Press Release DBL Nadiad Modasa Tollways Limited

Press Release

DBL Nadiad Modasa Tollways Limited December 30, 2020 Ratings Facilities Amount (Rs. crore) Ratings1 Rating Action 74.01 CARE A; Stable Long term Bank Facilities Reaffirmed (Reduced from Rs. 79.74 Crore) (Single A ; Outlook: Stable) 74.01 Total Facilities (Rupees Seventy Four Crore and One Lakh only) Details of facilities in Annexure-1

Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of DBL Nadiad Modasa Tollways Limited (DNMTL) continue to derive strength from its assured cash flow stream in the form of annuity receivable from Roads and Building Department (R&BD), Government of Gujarat (GoG) along with the operational status of its road project with established track record of receipt of annuities and creation of debt service reserve account (DSRA). Further, the annuity receipts of DNMTL adequately cover its debt servicing requirements. The rating of DNMTL also continue to take into account divestment of the controlling stake in DNMTL by DBL to Shrem Roadways Private Limited (SRPL; part of Chhatwal Group Trust) and responsibility of DBL for undertaking the requisite operation and maintenance (O&M) and major maintenance (MM) activity of DNMTL without any consideration for the same from DNMTL as per the agreement entered between SRPL and DBL. The above rating strengths, however, continue to be tempered by inherent interest rate risk and performance risk attached with the O&M contractor (i.e. DBL).

Rating Sensitivities Positive Factors:  Improvement in the credit profile of counter party Negative Factors:  Deterioration in the credit profile of counter party and significant deterioration in credit profile of O&M contractor  Non-adherence to the stipulated O&M and MM requirements by O&M contractor leading to delay/deduction in DNMTL’s annuity receipt thereby impacting debt coverage indicators  Change in existing O&M and MM arrangement deteriorating the debt coverage indicators  Significant interest rate movements adversely affecting its debt coverage indicators

Detailed description of the key rating drivers Key Rating Strengths Operational annuity road project coupled with established track record of receipt of annuity from R&BD, GOG: DNMTL’s annuity road project achieved commercial operations date (COD) on December 2013 ahead of its scheduled COD. Further, DNMTL has an established track record of receipt of twelve semi-annual annuities (including one bonus annuity) from R&BD, GoG in a timely manner.

Low counterparty credit risk: The Concessioning Authority, R&BD, GoG is a department of GoG. R&BD, GoG department is the nodal agency and is in-charge of all the activities pertaining to planning, construction and maintenance of all categories of roads and all state government-owned buildings in Gujarat. The department receives capital and revenue support in the form of budgetary allocations, toll collections on certain stretches and grants from central government, state government & multilateral agencies. The Gujarat state continues to enjoy a strong revenue surplus since FY12.

Adequate debt coverage indicators: Annuity received from R&BD, GoG adequately covers the debt obligation of DNMTL. Further, as per the terms of sanction of term loan, repayment of term loan shall be due after 56 days from due date of receipt of annuity, thus providing comfort in case of some delay in the actual receipt of annuity. However, timely and need based support from SRPL in case of exigencies, shall remain crucial from the credit perspective.

Established track record of O&M contractor i.e., DBL in execution and maintenance of road projects: DBL had entered in to a stake sale agreement on March 26, 2018 in lieu of which 74% stake of DNMTL were transferred to SRPL. Post stake sale, DNMTL has entered into an O&M contract with SRPL which in turn has sub-contracted the O&M work to DBL. As per the terms of stake sale and sub-contract agreement, DBL shall be entitled to the toll collection proceeds of its 11 out of 14

1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited

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State Highway (SH) road SPVs (in Madhya Pradesh and Gujarat) sold to SRPL while simultaneously being fully responsible for undertaking the requisite O&M and MM of all these road SPVs (including DNMTL); and any surplus or deficit arising thereof shall be attributed to DBL. Thereby, the SPV shall continue to benefit from the vast experience and established track record of DBL in O&M of roads.

Liquidity Analysis: Adequate Creation of DSRA and established track record of steady stream of annuity receipt from R&BD, GoG provides comfort: As per the terms of sanctioned debt, DNMTL has to maintain DSRA equivalent to six months of debt servicing in fund based or non-fund based form. DNMTL has created DSRA of Rs.12.91 crore in fund based form equivalent to the six months of debt servicing post expiry of DSRA bank guarantee. DNMTL has an established track record of receiving twelve annuities from R&BD, GoG, generally within 15 days from the due date while having gap of 56 days between annuity due date and debt repayment due date and thereby providing adequate liquidity cushion to DNMTL’s upcoming debt repayment.

Key Rating Weaknesses Inherent interest rate risk: The SPV remains susceptible to inherent interest rate risk over the long tenor of the loan considering variable rate of interest and presence of annual reset clause whereas its revenue stream in the form of annuities are fixed in nature. Consequently, any adverse movement in the interest rate may impact the debt coverage indicators of the company. Timely need-based support by SRPL in such an eventuality would be a key rating monitorable.

Inherent O&M risk along with performance risk related to O&M contractor: Although O&M requirement is relatively lower as the project stretch is part of low traffic state highway, DNMTL is still exposed to inherent O&M and MM risk attached to BOT projects as non-maintenance of the road as per the specified standards by DBL may result in delay or deduction in the receipt of its annuities. However, the responsibility of undertaking the requisite O&M and MM in DNMTL vests with DBL which has a considerable experience in such activity. Nevertheless, non-adherence to stipulated O&M and MM requirements by O&M contractor shall be a key rating sensitivity.

Analytical Approach: Standalone while factoring the track record and capability of the O&M contractor

Applicable Criteria: Criteria on assigning ‘outlook’ and ‘credit watch’ to Credit Ratings CARE’s Policy on Default Recognition Financial Ratios – Non Financial Sector Liquidity Analysis of Non-Financial Sector Entities Rating Methodology: Consolidation and Factoring Linkages in Ratings Rating Methodology – Annuity-based Road Projects

About the company DNMTL, a special purpose vehicle (SPV) originally incorporated by DBL, has entered into a 13 year Concession Agreement (CA) on January 05, 2012 with R&BD, GoG for the design, build, finance, operate and transfer (DBFOT) on annuity basis of existing two lane Nadiad – Modasa road in the State of Gujarat (part of SH-59) from km 0.600 to km 109.00 i.e. 108.40 km. The project achieved commercial operations date (COD) ahead of schedule. In August 2017, DBL had signed a term sheet with Chhatwal Group Trust to divest its entire stake in DNMTL and its 23 other SPVs. DNMTL has received the no objection certificate (NOC) from its lender. Further, it has also received NOC from R&BD, GoG for divestment of stake to the tune of 74% while balance to be held by DBL. As on March 31, 2020, SRPL holds 74% shares of DNMTL.

Brief Financials (Rs. Crore) FY19 (A) FY20 (A) Total Operating Income 32.17 22.41 PBILDT 17.70 12.80 PAT 19.49 2.59 GCA 14.27 10.15 Overall Gearing (Times) 1.92 1.54 Interest Coverage (Times) 1.88 1.48 A: Audited

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Note: DNMTL’s financials for FY19 and FY20 are as per IndAS applicable to it, wherein it has recognized financial assets as the present value of annuities receivable under its concession (discounted based on effective interest rate method) and interest income on these assets as it accrues during the period.

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History (Last three years): Please refer Annexure-2

Covenants of rated facility: Detailed explanation of covenants of the rated facilities is given in Annexure-3

Complexity level of various facilities rated for this company: Annexure-4

Annexure-1: Details of Facilities

Date of Coupon Maturity Size of the Issue Name of the Facility Rating assigned along with Rating Outlook Issuance Rate Date (Rs. crore) Fund-based - LT-Term Loan - - July 2024 74.01 CARE A; Stable

Annexure-2: Rating History of last three years

Current Ratings Rating history Name of the Date(s) & Date(s) & Date(s) & Date(s) & Sr. Amount Bank Rating(s) Rating(s) Rating(s) Rating(s) No. Type Outstanding Rating Facilities assigned in assigned in assigned in assigned in (Rs. crore) 2020-2021 2019-2020 2018-2019 2017-2018 Fund-based 1)CARE A; 1)CARE A; 1)CARE A; CARE A; 1. - LT-Term LT 74.01 - Stable Stable Stable Stable Loan (04-Mar-20) (21-Dec-18) (25-Sep-17)

Annexure-3: Detailed explanation of covenants of the rated facilities

Name of the Facility Detailed explanation A. Financial covenants Not Applicable B. Non-financial covenants Not Applicable

Annexure 4: Complexity level of various facilities rated for this Company

Sr. No. Name of the Facility Complexity Level 1. Fund-based - LT-Term Loan Simple

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

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Analyst Contact Group Head Name - Mr. Maulesh Desai Group Head Contact no. - 079- 4026 5605 Group Head Email ID - [email protected]

Relationship Contact Name - Mr. Deepak Prajapati Contact no. - 079- 4026 5602 Email ID - [email protected]

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