Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the non-convertible debentures (NCDs) of KNR Tirumala Infra Private Limited (KTIPL) and has withdrawn its rating on NCDs worth Rs 54 crore (see Annexure - Details of rating withdrawn) at the request of the company as these NCDs have not been placed. The withdrawal is in line with the CRISIL Ratings policy for withdrawal of ratings.

 

The project received its fifth annuity (along with interest) and operations and maintenance (O&M) payment from the National Highways Authority of India (NHAI; ‘CRISIL AAA/Stable’) under provisions of the concession agreement on December 4, 2023, with delay of 24 days (due on November 10, 2023). Around Rs 2 crore was withheld from the annuity amount of around Rs 75.7 crore, owing to tax deducted at source (TDS), labour cess and good and services tax (GST) TDS. The GST payment of Rs 9 crore was released after submission of documents in January 2024; this amount was withheld from the fifth annuity.

 

The project received final commercial operations date (COD) on June 8, 2023, for 60.538 km (around 99% of the total length) with the remaining length being descoped. Accordingly, revised bid project cost (BPC) stands at Rs 1,684 crore (including GST), against original BPC of Rs 1,730 crore. Adjusted revised BPC comes to Rs 1,824 crore.

 

The financial risk profile remains strong with healthy debt to annuities receivable ratio at 0.49 time and debt service coverage ratio (DSCR) expected over 1 time throughout the tenure of the debt. Furthermore, buffer of 55 days between scheduled annuity payment date and debt obligation date offers cushion in case of delay in receipt of annuity.

 

The asset was to be transferred to Cube Highways Trust (CHT; ‘CRISIL AAA/Stable/CRISIL A1+’). However, the transfer has been delayed on account of delay in receipt of approvals. There were put/call options at the end of two years from the date of allotment. As the option date was nearing and the transfer was delayed, the company revised the date to April 12, 2026, with approval from one of the debenture holders (SBI Mutual Fund) through communication dated February 15, 2024, while approval from the other debenture holder (HDFC Bank Ltd) is expected by end of February 2024. Furthermore, the rate of interest was fixed for the first two years and was expected to be revised based on mutual agreement between the borrower and debenture holders thereafter. The coupon rate will be revised to 8.47% per annum (from 6.3% for year 2) from April 12, 2024.

 

The rating continues to reflect the strong debt protection metrics of the project, inherent benefits of the hybrid annuity model (HAM) and the experienced management team of the sponsor, Cube Highways and Infrastructure III Pte Ltd (part of the Cube Highways group). These strengths are partially offset by susceptibility to volatility in operational cost and interest rate, and exposure to refinancing risk.

Analytical Approach

For arriving at its rating, CRISIL Ratings has considered the standalone business and financial risk profiles of KTIPL.

Key Rating Drivers & Detailed Description

Strengths:

• Strong debt protection metrics: The project will receive 60% of the completion cost through 30 semi-annual payments from NHAI for 15 years (starting provisional COD [PCOD]) and interest payments on the balance annuities at a rate equal to the prevailing bank rate plus 3%. The project had debt of Rs 469 crore as on January 31, 2024. The ratio of debt to annuities receivable is healthy at 0.49 time and the DSCR is expected above 1 time throughout the tenure of the debt, supported by moderate debt obligation and maintenance expenses. Furthermore, a gap of 55 days between the scheduled annuity payment date and the debt repayment date provides cushion in case of delay in receipt of annuity. Furthermore, a debt service reserve account (DSRA) covering six months of debt obligation has been created, in line with terms of the financing agreements.

 

The fifth annuity (along with interest) and O&M payment was received on December 4, 2023, with delay of 14 days from the due date. Around Rs 2 crore was withheld from the total annuity amount of around Rs 75.7 crore, owing to TDS, labour cess and GST TDS. The GST payment of Rs 9 crore was released after submission of documents in January 2024. Significant delay or substantial withholding in future annuities may affect the debt protection metrics and will remain a rating sensitivity factor.

 

• Inherent benefits of HAM: The project benefits from HAM include indexation done to the BPC and O&M cost to the extent of inflation and interest payments on residual annuity payments in the operational phase.

 

The project received PCOD on May 10, 2021. As per the provisions of the HAM concession agreement, full annuities and O&M payments are to be received starting six months from the PCOD. Accordingly, the project has received five annuities (along with interest) and O&M payments till date without any major deductions, in line with the provision of the concession agreement. Furthermore, the company received five milestone payments during the construction phase in a timely manner and in full. The company achieved final COD on June 8, 2023.

 

• Experienced management team: The Cube Highways group has a well-equipped team of professionals to oversee road maintenance. Its senior management consists of experienced professionals with a deep understanding of technical specifications and advanced O&M methods to proactively tackle issues in road maintenance. This is further supported by the experienced finance and legal team. The sponsor also has the financial flexibility to support the project, if needed, and has a demonstrated track record of doing so in its other projects.

 

Weaknesses:

• Susceptibility to volatility in operational cost and interest rate: The project remains exposed to risks related to maintenance of the project stretch. If the prescribed standards are not met, annuity payment may be reduced. Significant delay and deduction in annuities could impact the debt servicing ability. Nonetheless, the extensive experience of the management should mitigate this risk and aid effective maintenance and avoidance of any structural damage to the road.

 

Along with fixed annuities, the project receives interest payments on the balance annuities that are linked to the prevailing bank rate. Reduction in bank rate impacts project inflow, given that a large proportion of the cash flow comes from interest on balance annuities. The coupon rate on the NCDs was fixed for the first two years and expected to be revised based on mutual agreement between the borrower and the debenture holders thereafter. It has been revised to 8.47% per annum for the next two years and post this may follow the trend in bank rates, keeping DSCR in check. Although the cushion in cash flow will help partly absorb the impact of fluctuations, these components will be key rating sensitivity factors.

 

• Exposure to refinancing risk: The NCDs have put/call options, exposing the company to refinancing risk. Nevertheless, the refinancing risk is mitigated given sufficient time available for refinancing the NCDs, 90-105 days, stable cash flow and healthy debt protection metrics of the project, and extensive experience of the Cube Highways group. Further, the option dates stand revised to April 12, 2026, from April 12, 2024, with the approval of one of the debenture holders (SBI Mutual Fund) through communication dated February 15, 2024, while approval from the other debenture holder (HDFC Bank Ltd) is expected by end of February 2024.

Liquidity: Superior

Liquidity will be supported by receipt of semi-annual annuities (along with interest) and O&M pay-out from NHAI. The DSCR will remain comfortable over 1 time throughout the tenure of the debt. Further, DSRA covering debt obligation for six months (Rs 45 crore as on December 31, 2023) has been created. Buffer of 55 days between the scheduled annuity payment date and the debt obligation date provides a cushion in case of delay in annuity. The NCDs have put/call options exposing the company to refinancing risk. However, the conditions around redemption provide the company sufficient time to arrange for refinancing.

Outlook: Stable

CRISIL Ratings believes KTIPL will continue to benefit from the timely receipt of semi-annual payments from NHAI. 

Rating Sensitivity factors

Downward factors:

• Substantial delay in receipt of annuities from NHAI
• Considerable deduction in annuities and O&M payments
• Draw down of incremental debt weakening the debt protection metrics

About the Company

KTIPL is a special-purpose vehicle incorporated on April 13, 2018, as a wholly owned subsidiary of KNR Constructions Ltd (KNRCL; ‘CRISIL AA/Stable/CRISIL A1+’). KNRCL entered into a share purchase agreement (SPA) with the Cube Highways group for KTIPL in February 2019, wherein it sold its entire shareholding in KTIPL to the group in a phased manner. The 100% equity transfer to the Cube Highways group was completed by October 2022.

 

KTIPL has been set up to undertake six-laning (from the existing two lanes) of the Chittoor-Mallavaram section of national highway (NH)-140 in Andhra Pradesh on design, build, operate and transfer basis. The total length of the road to be developed was 61.128 km, of which 60.538 km has been completed and the remaining descoped. The pavement is flexible (bitumen).

 

The concession agreement was signed on May 9, 2018, and the concession period includes construction period of 910 days from the appointed date and fixed operations period of 15 years from the COD. Appointed date was received on January 4, 2019, and the project was given an extension of 90 days, owing to challenges induced by the Covid-19 pandemic. The project received PCOD on May 10, 2021, ahead of schedule. It received final COD on June 8, 2023. The revised project cost is Rs 1,316 crore, funded through NHAI grant to the extent of Rs 671 crore, debt of Rs 484 crore, and the balance through equity and unsecured loan from the promoters.

Key Financial Indicators*

Financials as on / for the period ended March 31		2023	2022
Revenue	Rs crore	36	288
Profit after tax (PAT)	Rs crore	-33	36
PAT margin	%	-94	-8.5
Adjusted debt / adjusted networth	Times	7.9	5.5
Interest coverage	Times	0.38	0.34

*CRISIL Ratings-adjusted financials

Any other information:

• GST notice: The company received a tax notice of Rs 250 crore from GST authorities, equivalent to GST on annuities to be received over the tenure of the project and includes penalty and interest thereof. The matter is sub judice. CRISIL Ratings will continue to monitor the developments.

 

• Put/call option on the NCDs: Next put/call option date is April 12, 2026.

 

• Step-up in coupon rate: The coupon rate shall move upwards by 0.25% for every notch downgrade in the credit rating of the debentures.

 

• Financial covenant: DSCR >= 1.10 times; breach of the same will be considered as an event of default if not cured within 15 days from the date of breach.

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
INE01NS07019	Non-convertible debentures	12-Apr-2022	8.47%^	31-Jul-2035	484.0	Complex	CRISIL AAA/Stable
INE01NS07027	Non-convertible debentures	12-Apr-2022	8.47%^	31-Jul-2035	37.0	Complex	CRISIL AAA/Stable

^Applicable from April 12, 2024, subject to approval from the remaining debenture holder (HDFC Bank Ltd); 6.3% per annum until April 11, 2024

 

Annexure - Details of ratings withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	54.0	Complex	Withdrawn

*Not placed