Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable' rating on the non-convertible debentures (NCDs) of Solapur Yedeshi Tollway Limited (SYTL).

 

Traffic on the stretch grew by 41.6% in fiscal 2023, on a low base of fiscal 2022. Traffic was impacted in the second half of fiscal 2022 due to a landslide on a feeder route. However, average annual daily traffic rose to over 24,000 passenger car units (PCUs) in fiscal 2023. Consequently, toll revenue grew by nearly 52.6% year-on-year, led by increase in traffic and toll rates. Additionally, with revision of ~5.0% in toll rates (linked to wholesale price index [WPI]) from April 1, 2023, toll collection should remain strong over the medium term. Toll collection was healthy at Rs 47.8 crore in the first four months of fiscal 2024 as against Rs 40.6 crore in the corresponding period of last fiscal. Debt protection metrics remain comfortable, as supported by healthy toll collections against no debt obligation, given the non-amortising structure of NCDs. Project cash flows will be sufficient to meet interest/coupon payments.

 

The rating reflects the moderate traffic potential of the project, strong debt protection metrics and a tight escrow mechanism with a well-defined payment waterfall, including creation of an upfront debt service reserve account (DSRA) and major maintenance reserve account (MMRA) for the first cycle. The rating also benefits from synergies arising out of the company’s association with IRB Infrastructure Trust (IRB Trust; ‘Provisional CRISIL AAA/Stable’). The trust has significant financial flexibility and is backed by strong sponsors, namely IRB Infrastructure Developers Ltd (IRB; ‘CRISIL AA-/Stable/CRISIL A1+’) and Government of Singapore Investment Corporation and its affiliates (GIC affiliates). These strengths are partially offset by susceptibility of toll revenue to volatility in traffic volume or change in tolling policy.

Analytical Approach

To arrive at the rating, CRISIL Ratings has taken a standalone view of the business and financial risk profiles of SYTL.

 

Unsecured loans from related parties and the holding company, amounting to Rs 400 crore (as on March 31, 2023), have been treated as debt. These loans are interest bearing and repayable as per terms of the agreements, from the surplus cash flows of the project.

Key Rating Drivers & Detailed Description

Strengths:

Moderate traffic potential of the stretch supported by strategic location: The project stretch lies entirely in Maharashtra and is part of the key Dhule-Solapur section of National Highway (NH)-211 (new NH-52) north-south corridor, connecting Delhi and northern parts of India with major cities such as Bengaluru, Chennai and Hyderabad in the south. SYTL also caters to east-west movement between Gujarat and states of Telangana, Andhra Pradesh and parts of Tamil Nadu. The stretch has no alternate or competing routes at present.

 

The project has been operational since March 2018. While there have been traffic fluctuations in the past, traffic has improved over the last 18 months. The project stretch saw traffic and revenue growth of 41.6% and 52.6%, respectively, in fiscal 2023, against a lower base in fiscal 2022, due to a landslide on a feeder route in second half of the fiscal. However, this was a one-time phenomenon and traffic improved in fiscal 2023 with average annual daily traffic of over 24,000 PCUs. Toll collection has been healthy at Rs 47.8 crore in the first four months of fiscal 2024 as against Rs 40.6 crore in the corresponding period of last fiscal. Collections should improve further in fiscal 2024, led by higher toll rates and healthy traffic. Annual toll rate escalation (revised annually on April 1) has a 3% fixed component and 40% of WPI, which limits complete dependence on WPI, thereby supporting revenue.

 

Strong debt protection metrics, supported by healthy toll collection and low debt: Average debt service coverage ratio (DSCR) is expected to remain healthy over the tenure of the NCDs. Debt protection metrics will be supported by presence of fixed price operations and maintenance contract with IRB. The first major maintenance (MM) is also covered under this fixed price contract. Additionally, the rate of interest/coupon on the NCDs is fixed at 8.65-8.75% per annum.

 

The NCDs have a tenor of 7 years (5 years for tranche I NCDs) exposing the company to refinancing risk. However, the risk is mitigated by the long tail at the end of tenure of NCDs, ability and track record of sponsors in refinancing and the healthy toll revenue potential of the stretch. Further, the project is part of the IRB Trust, which has significant financial flexibility and extensive experience in managing road assets. IRB has 51% unitholding in the infrastructure investment trust (InvIT), while the remaining 49% is held by GIC affiliates.

 

Tight escrow mechanism with a well-defined payment waterfall and creation of reserves: The waterfall mechanism ensures that toll collection will be escrowed and used to meet the principal and interest payments, post payment of taxes, statutory dues and maintenance expenses.

 

Further, DSRA equivalent to debt obligations for the next six months has been created and the structure stipulates maintenance of the DSRA throughout the term of the debentures. In case the DSRA balance dips below the threshold amount, the issuer needs to replenish it within three months. The escrow mechanism stipulates trapping of all surplus cash flows in case DSCR falls below 1.30 times. If the DSCR lies between 1.30 times and 1.50 times, 50% of the surplus cash would be trapped and mandatorily transferred to a restricted debt service account (RDSA). The minimum DSCR threshold/financial covenant is 1.10 times. The breach of above covenant will be an event of default (EOD) under the financing agreements and debenture holders/trustee have a right to take consequent actions, including immediate acceleration of the facilities, as per terms of the financing agreements. However, monthly testing of DSCR covenant on a trailing 12-month basis provides adequate check strengthening the structure.

 

Further, the project has created full reserve for its first MM activity. However, no incremental debt is expected to be availed for the second and third MM cycles, as these are expected to be funded from project cash flows. Any additional debt taken will remain a rating sensitivity factor.

 

Weakness:

Susceptibility of toll revenue to volatility in traffic volume or change in tolling policy: The company started toll collection in March 2018 and reported revenue of Rs 130 crore for fiscal 2023. Toll being the only revenue source, any volatility in collection because of factors, such as seasonal variations in vehicular traffic, economic downturns, and lack of timely rate hikes, could adversely impact the cash flow. Furthermore, any change in government policy such as the nationwide lockdown in fiscal 2020, could adversely impact the cash flow and debt protection metrics. Toll revenue was hit by traffic diversion on account of a landslide on a feeder route in fiscal 2022. Hence, both volatility in traffic volume and change in tolling policy will remain key rating sensitivity factors.

Liquidity: Superior

Average DSCR for fiscal 2023 was strong at 2.2 times and is expected to remain healthy over the tenure of the NCDs. DSRA equivalent to six months of debt obligation and MMRA (for first cycle) have been created. Furthermore, the DSRA will be maintained throughout the debt tenure. Given the non-amortising structure of NCDs for the first five years, there will be no repayment and hence, cash flows will be sufficient to cover the interest/coupon payments. The put/call options on the NCDs expose the company to refinancing risk. However, the risk is mitigated by the long tail at the end of tenure of NCDs, ability and track record of sponsors in refinancing, and healthy toll revenue potential of the stretch.

Outlook: Stable

CRISIL Ratings believes SYTL will continue to generate healthy toll revenue over the medium term, backed by moderate traffic potential and annual toll rate hikes. Upfront DSRA of two quarters also provide sufficient cushion for servicing the debt.

Rating Sensitivity Factors

Downward Factors

• Any incremental debt contracted
• Lower-than-expected toll revenue on a sustained basis
• Minimum DSCR falling below 1.3 times leading to lower buffer in relation to financial covenant
• Non-adherence to the structure

About the Company

SYTL was incorporated on January 10, 2014, as a special-purpose vehicle by IRB to design, built, finance, operate and transfer the Solapur-Yedeshi section of NH-211 (new NH-52) from kilometre (km) 0.000 to km 100.000 in Maharashtra on build, operate and transfer (BOT)-Toll basis under National Highway Development Program (NHDP) Phase-IV, pursuant to the Concession Agreement (CA) dated March 3, 2014, with National Highways Authority of India (NHAI; ‘CRISIL AAA/Stable’).

 

The CA entitles the company to collect toll on the Solapur-Yedeshi section of NH-52, for a period of 29 years from appointed date (AD). The AD was received on January 21, 2015 and the concession period is till January 20, 2044, excluding an extension. The project started tolling since March 5, 2018 and received the final commercial operations date on October 15, 2019. SYTL is part of the IRB Trust, along with nine other road assets. While 51% of unitholding of IRB Trust is held by IRB, remaining 49% is held by GIC affiliates.

Key Financial Indicators^

Particulars	Unit	2023	2022
Revenue	Rs.Crore	131	86
Profit After Tax (PAT)	Rs.Crore	(23)	(54)
PAT Margin	%	(17.2)	(63.4)
Adjusted debt/adjusted networth#	times	3.36	2.78
Interest coverage@	times	0.95	0.59

^CRISIL Ratings adjusted financials

#Adjusted debt to adjusted net worth excluding loan from related parties (Rs 400 crore) and unsecured loan from holding company (Rs 11.5 crore as of March 31, 2023) stood at 2.04 times and 1.55 times in fiscals 2023 and 2022 respectively.

@Interest cover adjusting for interest expense on unsecured loan from related parties (Rs 56 crore in fiscal 2023 and 2022) stood at 1.96 times and 1.29 times in fiscals 2023 and 2022 respectively

Any other information

•    Call option on the NCDs:

• No call option date till two years from date of allotment
• The first call option will be between the second and third year from the date of allotment
• The second call option will be between the third year and the fourth year and six months from the date of allotment
• Third call option will be after four years and six months from the date of allotment 

 

•    Put option on the NCDs:

• No put option for tranche I NCDs
• Put option for tranche II NCDs at the end of six years from date of allotment

 

•     Step-up in coupon rate:

• The coupon rate shall be revised upwards by 0.25% for every notch downgrade in the credit rating of the debentures from ‘AAA’ till ‘AA-‘
• The coupon rate shall be revised upwards by 0.50% for downgrade in the credit rating of the debentures from ‘AA-‘ to ‘A+’
• The coupon rate shall be revised upwards by 0.75% for downgrade in the credit rating of the debentures till from ‘A+’ to ‘A’
• The coupon rate shall be revised upwards by 1.00% for downgrade in the credit rating of the debentures till from ‘A’ to ‘A-‘

 

•    Cash trap/sweep:

• All surplus cash flows would be swept and utilised for early redemption in case DSCR falls below 1.30 times
• In case DSCR is between 1.30 times and 1.50 times, 50% of surplus cash would be trapped and mandatorily transferred to RDSA
• DSCR will be tested monthly on a 12-month trailing basis
• Breach of financial covenant (DSCR below 1.10 times) will be an EOD and the debenture holders/trustee have a right to take consequent actions, including immediate acceleration of the facilities