Detailed Rationale

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

 

The rating was placed on watch on October 27, 2022, following announcement of acquisition of 50% stake held by the Soma group in SIVATPL by Roadis, which is the road investment platform of the Public Sector Pension Investment Board (PSP Investment; rated ‘AAA/Stable/A1+’ by S&P Global Ratings). Roadis held 50% stake in the company earlier; following the stake sale, SIVATPL will become a 100% subsidiary of Roadis.

 

SIVATPL has received approvals from most of its lenders and only few approvals are pending; the transaction is in the final stage and should conclude by December 2023, subject to approvals from the remaining lenders, National Highways Authority of India (NHAI) and satisfaction of certain conditions precedent.

 

Presence of a strong parent and importance of the project in the India strategy of Roadis will likely enhance the credit risk profile of SIVATPL. CRISIL Ratings is in discussion with the management of SIVATPL and will remove the rating from watch once it obtains clarity on the post-acquisition support philosophy of the parent (Roadis) and the ultimate parent (PSP Investment). CRISIL Ratings will take the final rating action upon successful completion of the transaction.

 

Operating performance of the company was strong, with toll collection at Rs 509.5 crore in fiscal 2023, growth of 19% on-year, supported by tariff increase of 13-14% and traffic growth of 5-7%. Toll collection is expected to grow 12-15% in fiscal 2024, with toll of Rs 276 crore collected in the first half of fiscal 2024. This will support the debt service coverage ratio (DSCR) to remain above 1.2 times throughout the tenure of debt.

 

SIVATPL is expected to complete pending road construction of approximately 38 kilometre (km; post descoping) by June 2024, with balance project cost of Rs 2,640 crore as of September 2023. The company entered into a fixed-price contract with Welspun Enterprises Ltd (Welspun) at Rs 3,657 crore and other small engineering, procurement and construction (EPC) contractors in June 2022. The balance cost will be covered through a term loan of Rs 1,030 crore, NHAI grant of Rs 565 crore, internal cash accrual and receivables from NHAI for positive change of scope and escalation claims. Furthermore, liquid surplus in the escrow account was healthy at Rs 60 crore as on September 30, 2023, and SIVATPL can access these funds for construction purposes, apart from servicing debt.

 

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

 

The rating also factors in continued financial support from Roadis and favourable location of the project stretch. These strengths are partially offset by exposure to project implementation and funding risks and susceptibility of toll revenue to traffic volume.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SIVATPL and will reassess its analytical approach, subject to successful completion of the transaction and post-acquisition support philosophy of the parent (Roadis) and/or the ultimate parent (PSP Investment).

Key Rating Drivers & Detailed Description

Strengths:

• Expected continued financial support from Roadis

SIVATPL is expected to fund the pending project cost of Rs 2,640 crore prudently. Roadis shall extend funding support to ensure timely completion of the project. The sponsors infused around Rs 190 crore in fiscal 2019, Rs 50 crore in fiscal 2020 and Rs 140 crore in the second quarter of fiscal 2024, to ensure timely construction; they infused the entire committed equity in the project.

 

Roadis is owned by one of the largest Canadian pension fund managers, PSP Investment. As Roadis is expected to acquire the 50% stake of the Soma group (likely to be concluded by December 2023), SIVATPL will become its 100% subsidiary. The company will benefit from the strong profile of Roadis. Timely execution of the transaction will remain a key monitorable.

 

• Favourable location of the project stretch

The Varanasi-Aurangabad stretch is on national highway (NH) 2, which is part of the Golden Quadrilateral. The stretch connects various industrial areas in Varanasi, Chandauli and Sonbhadra across Uttar Pradesh, which houses 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 stood at Rs 509.5 crore in fiscal 2023, growth of 19% on-year supported by tariff hike of 13-14% and traffic growth of 5-7%. Toll collection is expected to grow 12-15% in fiscal 2024, with Rs 276 crore toll collected in the first half of fiscal 2024.

 

Weaknesses:

• Exposure to project implementation and funding risks

Out of 192.4 km, 9 km has been descoped and work on 144 km has been completed, with approximately 39 km pending as on June 30, 2023. The revised project cost is Rs 7,634.41 crore, of which the balance was Rs 2,640 crore as of September 2023. Implementation risk is partially offset as SIVATPL has entered into a fixed-price contract with Welspun and some other contractors for balance construction.

 

The balance cost will be funded through a term loan of Rs 1,030 crore, NHAI grant of Rs 565 crore, internal cash accrual and receivables from NHAI for positive change of scope and escalation claims. In addition, the initial concession agreement allowed the company to withdraw up to 50% of each tranche of debt disbursed by the senior lenders from the toll collection escrow account for construction. However, after signing of the modified supplementary agreement, the toll collection amount can be utilised towards construction activities, resulting in moderate funding risk.

 

• 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 geopolitical risks may impact cash flow and debt servicing ability. Furthermore, as over 60% of the traffic is commercial, traffic growth is linked to the economic scenario and may be impacted in case of adverse economic conditions. Toll revenue was impacted in fiscals 2020, 2021 and 2022 owing to the Covid-19 pandemic and extended monsoons. Any significant movement in traffic can impact toll revenue and the debt servicing ability of the company.

Liquidity: Adequate

Liquid surplus in the escrow account was healthy at Rs 60 crore as on September 30, 2023. Escrow funds are used to cover debt obligation by intimating NHAI. This is in line with the recommendation by statutory auditors, concurrent auditors and legal counsel of the lender. Existing funds in the escrow account, supported by annual cash accrual through toll collection, should be sufficient to cover annual debt obligation of Rs 120-220 crore and yearly interest obligation of Rs 120-220 crore.

 

The parent, Roadis, will provide support for completion of construction as well as throughout the tenure of the loan.

Rating Sensitivity factors

Upward factors

• Completion of stake acquisition by Roadis along with articulation of post-acquisition support philosophy
• Timely completion of balance work on the stretch as per recommended extended timeline of June 2024
• Improvement in toll collection, resulting in sustained improvement in cash accruals and 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 to 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. The 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 June 2024.

 

In fiscal 2023, toll revenue of SIVATPL was Rs 509.5 crore, with toll of Rs 155 crore collected in the first quarter of fiscal 2024.

Key Financial Indicators*

Particulars	Unit	2023	2022
Operating income	Rs crore	1,655	794
Profit after tax (PAT)	Rs crore	181	46
PAT margin	%	10.9	5.8
Adjusted gearing	Times	1.22	1.54
Adjusted interest coverage	Times	3.22	2.21

*As per analytical adjustments made by CRISIL Ratings

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
NA	Term Loan	NA	NA	Sep-29	2030.18	NA	CRISIL BBB-/Watch Positive
NA	Proposed Term Loan	NA	NA	NA	269.82	NA	CRISIL BBB-/Watch Positive