Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A/Stable' rating on the long-term bank facilities of Gawar Kangra Highways Private Limited (GKHPL; a hybrid annuity project of Gawar Construction Ltd [GCL; ‘CRISIL AA/Stable’]).

 

The rating factors in the healthy project progress, timely receipt of milestone payments from the National Highways Authority of India (NHAI; rated ’CRISIL AAA/Stable’), and availability of 100% right of way (ROW).

 

The project has achieved 39.55% of cumulative physical progress against a scheduled physical progress of ~49% as of December 2023. Lower physical progress is due to delay in approval in the drawings of the tunnel construction work. However, the project is expected to pick up pace after approval, and management expects to complete it within the scheduled timeline of December 27, 2024, as all major approvals are in place. Timely physical progress and achievement of commercial operations date (COD) will be monitorable.

 

The company has already received the full 4th milestone payment and 2nd interim payment of the 5th milestone payment from the NHAI, totalling Rs 201.30 crore (excluding escalation costs; out of a total Rs 440 crore). The sponsor has infused equity of Rs 78.04 crore (Rs 59.74 crore and Rs 18.30 crore infused in the form of unsecured loan and share capital, respectively) out of a total equity requirement of Rs 146.38 crore; and has drawn debt of Rs 73.00 crore (total sanctioned debt is Rs 438 crore).

 

The rating continues to factor in the inherent benefits of the hybrid annuity model (HAM), including adequate ROW and approvals, provision for change of scope, inflation indexation of construction, operations and maintenance (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 track record and financial strength of the sponsor, GCL, and need-based support from the sponsor during the construction and operational phases. These strengths are partially offset by the moderate implementation risk inherent in under-construction projects.

Analytical Approach

CRISIL Ratings has notched up the standalone rating of GKHPL, based on the expectation of strong support from its parent, GCL, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

• Inherent benefits of HAM

Benefits of HAM include 80% ROW assured on the appointed date (AD) and cost escalation assurance provided by the NHAI in the construction and operational stages. HAM also allows for provisional commercial operations date (PCOD) to be issued upon completion of construction on the land made available up to 180 days from AD, thereby allowing for full annuities to be paid as if all works of the project have been completed. The concessionaire will be required to complete construction on the remaining land whenever it is made available post the PCOD. Furthermore, the HAM concession agreement allows for change in scope on land not available within 146 days of the AD, thereby reducing completion cost and the corresponding annuity and O&M payments, while facilitating on-time 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.

 

The company has signed a fixed-price, fixed-time engineering, procurement and construction (EPC) contract with GCL, which has more than two decades of experience in constructing roads and highways, and a strong track record of project execution within the budgeted time and cost.

 

• Low funding risk

The BPC is Rs 1,100 crore (inclusive of GST). GKHPL has completed the process of financial tie-up for the project at a cost of Rs 1,024 crore (inclusive of GST, wherever applicable), funded by an NHAI grant of Rs 440 crore, debt of Rs 438 crore and balance through equity. Funding risk is low as the company had already achieved financial closure in October 2021; it has drawn debt of Rs 73.00 crore till December 2023. About 40% of the project cost is being given on milestone basis by NHAI (10 milestones as per the CA) while the interest-bearing mobilisation advance (10% of BPC) may be sought from NHAI if required. The company has received milestone payments of Rs 201.30 crore (excluding escalations) in the form of four full payments and 2nd payment of the 5th milestone till December 2023. The sponsor has infused equity amounting to Rs 78.04 crore (Rs 59.74 crore infused in the form of unsecured loan and Rs 18.30 crore in the form of share capital) till December 2023. Furthermore, GCL has provided an undertaking on financial support if there is any cost overrun or cash flow mismatch during the construction and operational phases.

 

• Expected operational and financial support from the sponsor

GKHPL 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 segment and has worked with established developers and undertaken build-operate-transfer/HAM projects as a sub-contractor. GCL has a portfolio of 24 HAM projects, of which 7 have achieved completion and the remaining are under-construction stage. Furthermore, the parent has completed five of its HAM project ahead of their scheduled completion dates and received bonus for early completion in four HAM projects.

 

Apart from cost overruns, GCL will support any increase in O&M expense during the construction phase. It will also meet any shortfall in creation of debt service reserve account (DSRA) and debt servicing during the operational phase. GCL will also fund any increase in O&M expense beyond the NHAI payout during the operational phase.

 

Weakness:

• Exposure to implementation risk

GKHPL faces implementation risk as the project is under construction. ROW of 100% in 3H stage is available and other major approvals have been received. The fixed-price fixed-time EPC contract with GCL and its strong execution capabilities will support implementation. Approval for tunnel construction work has been received and the project is expected to pick up pace after that. The project has moderate complexity, and any delay in project implementation will be closely monitored.

Liquidity: Strong

The project is currently under construction and the first repayment is scheduled after achieving COD. Liquidity is expected to be adequate after completion as the project will receive semi-annual annuities (along with interest) and O&M payout from NHAI. Debt service coverage ratio is expected above 1 time throughout the tenure of the debt. Repayment will begin seven months from the scheduled commercial operation date/COD, which provides additional cushion. Furthermore, DSRA equivalent to six months of debt (interest and principal) obligation will be created. Three months of interest obligation will be created within 30 days from the date of PCOD/COD, and the balance three months of interest as well as one principal instalment will be created within seven months of PCOD/COD. Moreover, GCL has provided an undertaking for financial support for cash flow mismatches during the construction and operational phases of the project.

Outlook: Stable

GKHPL will benefit from the significant ROW received and the sustained operational and financial support from the sponsor, GCL.

Rating Sensitivity factors

Upward factors

• Significant physical progress of the project (more than 50%) within scheduled timeline
• Completion of the project on or before time (730 days from AD) within the budgeted cost
• Timely receipt of annuities and creation of DSRA

 

Downward factors

• Delay or anticipation of delay in project completion beyond scheduled date of completion (December 27, 2024)
• Significant cost overruns
• Weakening of the credit risk profile of sponsor, GCL

About the Company

GKHPL is a special-purpose vehicle incorporated on May 10, 2021, for rehabilitation and upgrading of the existing 2 lane to 4 lane from Bhangbar (Near Ranital) to Kangra Bypass Section of National Highway (NH) 88 (New NH-303,503) up to intersection with NH-154 (Design Chainage - 175+270 kilometres [km] to 193+400 km, design length 18.130 km) in Himachal Pradesh on HAM. The project was awarded by NHAI in April 2021, and the CA was signed on June 22, 2021, for a concession period that includes construction period of 730 days from the AD and fixed operations period of 15 years from COD. The pavement type is fully flexible (bitumen) except tunnel and toll plaza. GCL controls 100% of the equity interest in GKHPL.

 

The BPC is Rs 1,100 crore and O&M bid cost is Rs 5 crore. 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 multiple indexation) during the construction phase, while the balance 60% will be paid out as annuity during the operational phase. Though GKHPL has tied up funding for the project, it is yet to achieve financial closure.

Key Financial Indicators*

Financials 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	Rupee Term Loan**	NA	NA	Dec-36	200	NA	CRISIL A/Stable
NA	Rupee Term Loan*	NA	NA	Dec-36	238	NA	CRISIL A/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	2.00	NA	CRISIL A/Stable

*Mobilisation bank guarantee of Rs 65.75 crore as sublimit of rupee term loan facility

**Mobilisation bank guarantee of Rs 55.25 crore as sublimit of rupee term loan facility