Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable’ rating on the non-convertible debentures (NCDs) of Mangalwedha Solapur Highways Pvt. Ltd (MSHPL).

 

The project received its second annuity (along with interest) and operations and maintenance (O&M) payment from National Highways Authority of India (NHAI; ‘CRISIL AAA/Stable’) as per the provisions of the concession agreement (CA) on December 21, 2022. However, an amount of Rs 4 crore is withheld by NHAI on account of certain pending work as per Independent Engineer (IE) report. The pending work is expected to be completed by mid of April 2023 and the withheld amount is expected to be received subsequently in the first quarter of fiscal 2024. NHAI had also withheld an amount of Rs 3.9 crore pertaining to the Goods and Services Tax (GST), which has now been received post submission of relevant documentation with the authority. The project has a track record of timely and full receipt of payment milestones during construction, and timely receipt of first and second annuity payment.

 

The project received provisional completion certificate (PCC) with effect from December 14, 2021, vide letter dated December 22, 2021, thereby significantly mitigating implementation risk. PCC has been received for 52.76 kilometre (km), i.e., 93.4% of total project length of 56.5 km. Pending work only pertains to punch list B, and MSHPL has requested the NHAI for descoping works amounting to Rs 4.53 crore. Approval for descoping of pending works of punch list B items is awaited from NHAI.

 

The rating continues to reflect healthy debt protection metrics of the project and inherent benefits of the hybrid annuity model (HAM). The rating also derives comfort from the strong management support, operating capabilities and financial flexibility of Cube Highways and Infrastructure III Pte Ltd (Cube Highways). These strengths are partially offset by susceptibility to changes in operating cost & interest rate and exposure to refinancing risk.

Analytical Approach

CRISIL Ratings has considered standalone business and financial risk profiles of MSHPL to arrive at the rating.

Key Rating Drivers & Detailed Description

Strengths

Healthy debt protection metrics

The project is to receive 60% of the bid project cost (BPC) from NHAI in the form of 30 semi-annual payments starting June 20, 2022. Out of this, 2 annuities are already received. Along with fixed annuities, the project will receive interest payments on the balance annuities at a rate equal to the prevailing bank rate plus 3%. Ratio of debt to annuities receivable is expected to be healthy at 0.43 time (assuming draw down of entire NCD and receipt of 100% annuity) and debt service coverage ratio (DSCR) comfortably above 1 time throughout the debt tenure. 

 

The first & second annuity was received with in 6-8 days from the schedule date. Nevertheless, the subsequent NCD repayments are scheduled for August 31 and February 28, providing a cushion of around 60 days between the scheduled annuity payment date and the debt repayment date. Additionally, debt service reserve account (DSRA) of Rs 24.9 crore (equivalent peak debt servicing obligation of six months) has been created upfront, protecting cash flow in the event of delay in receipt of annuity. Any significant delay or deduction in payment from NHAI will remain a rating sensitivity factor.

 

Inherent benefits of HAM

The project benefits from HAM with provisions such as de-linking/de-scoping of unavailable land, which lets PCC to be issued on completion of construction on the land made available up to 146 days from the appointed date (AD), thereby allowing annuities to be paid for the project works that have been completed. The concessionaire is required to complete construction on the remaining land whenever it is made available after the PCC. Other benefits of HAM include indexation done to the BPC and O&M cost to the extent of inflation movement and interest payments on residual annuity payments in the operational period.

 

The project had received PCC with effect from December 14, 2021 (vide letter dated December 22, 2021) for 52.76 km, i.e., 93.4% of total project length of 56.5 km. Pending work only pertains to punch list B, and MSHPL has requested the NHAI for descoping works amounting to Rs 4.53 crore. Approval for descoping of pending works of punch list B items is awaited from NHAI.  In case approval is not received for de-scoping, then the company may be required to incur incremental cost of Rs 4.53 crore which will be funded by infusion from sponsor. It will also result in an increase in the annuity amount which will result in higher inflows for debt servicing.

 

Experienced management team

The company is a wholly owned subsidiary of Cube Highways and Infrastructure III Pte. Ltd. Cube Highways has a well-equipped team to manage the maintenance of the road. Its senior management comprises experienced professionals with deep understanding of the technical specifications and advanced methods of O&M to proactively tackle the maintenance of road projects. This is further supported by an experienced finance and legal team.

 

Cube Highways has undertaken to fund any shortfall in annuity, O&M and interest pay-outs by NHAI due to pending work completion to achieve commercial operation date (COD) and has the financial flexibility to support the project, if needed, and have the track record of doing so in their other projects. Further, Cube Highways is supported by strong sponsors such as Abu Dhabi Investment Authority and I-Squared Capital.

 

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 the debt-servicing capability. Nonetheless, the management's extensive experience is expected to mitigate this risk and help in effective maintenance and avoidance of any structural damage to the road.

 

Coupon rate on the NCDs is floating after two years from deemed date of allotment and may follow the trend in bank rates which is increasing. However, this will partially offset as along with fixed annuities, the project will receive interest payments on the balance annuities that are linked to the prevailing bank rate thereby improving project inflow, given that a large proportion of the cash inflow is from the interest on balance annuities.

 

Exposure to refinancing risk

The NCDs have put/call options exposing the company to refinancing risk. The first put/call option date is two years from the deemed date of allotment and at the end of every year thereafter or as mutually agreed between the issuer and debenture holder. This risk is partially mitigated, given the sufficient time available for refinancing the NCDs, i.e., 90 days, stable cash flow and healthy debt protection metrics of the project and extensive experience of Cube Highways.

Liquidity: Superior

Liquidity will be supported by receipt of semi-annual annuities (along with interest and O&M pay-out) from NHAI. The DSCR is expected to be comfortably over 1 time throughout the tenure of debt. Further, DSRA of Rs 24.9 crore is available, which is equivalent to six months of peak debt servicing obligation. Furthermore, there is a gap of more than 60 days between the scheduled annuity payment date and the debt repayment date, which provides a cushion in case of delay in annuity. Financial support will also be available from Cube Highways in case of any shortfall/deduction in annuity due to any issue in project completion, under the sponsor support agreement signed for the NCDs. Cash & cash equivalents as on March 15, 2023, stood at Rs 87 crore.

Outlook Stable

MSHPL should continue to benefit from the receipt of PCC, leading to stable semi-annual payments from NHAI.

Rating Sensitivity factors

Downward factors

• Substantial delay in receipt of subsequent annuities from NHAI
• Significant deduction in annuity and O&M payments due to non-maintenance of the road
• Any significant additional debt contracted

About the Company

MSHPL is a special-purpose vehicle incorporated on April 11, 2018. Dilip Buildcon Ltd (DBL, rated ‘CRISIL A/Negative’) entered into an SPA with Cube Highways in August 2019, wherein DBL agreed to sell its entire shareholding in MSHPL to Cube Highways, in a phased manner. Presently, 100% of equity shareholding has been taken over by Cube Highways.

 

The SPV was established to undertake four-laning (from existing two-lane) of the Sangli-Solapur (Mangalwedha to Solapur) section of national highway (NH) 166 in Maharashtra on a design, build, operate and transfer basis under HAM. Total length of the road is 56.5 km and the pavement is rigid (concrete).

 

The CA was signed on May 10, 2018, and the concession period includes construction period of 730 days from the AD and fixed operations period of 15 years from the COD. AD was received on May 23, 2019, and the project received an extension of 180 days owing to the Covid-19 pandemic-related disruptions. The project received PCC on December 14, 2021. The project cost is Rs 889 crore, funded through NHAI grant to the extent of Rs 431 crore, debt of Rs 334 crore, and the balance through equity and contribution extended by the promoters.

Key Financial Indicators

Particulars	Unit	2022	2021
Revenue*	Rs crore	119	318
Profit after tax (PAT)	Rs crore	-15	-24
PAT margin	%	-12.8	-7.5
Adjusted debt/adjusted networth	Times	-622.81	20.85
Interest coverage	Times	0.51	-0.!

*Revenue includes construction cost incurred in the project as per IND AS accounting requirements

Any other information:

• Put/call option on the proposed NCDs: First put/call option date is two years from deemed date of allotment and every year thereafter
• Step-up/step-down in coupon rate: The coupon rate shall be revised upwards by 0.25% for every notch downgrade in the credit rating of the debentures till AA. In case of rating downgrade to AA- or below, the coupon shall be increased by 1.00% for every notch downgrade below AA. The coupon rate shall be revised downwards by 0.35% for upgrade in rating to AAA.

 

Financial covenants

DSCR below 1.10 time will be considered a breach of restricted payment conditions.

Annexure - Details of Instrument(s)

*Yet to be issued