Detailed Rationale

CRISIL Ratings’ ratings on the bank facilities of Soma Indus Varanasi Aurangabad Tollway Private Limited (SIVATPL) continues on 'Rating Watch with Positive Implications'

 

The ratings were put on Watch on 27th October, 2022 following the likely acquisition of 50% stake held by the Soma group in SIVATPL by the Roadis Group. The Roadis group already holds a 50% stake in the company. Following the stake sale, SIVATPL will become a 100% subsidiary of Roadis. The transaction is expected to conclude by June 2023, subject to approval from the National Highway Authority of India (NHAI; rated ‘CRISIL AAA’), consent from lenders and satisfaction of certain conditions precedent.

 

Roadis is the road investment platform of the Public Sector Pension Investment Board (PSP Investment; rated ‘AAA/Stable/A1+’ by S&P Global Ratings). Presence of a strong parent and importance of the project in the India strategy of Roadis will likely enhance the credit profile of SIVATPL. CRISIL Ratings is in discussion with the company to understand the stance of support from the parent and will monitor the progress on completion of the transaction. The appropriate rating action will be undertaken post receipt of clarity on the above aspects.

 

The rating continues to factor the healthy debt protection metrics of the company and expected exit of a weak sponsor. Adequate clarity on project cost and implementation timelines, favourable location of the project stretch, and healthy liquidity backed by continued toll collection and gradual reduction in project risk, are other key monitorables. Toll revenue declined to Rs 413 crore in fiscal 2022, following the ban on sand mining caused by Covid-19 restrictions. Toll collections for fiscal 2023 stands at Rs 509.5, a growth of 23% y-o-y, supported by a tariff hike of 13-14% and traffic growth of 5-7%. Toll collection is expected to grow by 12-15% in fiscal 2024.

 

SIVATPL is expected to complete the pending road construction of approximately 60 km, entailing a cost of Rs 4,104.29 crore. The company has entered into a fixed price contract with Welspun Enterprises Ltd at cost of Rs 3,657 crore and other small engineering, procurement and construction (EPC) contractors and is targeting completion by November 2023. The balance cost will be funded through term loans of Rs 1,060 crore, NHAI grant of Rs 565 crore, and internal accrual of Rs 300 crore.

 

Gradual progress in execution and presence of a large EPC contractor mitigate project implementation risk. Timely implementation of the project within budgeted cost will remain a key monitorable.

 

Furthermore, liquid surplus in the escrow account was healthy at Rs 179.14 crore as on March 2023 and SIVATPL can access these funds for construction purposes, apart from servicing debt.

 

These strengths are partially offset by exposure to project implementation risk and susceptibility of toll revenue to traffic volume.

Key Rating Drivers & Detailed Description

Strengths:

• Expected continued financial support from Roadis

SIVATPL is expected to fund the pending project cost of Rs 4,104.29 crore prudently. Roadis too shall extend funding support to ensure timely completion of the project, as articulated by the management. Roadis is owned by one of the largest Canadian pension fund managers, PSP Investment.

 

Now that Roadis is expected to acquire to acquire the 50% stake of the Soma group by Roadis (likely to conclude by March 2023), SIVATPL will become its 100% subsidiary. Timely execution of the transaction is a key monitorable. SIVATPL is expected to benefit from the strong profile of Roadis. The sponsors have infused around Rs 190 crore and Rs 50 crore in the project during fiscals 2019 and 2020, respectively, for debt servicing and construction.

 

• Favourable location of the project stretch

The Varanasi-Aurangabad stretch is on National Highway (NH)-2, which is part of the Golden Quadrilateral. Furthermore, the stretch connects various industrial areas in Varanasi, Chandauli district, and Sonbhadra in Uttar Pradesh, which house coal fields, sand quarries, stone crushing units and a large aluminium plant of Hindalco Industries Ltd. Thus, the project stretch is favourably located and has good traffic potential in the absence of any other alternative route.

 

As the project involves expansion from four lanes to six lanes, the company was allowed to collect toll from the appointed date - September 12, 2011. Toll collection from the existing stretch was Rs 413 crore in fiscal 2022 following the impact of the ban on sand mining. Toll collections for fiscal 2023 stands at Rs 509.5, a growth of 23% y-o-y, supported by a tariff hike of 13-14% and traffic growth of 5-7%. Toll revenue is expected to grow 12-15% in fiscal 2024 driven by a hike in traffic and revision in toll rates. Traffic is expected to grow 5-7% in fiscal 2023 post removal of the ban on sand mining and by 2-3% from fiscal 2024 onwards, assuming lesser diversion after the pending construction is completed.

 

Accumulated toll collection funds stood at Rs 509.5 crore for fiscal 2023, but could be utilised for construction in proportion to the debt disbursement towards project construction work, as per the terms of the concession agreement. The concession agreement allows the company to withdraw only up to 50% of each tranche of debt disbursed by the senior lenders from the toll collection escrow account. As the project became operational from February 28, 2020, toll collections can now be utilised for servicing debt obligation by intimating NHAI. This is in line with the recommendation by statutory auditors, concurrent auditors and the legal counsel of the lender.

 

Weaknesses:

• Exposure to project implementation risk

Out of 192.4 km, right of way on 11.82 km is awaited and work on 138 km has been completed till date, with approximately 45 km pending. The revised project cost is Rs 7,634.41 crore, of which Rs 3,528.12 crore has been incurred as of March 2022. The company is expected to fund the balance through NHAI grant of Rs 565 crore, term loan of Rs 1,030 crore and internal accrual of Rs 297.09 crore. SIVATPL has identified Welspun as the contractor for balance construction and has entered into a fixed-price contract for the project to be completed by November 2023. This has mitigated the implementation risk to some extent.

 

• Susceptibility to fluctuations in traffic volume and revision in toll rates

Toll collection is the only source of revenue for the project. Fluctuation in traffic volume, revision in toll rate or geo-political risks may impact cash flow and debt servicing capability. Furthermore, given that over 60% of the traffic is commercial, traffic growth is linked to the economic scenario and could be impacted in case of adverse economic conditions. Toll revenue for fiscals 2020, 2021 and 2022 was impacted by the Covid-19 pandemic and the extended monsoon. Any significant movement in traffic can impact toll revenue and thus, the debt servicing ability of the company.

Liquidity: Adequate

The amount in the escrow account was Rs 179.14 crore (invested in the form of fixed deposits) as of March 2023. Escrow funds are used to service debt obligation by intimating NHAI. This is in line with the recommendation by statutory auditors, concurrent auditors and the legal counsel of the lender. Existing funds in the escrow account will suffice to cover the annual debt obligation of Rs 92 crore and interest obligation of around Rs 140 crore. Liquidity will also be aided by expected funding from Roadis.

 

Construction on the balance stretch requires funding of Rs 1,060 crore. The management has indicated that it would be funded out of the term loan. Therefore, disbursal of the remaining term loan is critical for the completion of the balance project, as the NHAI grant as well as use of toll collection for construction are linked to disbursal of the loan. Any significant delay in disbursal can impact the timely completion of the balance project.

Rating Sensitivity factors

Upward factors:

• Timely completion of stake acquisition by Roadis
• Increase in progress of balance work on the stretch as per stipulated timelines of November 2023
• Improvement in toll collection resulting in sustained improvement in debt service coverage ratio (DSCR)

 

Downward factors:

• Lower-than-expected toll collection, impacting the cash flow and leading to DSCR below 1.2 times on a sustained basis
• Change in stance of support from the sponsor
• Delay in completion of pending construction or repair and maintenance work, weakening the quality of the road stretch and impacting the tolling rights of the project

About the Company

Incorporated in 2010, SIVATPL is a special-purpose vehicle, set up by Indus Concessions India Pvt Ltd (part of the Isolux Corsan group, now Roadis) and Soma Enterprises Ltd. The project entails augmentation of the existing four lanes into six lanes of the Varanasi-Aurangabad section of NH-2 (connecting Delhi-Agra-Allahabad-Varanasi-Aurangabad-Kolkata, one of the important sections of the Golden Quadrilateral) from 786.0 km to 978.4 km (length of 192.4 km) in Uttar Pradesh and Bihar on a DBFOT (design, build, finance, operate and transfer) toll basis. This project was awarded by NHAI under the National Highways Development Project Phase-V. The concession period for the project is 30 years, including construction period of 30 months.

 

Roadis, which acquired road assets of the Isolux Corsan group, is owned by one of the largest Canadian pension fund managers, PSP Investment. Roadis manages its assets through promotion and financing of projects, during the construction and operational phases.

 

Tolling on the existing four-lane stretch commenced from September 12, 2011, as the project expands the existing four lanes into six lanes. Roadis is expected to acquire the pending stake by March 2023.

 

In fiscal 2023, toll revenue of SIVATPL was Rs 509.5 crore.

Key Financial Indicators

Particulars	Unit	2022	2021	2020
Revenue	Rs crore	840	662	504
Profit after tax (PAT)	Rs crore	47	113	202
PAT margin	%	5.8	17.1	40.1
Adjusted gearing	Times	1.53	1.85	2.21
Interest coverage	Times	1.89	1.83	2.89

 

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	Rating
NA	Term loan	NA	NA	Sep-29	1286.36	NA	CRISIL BBB-/Watch Positive
NA	Proposed Term Loan	NA	NA	NA	713.64	NA	CRISIL BBB-/Watch Positive