Key Rating Drivers & Detailed Description

Strengths:

Inherent benefits of HAM

The project benefits from HAM, such as delinking of unavailable land, which allows PCOD to be issued on completion of construction on the land made available up to 182 days from the appointed date, thereby allowing 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 after the PCOD. Other benefits of HAM 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 project received PCOD on January 9, 2021. As per the provisions of the HAM CA, full annuities and O&M payments are to be received starting six months from the PCOD itself. Accordingly, the project has received its first annuity (along with interest) and O&M payment without any major deductions in line with the provision in the CA. Furthermore, the company received early completion bonus amounting to Rs 66 crore along with the first annuity (on account of early completion).

Healthy debt protection metrics

The project will receive 60% of the completion cost in the form of 30 semi-annual payments from NHAI for the next 15 years. The project will also receive interest payments on the balance annuities at a rate equal to the prevailing bank rate plus 3%. Debt reduced to Rs 375 crore from sanction of Rs 427 crore due to savings in project cost because of early completion. Of the total revised sanctioned debt, Rs 365 crore has been drawn down as on August 6, 2021. The ratio of debt to annuities receivable is healthy at 0.53 time (assuming Rs 375 crore debt drawndown and with receipt of 100% annuity) and the DSCR is expected at above 1 time throughout the tenure of the debt, supported by moderate debt obligation and moderate maintenance expenses as around 80% of the project has a rigid pavement. Furthermore, there is a gap of one month between the scheduled annuity payment date and the debt obligation date, which provides a cushion in case of delay in annuity. Further, DSRA covering six months of debt servicing obligation of existing debt has been created in line with the terms of the financing agreements.

The first annuity (along with interest) and O&M payment was received on August 2, 2021. The same was required to be received within 15 days from the due date as per the provisions of CA, however the same was received with a delay of 10 days. This is expected to be a one-time occurrence, given the procedural delays/compliances in computation of the early completion bonus amount for this project; the project was completed 20 months ahead of schedule. Annuities, interest and O&M payments are expected to be received together and on time going forward. Any significant delay or deduction in payment from NHAI will remain a rating sensitivity factor.

Expected operational and financial support from sponsor

The company will benefit from strong operational support from GCL, the single largest shareholder. GCL is the O&M contractor and will be responsible for routine and periodic maintenance of the project stretch. 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 currently has a portfolio of 11 HAM projects, out of which one has achieved COD on July 31, 2020, two have achieved provisional completion in January 2021, one is under construction and more than 85% complete, four have achieved financial closure of which three of them have received appointed date. The remaining three projects have been awarded recently and are yet to achieve financial closure. Further, the project enjoys financial flexibility in the form of an undertaking provided by GCL for financial support in case of shortfall in DSRA and cash flow mismatches during the operational phase.

While the project has received PCOD, 0.32% of the work is yet to be completed as of June 2021 and will have to be undertaken by the concessionaire when land is made available. Around Rs 4 crore of work needs to be completed as on date, pertaining to the service roads and not the main carriageway. The balance land is in the final stage of acquisition and pending work is expected to be completed by October 2021 (subject to timely handover of land by the concessioning authority). The concessionaire will, however, have to complete construction within the original stipulated cost as all five construction grants have been received from NHAI. This risk is mitigated by the fixed-time, fixed-price contract with GCL.

Weaknesses

Susceptibility to changes in operational cost and interest rate

The project is exposed to risks related to maintenance of the project stretch. If the prescribed standards are not met, annuity payment may be reduced. Any significant delay and deduction in annuities could impact debt-servicing capability. Nonetheless, strong track record of sponsor, who is also the O&M contractor, is expected to mitigate this risk.

Along with fixed annuities, the project will receive interest payments on the balance annuities that are linked to the prevailing bank rate. Bank rate has reduced significantly in the past 12-18 months, thereby impacting project inflow, given that a large proportion of the cash inflow is from the interest on balance annuities. However, this is partially offset as the interest rate on debt is floating and may follow the trend in bank rates, thus keeping DSCR in check.

Annexure - Details of Instrument(s)

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