Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facility of Porbandar Dwarka Expressway Pvt Ltd (PDEPL) to ‘CRISIL AAA/Stable’ from ‘CRISIL AA/Positive’.

 

The rating revision follows the creation of a debt service reserve account (DSRA) of Rs 42.08 crore, covering six months of debt servicing obligations, as stipulated in the financing agreements. The project has received two full annuities (along with interest) and operations and maintenance (O&M) payment without any significant deductions from National Highways Authority of India (NHAI; ‘CRISIL AAA/Stable’) as per the provisions of the concession agreement. The project had received provisional commercial operations date (PCOD) of April 18, 2020, which was 10 months ahead of the scheduled completion date of February 10, 2021.

 

Of the Rs 672 crore debt tied up for the project, Rs 660 crore was disbursed by October 2020 and in January 2021, entire outstanding loan in the project to the tune of Rs 642.18 crore (balance of ~Rs 18 crore was repaid in the first instalment in October 2020) was refinanced. The new loan is to be repaid over a tenure of 13 years (which leaves a tail period of 1.5 years) and interest rate is linked to the bank’s 6 month marginal cost of lending rate. Ratio of debt to annuities receivable is healthy at 0.63 time and debt service coverage ratio (DSCR) is expected to remain above 1 time throughout the tenure of the debt, supported by moderate debt obligation and limited maintenance expenses as the project has a rigid pavement.

 

The rating continues to reflect the inherent benefits of the hybrid annuity model (HAM), PDEPL’s healthy debt protection metrics, and the operational experience and financial strength of the sponsor and engineering, procurement, and construction (EPC) contractor G R Infraprojects Ltd (GRIL; ‘CRISIL AA/Stable/A1+’). These strengths are partially offset by susceptibility to changes in operational cost and interest rate.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has taken a standalone view of PDEPL.

Key Rating Drivers & Detailed Description

Strengths:

• 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 219 days from the appointed date. However, for PDEPL, as per a mutual agreement with NHAI, PCOD was granted on work completed on land made available up to September 2019 and the rest of the land was delinked. Based on this, PCOD has been granted on April 18, 2020 for 100 km of the project out of the total length of 117 km. As of March 2021, physical progress of around 99% has been achieved; the remaining 1% is pending on account of non-availability of land, which was to be handed over by NHAI. As per the provisions of the concession agreement, full annuities and O&M payments (assuming 100% work is completed) are to be received starting six months from PCOD, and the concessionaire will have to complete the remaining 1% work when land is made available. Accordingly, the project has received two full annuities (along with interest) and O&M payment.

 

The concessionaire would have to complete construction on the remaining land whenever it is made available within the original stipulated cost, as all five construction grants have been received in full from NHAI. Work pending on the project is estimated at Rs 16 crore as of March 2021 (less than Rs 10 crore as of mid-May 2021). Out of the Rs 672 crore debt tied up for the project, Rs 660 crore was disbursed and a fixed deposit of Rs 40 crore has been created which is earmarked for the pending construction work. Sponsor, GRIL, is likely to financially support completion of the project if the need arises.

 

• 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 (of which 2 have been received). Along with fixed annuities, the project will also receive interest payments on the balance annuities at a rate equal to the prevailing bank rate plus 3%. The ratio of debt to annuities receivable is healthy at 0.63 time and DSCR is expected above 1 time throughout the tenure of the debt, supported by moderate debt obligation and limited maintenance expenses as the project has a rigid pavement. Furthermore, there is a gap of 30 days between the scheduled annuity payment date (April and October of every year) and the debt obligation date (May and November of every year), which provides a cushion in case of delay in annuity. Further, DSRA covering six months of debt servicing obligation of existing debt has been maintained in line with the terms of the financing agreements.

 

The first annuity (along with interest) was received on time on October 17, 2020, however there was some delay in receipt of the O&M payment (received on November 11, 2020) due to clerical issues. The second annuity along with O&M payout was however received on time (on April 29, 2021). 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.

 

• Operational experience and financial strength of the sponsor

Strong operational and financial support is expected from GRIL, the sponsor and largest shareholder. It will meet any shortfall in debt servicing and in the DSRA, and any increase in O&M expenses beyond the NHAI payout.

 

While the project has received PCOD, around 1% of the work is yet to be completed and will have to be undertaken by the concessionaire when land is made available. 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 GRIL.

 

Weakness:

• Susceptibility to changes in operational cost and interest rate

PDEPL 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 project's debt servicing capability. This risk is however mitigated by the strong operational track record of O&M contractor GRIL. Also, along with fixed annuities, the project will receive interest payments on the balance annuities that are linked to the prevailing bank rate. Reduction in bank rates, as is currently being witnessed (bank rate was 6.25% when the project received appointed date in February 2018, and now stands at 4.25%), can impact the DSCR given that a large proportion of the cash inflow is from the interest on balance annuities. Furthermore, as operation cost depends on inflation and interest rate on the project is floating, any significant increase in these components could impact cash flow. Although cushion in the cash flow will help partially absorb the impact of such fluctuations, these components will be key monitorables.

Liquidity: Superior

Funding risk is low as funds required for balance construction work of around Rs 10 crore will be met through the liquidity of Rs 40 crore maintained in the company in the form of fixed deposit. Liquidity is expected to be strong as the project will receive semi-annuities (along with interest) and O&M payout from NHAI. DSCR is expected to be comfortable with average DSCR of over 1 time throughout the tenure of the debt.

 

Moreover, DSRA covering six months interest and principal obligations has been created in the form of cash and will be maintained throughout the tenure of the debt. Furthermore, there is a gap of 30 days between the scheduled annuity payment date and the debt obligation date, which provides a cushion in case of delay in annuity. The company has also created major maintenance reserve of Rs 4 crore as of April 2021, basis the refinanced lender’s base case plan. GRIL has also provided an undertaking for financial support in case of shortfall in debt servicing for the entire tenor of the loan.

Outlook: Stable

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

Rating Sensitivity factors

Downward factors

• Delay of more than a month in receipt of subsequent annuities
• Considerable deduction in annuities and O&M payments
• Substantial additional debt contracted

About the Company

PDEPL is a special purpose vehicle incorporated in June 2017 and promoted by GRIL for four-laning of the Porbandar-Dwarka section of National Highway 8E in Gujarat from 356.786 km to 473.000 km (a stretch of 116.214 km) on a design, build, finance, operate, and transfer basis under HAM.

 

The concession agreement between PDEPL and NHAI was signed in August 2017. Concession was granted to PDEPL for 18 years (including construction period of 1,095 days) based on semi-annual annuity payment. The appointed date was declared in February 2018, and the project received PCOD in April 2020. There have been minor deductions in annuities on account of tax deducted at source (TDS), labour cess and goods and services tax (GST) on TDS. While TDS is a standard deduction which is refundable, the company is contesting the deduction of labour cess and GST-TDS and is expecting a refund of the same. 

 

The total project cost of Rs 1,480 crore was to be funded through NHAI to the extent of Rs 640 crore, and through debt of Rs 672 crore and equity. The entire construction grant from NHAI and GRIL’s equity contribution have been received. Of the Rs 672 crore debt tied up for the project, Rs 660 crore was disbursed.

Key Financial Indicators

As on / for the period ended March 31		2020	2019
Revenue*	Rs crore	569	795
Profit after tax (PAT)	Rs crore	21	43
PAT margin	%	3.7	5.4
Adjusted debt / adjusted networth	Times	5.95	1.88
Interest coverage	Times	1.70	5.75

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

Any other information: Not applicable

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
NA	Term loan	Mar-17	NA	Nov-33	672.0	NA	CRISIL AAA/Stable