Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of KCC Walajahpet Expressway Pvt Ltd (KWEPL; a hybrid annuity project) to ‘Positive’ from 'Stable' while reaffirming the rating at ‘CRISIL A-’.

 

The revision in outlook reflects healthy project progress, receipt of 5 milestone payments from National Highways Authority of India (NHAI,’CRISIL AAA/Stable’) and availability of 98.98% right of way (ROW). The company has achieved 54.04% of cumulative physical progress as on 15th September, 2023 vis-à-vis the scheduled physical progress of 52.91%. The project is expected to be completed within the stipulated timeline of 14th July, 2024. In terms of funding the project, the company has already received Rs. 166.40 cr (excluding escalation costs and GST) as milestone payments from NHAI (total milestone payment to be received is Rs. 332.80 crores), infused Rs. 60.91 crores of equity as on 27th September 2023 (Rs. 23.66 crores of share capital and Rs. 37.25 crores in unsecured loans) out of a total planned infusion is Rs. 94.64 crores and has drawn a debt of Rs. 173.51 crores (total sanctioned debt is Rs. 325 crores) as on 27th September 2023.

 

The ratings continue to factor in inherent benefits of the hybrid annuity model (HAM) such as adequate right-of-way (ROW) and approvals and change of scope to the extent of non-receipt of 100% ROW within stipulated time as per the concession agreement. The rating also reflects low funding risk with debt tied up and expected operational and financial support from the sponsor, KCC Buildcon Private Limited (KBPL). These strengths are partially offset by exposure to implementation risk given its nascent phase of construction.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

• Inherit benefits of HAM:

Benefits of HAM include 80% ROW assured on the appointed date and cost escalation assurance provided by the National Highways Authority of India (NHAI; rated ‘CRISIL AAA/Stable’) in the construction and operational stages. HAM also allows for issue of the provisional commercial operations date (COD) upon completion of construction on the land made available up to 180 days from the appointed date, 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-provisional COD. Furthermore, the HAM concession agreement allows for change in scope on land not available within 180 days of the appointed date, thereby reducing completion cost and the corresponding annuity and operation and maintenance (O&M) payments, while facilitating on-time completion of the project.

 

NHAI has handed over the requisite ROW as on Appointed Date as per provision of Concession Agreement. As on 15th September, 2023 company has significant ROW of 98.98% without any encumbrance, and major approvals, including the major ones -environmental and forest-related, utility shifting, and tree cutting.

 

• Low funding risk:

Total bid project cost is Rs 832 crore, and the company has achieved financial closure for project cost of Rs 752.44 crore, funded by an NHAI grant of Rs 332.80 crore, debt of Rs 325 crore, and the balance through equity. Funding risk is low as the company has already tied up for the bank loan. The sponsor has infused equity amounting to Rs. 60.91 cr till date (Rs. 23.66 cr of equity share capital and Rs. 37.25 cr of unsecured loans), debt drawn stands at Rs. 173.51 cr as on 27th September 2023. The company has received grants of Rs. 166.40 cr (excluding escalation costs and GST) as milestone payments from NHAI. Furthermore, KBPL has given an undertaking to provide financial support in case of cost overrun and cash flow mismatch during the construction and operational phases.

 

• Operational experience and financial strength of the sponsor:

Benefits are likely from the strong operational and financial strength of KBPL, the sponsor and parent of KWEPL. KBPL has a healthy track record in road construction with promoters’ experience spanning over more than two decades. The business risk profile of KBPL remains healthy with order book of Rs 6214 crore as on 31st July, 2023, having a mix of Engineering, Procurement and Construction (EPC) and HAM road projects. The order book to revenue ratio is expected to remain at 2-3 times over the near future. The current order book provides healthy revenue visibility over the medium term.

 

The financial risk profile of KBPL is supported by healthy capital structure and debt protection measures.  CRISIL Ratings expects annual cash generation of over Rs 320-270 crore for KBPL over the next 2-3 years which is likely to be sufficient for the equity requirements in recently won HAM projects and no requirement of any additional debt in KBPL.

 

Apart from any cost overrun, KBPL will support any increase in O&M expenses during the operation phase of KWEPL. KBPL will also meet any shortfall in creation of debt service reserve account (DSRA) till receipt of 2nd Annuity from NHAI.

 

Weaknesses:

• Exposure to implementation risk

The project received appointed date on 16th July, 2022 and is progressing at a healthy pace. Substantial ROW of 98.98% with all the approvals are in place. However, this risk is mitigated by the fixed-price, fixed-time EPC contract plus escalation linked to Price lndex Multiple components to the extent of inflation payment received from Authority during Project development. For the avoidance of doubt, any payment received from Authority towards indexation of inflation during development of the Project will be passed on to the EPC Contractor towards meeting inflation of prices during execution period. KBPL, which has expertise spanning about two decades in the construction business and a track record of project execution within the scheduled time and budgeted cost. While the project is low in complexity, any delay in project implementation will be closely monitored.

Liquidity: Strong

The project is currently under construction and the first repayment is scheduled seven months after SCOD of 14th July 2024. Funding risk is low because the company has already tied up with banks for loans.  KBPL has provided an undertaking for financial support in case of cost overrun and cash flow mismatches during the construction, as well as operational phases.

 

Liquidity is expected to be healthy post completion (July 2024) as the project will receive semi-annual annuities (along with interest linked with 1 Year Average MCLR of top 5 Schedule Commercial Banks) and O&M payout from NHAI linked with Price Index Multiple. Debt service coverage ratio is expected to be more than 1.0 time throughout the tenure of the debt. Furthermore, DSRA for 6 months' debt servicing requirement shall be created in a phased manner. DSRA for meeting 3 months' interest servicing requirement, shall be created by the Sponsor on COD of the project. The balance amount of DSRA shall be created by the Borrower on receipt of second annuity. In case the borrower is unable to create the required DSRA amount after receipt of first 2 annuities, then the Sponsor shall arrange from their own sources for the amount of shortfall in creation of DSRA. KBPL will also provide support for any increase in O&M expenses beyond the NHAI payout during the operational phase.

Outlook: Positive

KWEPL will benefit from the significant ROW and approvals received, healthy project progress, and expected timely completion as well as sustained operational and financial support from the sponsor, KBPL.

Rating Sensitivity factors

Upward factors:

• Substantial increase in physical progress of the project and receipt of PCOD/COD
• Completion of the project on or before time (730 days from AD) within the budgeted cost
• Timely receipt of annuities and creation of DSRA for 6 months’ debt servicing requirement

 

Downward factors:

• Delay or anticipation of delay in project completion beyond scheduled date of completion (14th July 2024)
• Significant cost overruns resulting in weakening of financial risk profile
• Weakening in the credit risk profile of sponsor, KBPL

About the Company

KCC Walajahpet Expressway Private Limited is a Special Purpose Vehicle (SPV) Company incorporated by KCC Buildcon Private Limited to undertake the “Construction of four-lane Bangalore Chennai Expressway from km 180.000 to km 204.500 (Walajahpet to Arakkonam Section in the State of Tamil Nadu) under Bharatmala Pariyojana on Hybrid Annuity Mode (Phase III-Package II).

 

NHAI declared KCC Buildcon Private Limited as lowest bidder (Bid Price amounting to Rs. 779.74 Crore i.e., NPV of Sum of Bid Project Cost of Rs. 832.00 Crore and 1st year O&M cost of Rs. 2.74 Crore) and awarded the project vide Letter of Award no. NHAI/Tech/TN/BCE/Phase III/P-II/2020/35354 dated 14th September 2021. Concession period for the project is 17 Years including construction period of 2 years and operation period of 15 years. The Concession Agreement for the Project executed on 17th November 2021 and Appointed date has been declared with effect from 16th July, 2022.

Key Financial Indicators*

As on / for the period ended March 31		2023	2022
Revenue	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