Rating Rationale
July 31, 2018 | Mumbai
Pimpri Chinchwad Municipal Corporation
Rating reaffirmed
 
Rating Action
Rs.200 Crore Bond CRISIL AA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its rating on the bond programme of Pimpri Chinchwad Municipal Corporation (PCMC) to 'CRISIL AA/Stable'.
 
The ratings reflect expectation of a sustained strong financial risk profile backed by healthy revenue surplus and robust liquidity. The rollout of goods and services tax (GST) has been revenue-neutral for the corporation. The local body tax (LBT) compensation from state government was timely in fiscal 2018. The municipal corporation had strong revenue surplus of over Rs 900 crore in fiscal 2017 and is estimated to sustain at higher levels over medium term. Further, the corporation had liquidity of over Rs 2700 crore as on March 31, 2018 and is expected to continue to be robust going forward. 
 
The rating reflects a favorable economic base and sound service levels. These strengths are partially offset by modest cost recovery for services provided and collection efficiency.

Key Rating Drivers & Detailed Description
Strengths
* Strong financial risk profile backed by its healthy revenue surplus and robust liquidity
The healthy revenue surplus of over Rs 900 crore during fiscal 2017, which was backed by timely local body tax (LBT) compensation from state government of Rs 928 crore for 9 months in fiscal 2018 since the introduction of GST on 1st July 2017. There are also other revenue sources, such as property tax, town planning and fees from building approvals and rent from properties. The corporation completed a full survey of its properties in fiscal 2014, which resulted in an increase in property tax collection to Rs 294 crore in fiscal 2017 from Rs 198 crore in fiscal 2014. Liquidity is robust, with cash and equivalents of over Rs 2700 crore as on March 31, 2018.
 
Furthermore, there is low indebtedness of around Rs 130 crore as on March 31, 2018. In the past, capital expenditure (capex) was entirely funded from revenue surplus, resulting in low reliance on borrowing.
 
Following the introduction of GST from July 1, 2017, entry tax, octroi, and LBT have been abolished. To compensate for the loss of LBT for urban local bodies (ULBs) in Maharashtra, the state government has announced compensation in the form of grants from July 2017. The grant for PCMC was Rs 928 crore in 9 months of fiscal 2018. The revenue loss on account of abolishment of LBT is expected to be adequately compensated by compensation in a timely manner over the medium term.
 
* Favourable economic base and sound service arrangements 
The corporation has a strong industrial base with more than 4,000 industrial units, including small and medium-scale enterprises as well as multinational companies. It is an established hub for the automotive industry (Tata Motors Ltd, Kinetic Engineering Ltd, Force Motors Ltd, Bajaj Auto Ltd, SKF Bearing India Ltd, and others). The region also has large information technology (IT) majors such as Infosys Ltd, Wipro Ltd, IBM India Pvt Ltd, and KPIT Technologies Ltd. Furthermore, it benefits from its close proximity to Pune, which is a major industrial town in Maharashtra. This results in strong employment generation opportunities and high per capita income.
 
Sound service delivery is reflected in good coverage of water supply, sewerage network, and solid waste management. Water supply covers about 100% of the population and 85% of the area, with 96% metering. Under sewerage, the area covered is 85% with adequate treatment capacity for sewage generated. Solid waste management services are good, reflected in 94% door-to-door collection and 100% waste disposal.
 
Weaknesses
* Moderate cost recovery for services provided and collection efficiency
Although the corporation has good service arrangements, it has to focus on improving its cost recovery.  Cost recovery for water supply, solid waste management, and sewerage is moderate. The collection efficiency of property tax, which is a major revenue source, is also modest (collection efficiency stood at 70% during fiscal 2017).
The corporation has been highly self-reliant with over 90% of revenue derived from own sources in the past. However, the share of revenue from own sources has decreased due to abolishment of LBT and subsequent GST implementation. In order to increase own revenue, PCMC will have to focus on increasing overall collection efficiency of property tax, town planning charges, water taxes, as well as cost recovery of services.
Outlook: Stable

CRISIL believes PCMC will maintain its strong financial risk profile over the medium term, supported by healthy revenue surplus and liquidity.

Upside scenario
* Substantial improvement in operating surplus supported by healthy increase in property tax and other own revenue
 * Significant improvement in service levels and cost recovery

Downside scenario
* A considerable decline in revenue, resulting in deterioration in liquidity
* Large, debt-funded capex, leading to moderation in the financial risk profile.

About the Company

PCMC services an area of 177 square kilometer, inhabited by around 20 lakh people. The corporation provides key obligatory services such as roads and bridges, water supply and sanitation, drainage and sewerage, public health, solid waste management, and primary education. It also offers discretionary services such as transport.

Key Financial Indicators
As on / for the period ended March 31 Units 2017 2016
Revenue receipts Rs crore 2090 2084
Revenue surplus Rs crore 910 1010
Revenue surplus/ revenue receipts % 43% 50%
 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs Cr)		 Rating Assigned with Outlook
NA Bond* NA NA NA 200 CRISIL AA/Stable
*Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  0.00
31-07-18 		 CRISIL AA/Stable      20-07-17  CRISIL AA/Stable  30-06-16  Withdrawn  31-03-15  CRISIL AA/Stable  CRISIL AA/Stable 
            15-03-17  CRISIL AA-/Stable           
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Municipal and Urban Local Bodies

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