from the appointed date, thereby allowing for annuities to be paid accordingly on pro rata basis. Furthermore, the HAM concession agreement allows for change in scope on land which is not made available by NHAI within 180 days of AD, thereby facilitating on-time completion of the project.

 

The existing project stretch is two lane with expansion plan and therefore most of the land is already available. Out of the additional land requirement, ~89% and ~ 86% of ROW is available in 3G (land compensation decided) and 3H stage (land compensation paid) respectively. There is no forest land in the project. The project received AD on October 25, 2022 and is currently under construction with 19.30% physical progress as of September 2023. Terrain of project land is plain and entire pavement is flexible.

 

Low funding risk:

The Bid Project Cost is Rs 1,617.2 crore (exclusive of GST to be paid to the concessionaire by NHAI at applicable rates) and the company has achieved financial closure for estimated project cost of Rs 1,887 crore (including the GST amount to be paid to the EPC contractor), to be funded by an NHAI grant of Rs 724.5 crore, debt of Rs 930 crore and the promoter’s contribution of Rs. 232.5 crore. Funding risk is low as the company has already tied up for the bank loan of Rs. 930 crores. The sponsor brought in equity amounting to Rs. 116.26 cr (Rs. 29.09 cr of equity and Rs. 87.17 cr towards unsecured loans) till date, debt drawn stands at Rs. 50.01 cr. The company has received grants of Rs. 229.08 cr as milestone payments from NHAI in the form of 3 full milestone payments till 2nd November 2023. Furthermore, OSEPL & OTPL (Sponsors) have provided sponsor undertaking for assuring financial support including but not limited to meeting cost overruns (including cost overrun due to inflation), shortfall in termination payments, cash flow mismatches, shortfall in debt servicing during the construction and operational phases. Sponsors have also provided the CG for any shortfall in termination payments from NHAI to lender(s).

 

Expected operational and financial support from Sponsors:

EKHPL will benefit from the strong operational and financial support of the Sponsors, OSEPL & OTPL, with OSEPL having 51% shareholding and OTPL having 49% shareholding (OTPL is 100% held by OSEPL). The sponsor support includes but is not limited to meeting cost overruns (including cost overruns due to inflation), shortfall in termination payments, cash flow mismatches during construction and operations phase, increase in O&M expenses in excess to that stated in the base case scenario, shortfall in debt service payments, without any recourse to the project. Corporate guarantee (CG) has been provided by OSEPL to meet any shortfall in termination payments till COD. The EPC contractor, OSEPL has strong experience in execution of road projects and currently has a portfolio of 9 projects (excluding InvIT portfolio of 5 projects), with 4 toll and 3 HAM projects as operational and 2 HAM projects in under construction/pre-construction stage. Out of the 3 HAM projects, final COD has been achieved in one project, PCOD has been achieved in other two projects. Two of the projects have started receiving annuities.

 

Weakness:

Moderate implementation risk

The project faces moderate implementation risk as it is in the early stages of construction. The project is of medium technical complexity with construction of 8 major bridges, 8 minor bridges, 1 railway over bridge and 4 flyovers amongst other structures. As on September 15, 2022, ~89% and ~86% of ROW was available in 3G and 3H stages respectively for the additional land parcel.

 

Furthermore, implementation risk is mitigated by the fixed-price, fixed-time EPC contract, to be signed with OSEPL, which has strong experience in roads sector along with strong project execution capabilities. The fixed price O&M contract would also be signed with OSEPL. Any delay in project implementation, however, will remain a rating sensitivity factor.

Liquidity: Adequate

The project is currently under construction, and the first repayment is scheduled post-achieving the commercial operation date of 25 April 2025 and one month post receipt of annuity. Liquidity should be adequate post-completion of the project, on receipt of semi-annual annuities, interest on reducing annuity balance and O&M payout from NHAI. Debt service coverage ratio is expected to be above one time throughout the debt tenure. Repayment will begin 7 months from the scheduled commercial operation date/PCOD, thus providing an additional cushion. Furthermore, debt service reserve amount equivalent to six months of ensuring debt (interest and principal) obligations shall be created in a phased manner till the receipt of the 2nd annuity. Furthermore, OSEPL & OTPL have provided an undertaking to provide financial support to cover cash flow mismatches during the construction and operational phases.

Outlook: Stable

EKHPL will benefit from the significant ROW available as well as sustained operational and financial support from the sponsors, OSEPL & OTPL.

Rating Sensitivity factors

Upward factors

• Substantial increase in physical progress of the project and receipt of PCOD/COD within scheduled timelines
• Completion of the project on or before time (910 days from AD) within the budgeted cost
• Timely receipt of annuities and creation of DSRA for 6 months’ debt servicing requirement

 

Downward factors

• Significant delay or anticipation of delay in project completion beyond scheduled completion date (April 21, 2025) due to delay in physical progress.
• Significant cost overruns resulting in weakening of financial risk profile
• Weakening of the credit risk profile of the sponsors, OSEPL & OTPL.

About the Company

EKHPL is an SPV incorporated in February 2022 to undertake “Six laning (from existing two-lane road) from Kodungallur to Edapally section of NH-66 from design chainage km 397+750 to design chainage 423+780 (design length – 26.03 kms) in Kerala on HAM mode from NHAI under Bharatmala Pariyojana. The project was awarded to the concessionaire in December 2021 and the CA was signed on March 14,2022 for a concession period, including construction period of 910 days from AD and fixed operations period of 15 years from COD. The pavement type is flexible (bitumen). EKHPL is held 51% by OSEPL & 49% by OTPL (which is a 100% subsidiary of OSEPL).

 

The BPC is Rs 1,617.2 crore and O&M bid cost is Rs 10 crore (both BPC & O&M cost exclusive of GST to be paid to the concessionaire by NHAI at applicable rates). Both are adjusted for price index variation between the bid date and the milestone date to arrive at the completion cost (for BPC) and each O&M payment (for O&M bid cost). The project will be funded by NHAI to the extent of 40% of adjusted BPC (adjusted for price index multiple) during the construction phase, while the balance 60% will be paid out as annuity during the operational phase and will be ascertained basis the completion cost. The company has tied up funding for the project and achieved FC on August 06, 2022. The project is currently under construction.

Key Financial Indicators*

As on/for the period ended March 31		2023	2022
Operating Income	Rs crore	NM	NM
Profit after tax (PAT)	Rs crore	NM	NM
PAT margin	%	NM	NM
Adjusted debt/adjusted networth	Times	NM	NM
Adjusted interest coverage	Times	NM	NM

*Financial indicators are not meaningful (NM) as project is under construction

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	Aug-2038	930	NA	CRISIL A/Stable

*with Mobilization Advance BG of INR 177.90 crore as sublimit to the term loan.