| Vadodara Municipal Corporation | ||
| Rating reaffirmed at ‘CRISIL AA/Stable’ | ||
| Rating Action | ||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||
| 1 crore = 10 million | ||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable’ rating on the Rs 100 crore bond programme of Vadodara Municipal Corporation (VMC). The rating continues to reflect the strength of trustee-administered escrow account, payment mechanism and adequate liquidity in the form of a debt service reserve account (DSRA). The payment mechanism for coupon and redemption is given in the annexure.
The rating also reflects the strong creditworthiness and low performance risk of the originator, high debt service coverage ratio (DSCR) leading to low impact of future flow on originators’ other obligations, additional security in the form of DSRA created before pay in, presence of a payment structure and recourse to the originator. Performance linkage is low as the inflows are dependent on taxes collected by VMC. Typically, the taxes see an increase over time reducing risk from inflows. CRISIL Ratings estimates DSCR to be high which, coupled with strong inflow and low debt, will have minimal impact on the financial profile of VMC. The bonds have a well-defined structure of escrow account, payment structure and points of recourse in case of shortfall.
The rating also factors in the corporation's strong operating efficiency, driven by consistently high tax collection efficiency, healthy economic base, and strong financial risk profile on account of low debt and robust liquidity. These strengths are partially offset by high capital expenditure (capex) largely funded from grants and moderate service deliveries. |
Analytical Approach CRISIL Ratings has applied its criteria on future flow securitisation. |
Key Rating Drivers & Detailed Description Strengths:
The escrow and bond payment mechanism provides adequate strength to the bond issuance. The tax receipts escrowed at collection, trustee-managed escrow mechanism and payment structure with recourse to originator ensure adequate safety for timely payment of debt obligation to the investors. The creation of the DSRA before pay-in and maintenance of the same throughout the tenure of the bond further enhances the strength of the structure. The DSCR is also expected to be high throughout the tenure of the bond.
Revenue profile includes income from collection of property tax, water and conservancy tax, income from other taxes, octroi compensation and other revenue grants, and non-tax income. Revenue surplus is healthy, backed by strong property tax collection and steady receipt of grants from the state government in lieu of octroi and non-tax income comprising town development income.
While revenue expenditure has increased over the years, strong growth in the tax and non-tax collections led to improvement in operating surplus to Rs 284 crore in fiscal 2022 against Rs 131 crore in the Covid-19 hit fiscal 2021. This was supported by grants worth ~Rs 450 crore from the state government. Operating surplus is expected to sustain in fiscal 2023, driven by healthy revenue collections, improvement in economic activity. The ability of the corporation to improve collection efficiency of property tax, which has dipped to 82-84% in the last two fiscals from the consistent 90% plus levels reported before Covid-19 outbreak will be a key monitorable.
Vadodara is the third largest city in Gujarat (Ahmedabad and Surat being the first two). Centrally located in the state, the city is accessible by road and rail from major cities across the state and country. The city has a strong population base of over 22.4 lakh. Major educational institutions, including the state university Maharaja Sayajirao University, are in the city. The establishment of Gujarat Refinery nearby has led to the growth of many state-owned and private industries in the vicinity, which has helped in the growth of economic activities in the city.
Financial risk profile is supported by above-average revenue receipts, healthy operating surplus of more than Rs 100 crore over the past five fiscals and relatively low debt. Revenue receipts were over Rs 1,000 crore for the three fiscals through 2022. VMC is expected to report operating surplus of Rs 150-250 crore over the medium term, with gradual increase in both tax and non-tax revenue. Furthermore, low net indebtedness supports the financial risk profile. Despite increase in debt on account of bond issuance, overall indebtedness is expected to remain below Rs 200 crore. Debt protection metrics are expected to be comfortable, as reflected in interest coverage ratio of over 10 times. VMC also had strong liquidity (investment and cash/bank balances) of over Rs 1,600 crore as on March 31, 2022.
Weaknesses
VMC has significant yearly capex of Rs 700-800 crore over the medium term as against expected annual operating surplus of Rs 150-250 crore. As in the past, capex is expected to be primarily funded through grants. However, operating surplus is expected to be sufficient to fund VMC’s share of the capex. VMC has been receiving grants for various projects in a timely manner. Also, VMC has strong liquidity which can be used to fund this capex, if required.
VMC’s service delivery adequacy levels are stable across water, sewerage and solid waste management on the back of high coverage network (water supply: 97%, sewerage: 100%, solid waste: 100%), Furthermore, supply of water is ~165 LPCD, higher than the recommend by ‘Central Public Health and Environmental Engineering Organisation’ norms of 135 LPCD. This is however constrained by low metering of water supply (7%) along with limited supply (1 hour/day). On the collection front, efficiency levels have declined from the historic highs on account Covid-19 coupled with the addition of new areas to the municipal jurisdiction. Improvement in collection efficiency to historic levels remains a key monitorable. |
Liquidity: Strong Liquidity is driven by healthy operating surplus of more than 10% annually over the past five fiscals and unencumbered cash and bank balance of Rs 1,600 crore as on March 31, 2022. Operating surplus is expected at Rs 150-250 crore, against debt obligation of Rs 30-60 crore over the next 2-3 fiscals (including the sinking fund contribution). VMC is likely to maintain unencumbered cash and bank balance and continue to generate healthy operating surplus that will be sufficient to meet debt obligation and partly fund the capex. |
Outlook Stable CRISIL Ratings believes VMC will continue to generate healthy operating surplus and maintain strong financial risk profile. |
Rating Sensitivity factors Upward factors
Downward factors:
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About the Company VMC is governed by the Gujarat Provincial Municipal Corporation Act, 1949. It has jurisdiction over 220.33 square kilometre in Vadodara city, formerly known as Baroda, and provides a range of civic services to over 22.4 lakh residents. Majority of these services include water supply, sewage disposal, solid waste management, primary education, transportation, and slum improvement. |
Key Financial Indicators
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Any other information: Not applicable Annexure Broad contours of the escrow structure pertaining to the current Rs 100 crore bond issue are:
Interest payment mechanism T - Interest payment date
Redemption mechanism
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Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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