Detailed Rationale

CRISIL Ratings has upgraded its rating to ‘CRISIL A+/Stable’ from ‘CRISIL A/Stable’ on the long-term bank facilities of Gawar Bangalore Highways Private Limited (GBHPL; a hybrid annuity project of its sponsor Gawar Construction Limited [GCL; rated ‘CRISIL AA/Stable’]).

 

GCL had taken over this project through lender’s initiated harmonious substitution from erstwhile concessionaire, Sadbhav Bangalore Highway Pvt Ltd (SBHPL), which was stalled for around a year due to various reasons.  Substitution of the concessionaire was also approved by the National Highways Authority of India (NHAI; rated ‘CRISIL AAA/Stable’) through an Endorsement Agreement dated February 13, 2023.

 

The rating action follows the fact that the company has started getting annuities from NHAI. It received its third and fourth annuities in June and July 2023, respectively, which were pending and pertaining to pre-substitution period. While the fifth annuity was scheduled in June 2023, it was received in September 2023 due to annuity calculations being deliberated with NHAI: annuities are to be received basis latest physical progress and not according to the provisional completion certificate received for the stretch of 81.175 kilometres (km; total length: 170.92 km (6.58 km is descoped)). The next annuity is due in December 2023.

 

The company has already achieved physical progress of 82% as of August 2023 (up from ~77% as of February 2023), and is likely to complete the project within the approved extended timeline (March 27, 2024) as all major approvals are in place. Timely project execution will remain a key monitorable. The project funding is through debt, equity, NHAI grant, and annuities (including operations and maintenance [O&M] and interest on annuities). The annuities received during the construction period will be utilised towards completion of the project and debt servicing (repayments will start from January 2024, before the actual commercial operations date [COD] of March 2024). The annuities should be adequate for meeting debt obligation, and debt service coverage ratio (DSCR) is expected to remain above 1 time. However, timely receipt of annuities will remain a key monitorable. Moreover, a shortfall undertaking from the sponsor with respect to the servicing debt obligations, in case of any cash flow mismatches, provides comfort.

 

The rating reflects the inherent benefits of the hybrid annuity model (HAM), including adequate ROW (right of way) and approvals, provision for change of scope, inflation indexation of construction, O&M costs, and interest payment on annuity during the operational period as per the concession agreement (CA). The rating also reflects low funding risk, operational experience and financial strength of the sponsor, GCL. These strengths are partially offset by exposure to risks related to implementation of the project.

Analytical Approach

CRISIL Ratings has notched up the standalone rating of GBHPL in anticipation of strong support from the ultimate parent and sponsor, GCL, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

Expected operational and financial support from the sponsor

GBHPL will benefit from the strong operational and financial support of GCL, which owns 100% of the company’s shares. GCL has a track record of more than two decades in the EPC (engineering, procurement, and construction) segment and has worked with established developers and undertaken HAM projects. It has a portfolio of 22 HAM projects of which 4 have achieved COD. All these projects have become operational well ahead of their scheduled timelines. 8 . 3 projects have achieved the provisional commercial operation date. Other under-construction HAM projects are also running well ahead of their respective completion timelines.

 

The parent will provide support in case of any cost overrun during the construction phase. It will also support any increase in O&M expense and will meet any shortfall in creation of debt service reserve account (DSRA) or debt servicing.

 

Benefits of HAM and receipt of 100% ROW and approvals

GBHPL has received ROW and approvals, which are critical during the construction phase of the project. Land required for the project is fully available at 3H stage (land compensation paid), which mitigates land acquisition risk.

 

Benefits of HAM include stable cashflows in the form of semi-annual annuities during operations period, Mobilisation advance to the extent of 10% of BPC, cost-escalation assurance provided by the NHAI in the construction and operational stages, provision of termination payment from the Authority in case of termination on account Concessionaire as well as Authority. HAM also allows for provisional commercial operations date (PCOD) to be issued upon completion of construction on the land made available up to 146 days from the AD. Furthermore, the HAM CA allows for change in scope on land not available within 180 days of the AD, reducing completion cost and the corresponding annuity and O&M payments while facilitating timely completion of the project. Other benefits include indexation done to the bid project cost (BPC) and O&M cost to the extent of inflation movement and interest payments on residual annuity payments in the operational period. Extension of timeline of the project to March 27, 2024 has been approved by NHAI.

 

GCL has a track record of more than two decades in the roads and construction sector. The EPC agreement is proposed to be signed with GCL for a fixed price and time, which mitigates cost and time overrun impact on the SPV.

 

Low funding risk 

The revised BPC is Rs 944 crore. The company has completed financial tie-up for the balance project at a cost of Rs 912 crore (96.6% of BPC), funded through NHAI grant of Rs 54 crore, debt of Rs 528.91 crore, equity of Rs 169 crore (for project cost Rs 136 crore and balance for DSRA), and the balance through pending annuity payments. About 70% of the equity is to be brought in upfront by the promoter before the disbursement. The project has achieved ~82% progress, which has been funded through NHAI grants, debt and funds from the sponsor (including indirectly through promoter). As of August 2023, the sponsor has brought in nearly 87% of the equity commitment, while close to Rs 255 crore of the debt has been disbursed. Also, the company has received annuity and O&M payment of Rs 136 crore till date. Furthermore, GCL has given an undertaking to provide financial support in case of cost overrun and cash flow mismatch during the construction and operational phases.

 

Weaknesses:

Exposure to moderate implementation risks

The project was stalled for around 1 year and physical progress was ~77% in February 2023; it improved to ~82% in August 2023. NHAI has approved extension of time upto March 31, 2024.

The project is moderate in complexity as the terrain is mainly plain. Availability of 100% ROW, fixed-price and fixed-time EPC contract and strong execution capabilities of the promoter should support implementation. However, since the project was stuck for almost 12 months, any further delay or issue in its implementation will be closely monitored.

 

Susceptibility to fluctuations in operational cost and interest rate

GBHPL is exposed to risks related to maintenance of the project stretch. If the prescribed standards are not met, annuity payment may be reduced or delayed, which could impact the project’s debt-servicing ability. This risk is, however, mitigated by the strong operational track record of the O&M contractor. Furthermore, as operation cost depends on inflation, any significant increase therein may impact cash flow.

 

Also, along with fixed annuities, the project will receive interest payments on the balance annuities that are linked to the prevailing bank rate. The reduction in bank rate impacts project inflow given that a large proportion of the cash inflow is from the interest on balance annuities. However, this is partially offset by the fact that the interest rate on debt is floating and is also expected to follow the trend in bank rates, thus keeping DSCR in check. Although the cushion in cash flow will help absorb the impact of such fluctuations partially, these components will be key rating sensitivity factors.

Liquidity: Adequate

Liquidity is strong as the project has started receiving semi-annual annuities (along with interest) and O&M payout from NHAI on pro rata basis the progress. The DSCR is expected to be comfortable at over 1 time (base case) throughout the tenure of the debt. DSRA for 6 months of debt servicing shall be created in the phased manner after COD.

Outlook: Stable

GBHPL will benefit from resumption of semi-annual payments from NHAI as well as operational and financial support from GCL during the construction and operational phases.

Rating Sensitivity Factors

Upward factors

• Completion of the project on or before scheduled time (March 27, 2024) and within the budgeted cost.
• Timely receipt of annuities and creation of DSRA of 6 months of debt servicing requirements.

 

Downward factors

• Significant delay or anticipation of delay in receipt of final COD beyond March 27, 2024, leading to significant cost overrun
• Weakening of the credit risk profile of the sponsor, GCL

About the Company

GBHPL is an SPV created by Gawar Construction Limited for two/four laning of BRT Tiger Reserve Boundary to Bangalore section of NH -209 (Existing Chainage from Km 287.520 to km 461.550) in the state of Karnataka on Hybrid annuity mode under NHDP Phase-IV.

 

GCL controls 100% of the equity interest in GBHPL.

Key Financial Indicators*

Financials as on/for the period ended March 31	Unit	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

NM: Not meaningful

*Financial indicators are not meaningful as the entity was created in November 2022 and operations started after harmonious substitution of the project from SBHPL to GBHPL in February 2023. The annuities have started coming in the current fiscal.

Any other information: Not applicable