Pune Metropolitan Region Development Authority

February 18, 2019

Summary of rating action Current Rated Amount Instrument* Rating Action (Rs. crore) Proposed Non-convertible Debenture 250.00 Provisional [ICRA]AA(SO)(Stable); assigned Programme Total 250.00 *Instrument details are provided in Annexure-1

Rationale ICRA has assigned a Provisional [ICRA]AA(SO)(Stable) (pronounced as provisional ICRA double A structured obligation)1 rating to the proposed Rs. 250-crore long-term bond programme of Pune Metropolitan Region Development Authority (PMRDA). The letters SO, in parenthesis, suffixed to the rating symbol stand for structured obligation. An SO rating is specific to the rated issue, its terms and structure. The SO rating does not represent ICRA’s opinion on the general credit quality of the issuers concerned. The rating assigned is provisional, as of now (as denoted by the prefix, provisional, before the rating symbol). It is subject to the fulfilment of all conditions under the structure, as mentioned to ICRA, including the execution of the transaction documents with the same being in line with the terms shared with ICRA.

The coupon payment of the non-convertible debentures (NCDs) shall be made on a semi-annual interval while the principal shall be redeemed at the end of the 7th to 10th year (annual instalment of 25% each). The assigned rating reflects specific credit enhancements and the integrity of and expected adherence to the same by PMRDA, monitored by the Debenture Trustee. Credit enhancements on the NCDs are available in the form of a debt service reserve and a defined escrow and waterfall mechanism, so that sufficient funds are transferred, prior to the due date, into the interest payment account (IPA) and the sinking fund account (SFA), which would be used for the timely servicing of debt.

The assigned rating also reflects PMRDA’s strategic importance to the Government of Maharashtra (GoM), given its status as a special planning authority (SPA) as well as the nodal agency for planning, regulating, developing and coordinating the overall urban development in the entire Pune Metropolitan Region (PMR). The rating also derives comfort from the GoM’s support to PMRDA by way of various project-specific approvals and funding, legal clearances and key policy-related decisions in a timely manner, which are crucial for sustainable growth and timely project execution. Moreover, the GoM’s adequate credit profile augurs well for PMRDA. The rating is also supported by PMRDA’s comfortable capital structure, owing to its debt-free status, at present. While the proposed bond issue is likely to increase the gearing, the same would remain low at an absolute level owing to PMRDA’s healthy level of surplus that is expected to be generated from its operations, a trend which has been witnessed since the entity’s inception. Further, given PMRDA’s plan to develop a large underdeveloped area in the PMR through various town planning schemes, its revenues from building permission charges are likely to increase in the medium term.

The rating is, however, constrained by PMRDA’s limited track record in executing large scale infrastructure projects. Going forward, any delay in execution would lead to cost and time overruns which, in turn, would impact PMRDA’s overall business risk profile. PMRDA also remains exposed to the price and demand volatilities in the real estate market, which are likely to keep its key revenue streams volatile.

1 For complete rating scale and definitions, please refer to ICRA’s website www.icra.in or other ICRA Rating Publications

Outlook: Stable The Stable outlook assigned to the rating of the proposed Rs. 250-crore bond programme reflects ICRA’s expectation of satisfactory adherence to the structured payment mechanism by PMRDA. The Stable outlook also reflects ICRA’s expectation that PMRDA, will continue to maintain healthy revenue surpluses, aided by its growing own revenues. The outlook may be revised to Positive if there is a substantial growth in revenues, resulting in a consistent improvement in the revenue surplus position and further strengthening of the liquidity position. Conversely, the outlook may be revised to Negative in case any significant delay in project execution is witnessed, leading to time and cost overruns and/or additional funding responsibilities are passed on to PMRDA for projects of other government entities, which would weaken its liquidity profile.

Key rating drivers

Credit strengths Defined escrow mechanism and supporting structure – PMRDA’s major revenue comprises building permission fees, majority of which are collected in five specific accounts owned and operated by PMRDA. As per the terms of the bonds, PMRDA would provide an irrevocable standing instruction to the bank to transfer all funds, on a daily basis (subject to an annual cap of 1.10x of the debt outstanding), from these five specific accounts to the escrow account (a designated account lien-marked in favour of the Debenture Trustee). From this escrow account, funds would be transferred, on a monthly basis, to the IPA and SFA, as per a pre-specified schedule, which would ensure that sufficient funds would be available in the IPA and SFA ahead of the due dates of the debt servicing. Further, a debt service reserve account (DSRA) shall be maintained for the next two interest payments obligations (i.e. 1-year interest). In case of any shortfall in the DSRA, IPA and SFA (which is not met from the cashflows in escrow account), PMRDA shall be obligated to deposit funds from its other revenues in terms of the defined payment mechanism. Funds accumulated in the escrow account, which are more than the monthly requirements of subsequent transfers to IPA/SFA/DSRA, shall be released back to PMRDA on a daily basis.

Strategic importance to GoM – Apart from being an SPA, PMRDA acts as the nodal agency for implementing major urban development and transport-related projects in the PMR. The PMR has a population of approximately 75 lakh, and it is estimated that more than 30 lakh people are likely to migrate to the PMR during the next two decades. It is currently one of the fastest growing metropolitan regions in India with the automobile, manufacturing and information technology (IT) sectors having a strong presence in this area. As an SPA, PMRDA is responsible for preparing a master plan for the development of the PMR and for regulating the development in its jurisdiction as per the development control regulation (DCR). Going forward, PMRDA’s focus would be on cluster as well as transit orientated development which, in turn, is key for the overall development of the region.

Sustained revenue surplus and robust capital structure – PMRDA reported a revenue surplus of Rs. 367.5 crore in FY2018 and Rs. 214.2 crore in H1 FY2019. The capital structure remains robust owing to its currently debt-free status. The consistently healthy revenue surplus has resulted in a strong net worth position and cash balance. Consequently, despite the proposed bond issue for funding various town planning schemes, the gearing is likely to remain low in the near term. ICRA notes that PMRDA would earn significant income, in future, from the monetisation of various land parcels in the developed areas. During the first nine months of the current fiscal, PMRDA earned a revenue of Rs. 37 crore by monetising some land parcels.

Credit challenges Limited track record in executing large-scale infrastructure projects - PMRDA has proposed a number of large-scale projects with an estimated cost of Rs. 12,179 crore, in which PMRDA’s share would be ~23%. This includes ring road phase 1, metro line 3 and various town planning schemes. The ring road project has been approved for funding under the Bharatmala Pariyojana, wherein the Government of India (GoI) would provide funds to the tune of Rs. 1,981 crore. The balance (Rs. 896 crore) includes service road and land acquisition costs, which will be borne by PMRDA. On the other hand, the metro line 3 project has been awarded to a consortium of TRIL Urban Transport (a Tata Group company) and Siemens Project Ventures (a subsidiary of Siemens Financial Services) under the PPP mode. The concessionaire (the Tata- Siemens joint venture) will raise Rs. 5,052 crore through a mix of debt and equity to partly fund the project. PMRDA would contribute Rs. 250 crore towards land acquisition for metro car shed. The GoI and the GoM will provide viability gap funding (VGF) for the balance amount. While these two projects will be implemented in the next three years, the town planning schemes, which will be funded entirely by PMRDA, will be implemented over the next 7-10 years. Given only 3-4 years of operations since inception, PMRDA's limited track record in executing such large-scale projects remains a key credit concern. Going forward, any delay in execution would lead to cost and time overruns which, in turn, would impact PMRDA’s overall business risk profile.

Exposure to revenue volatility - Building permission and user charges accounted for 93% of PMRDA’s total revenues in H1 FY2019. Also, going forward, the GoM will be sharing 0.25% stamp duty collected in the PMR with PMRDA. ICRA believes any adverse movement in the real estate market is likely to impact both these revenue streams, thereby limiting PMRDA’s revenue growth prospects.

Liquidity position

PMRDA is yet to avail any external borrowing. The entity is planning to raise Rs. 250 crore through NCDs for funding the town planning schemes. The liquidity position of the entity has remained comfortable with cash and liquid investments of Rs. 1,146 crore as on September 30, 2018. However, any significant additional funding responsibilities passed on to PMRDA by the GoM may weaken its liquidity position.

The terms of the NCDs ensure that a significant quantum of funds shall be routed through the escrow account of the NCDs and shall be transferred on a monthly basis to the IPA and the SFA (as per a pre-defined schedule), ahead of the required debt servicing. Along with the stipulated DSRA of 1-year interest, the liquidity for the payments of the NCDs is expected to remain comfortable.

Analytical approach

Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies State Government Finances Securitisation Transactions The assigned rating factors in PMRDA’s importance to the GoM as the nodal agency for land use planning, and regulation infrastructure planning and Parent/Group Support development within the PMR, as well as its strong operational and financial linkages with the GoM. Consolidation / Standalone Standalone

About the entity: Pune Metropolitan Regional Development Authority (PMRDA) was established as an area development authority for the Pune Metropolitan Region (PMR). It was initially incorporated under the Maharashtra Regional and Town Planning (MRTP) Act, 1966, w.e.f. April 01, 2015. Later, in June 2016, the GoM notified an ordinance, the Maharashtra Metropolitan Region Development Authority Ordinance, 2016, which covered all the metropolitan development authorities (MDAs) across the state except for the Mumbai Metropolitan Region Development Authority (MMRDA), which is covered under the Mumbai Metropolitan Region Development Authority Act, 1974.

The overall functions of PMRDA are supervised by a committee, known as the Authority. The members of this committee are nominated by the GoM and it is headed by a Chairman (the Chief Minister as per the MMRDA Act). The Metropolitan Commissioner, appointed by the GoM, is the Chief Executive Officer of PMRDA, and is supported by various department heads.

The PMR covers an area of 7,256 sq km, which consists of two municipal corporations, seven municipal councils, three cantonment boards and 842 villages. The total population under this region is approximately 75 lakh. PMRDA is the key implementing and funding agency for urban and transport infrastructure development in the PMR.

In H1 FY2019, the entity reported a net surplus of Rs. 214.2 crore on a revenue income (RI) of Rs. 227.4 crore compared to a net surplus of Rs. 367.5 crore on an RI of Rs. 403.1 crore in FY2018.

Key Financial Indicators Particulars FY2017 FY2018 H1 FY2019 (P) Revenue Income (Rs. crore) 661.5 403.1 227.4 Net Surplus (Rs. crore) 580.0 367.5 214.2 Revenue Surplus/Revenue Income (%) 87.7% 91.2% 94.2% RoCE (%) 114.4% 37.5% 33.7% Total Debt/TNW (times) - - - Total Debt/Revenue Surplus (times) - - - Revenue Surplus/Interest (times) - - - P – Provisional; Note: OPBDIT: Operating Profit before Depreciation, Interest and Taxes; RoCE (Return on Capital Employed): Profit before Interest and Tax (PBIT)/Avg (Total Debt + Tangible Net-Worth + Deferred Tax Liability - Capital Work -in Progress); NWC: Net Working-Capital; Source: PMRDA

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years Chronology of Rating History for the Current Rating (FY2019) Past 3 Years Amount Date & Instrument Amount Date & Rating in Rated Rating Type Outstanding (Rs. (Rs. crore) Feb 2019 FY2018 FY2017 FY2016 crore) Proposed Non- Provisional convertible Long [ICRA]AA 1 250.00 - - - - Debenture Term (SO)(Stable) Programme assigned

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument details Date of Amount Coupon Maturity ISIN Instrument Name Issuance / Rated Current Rating and Outlook Rate Date Sanction (Rs. crore) Proposed Non- Provisional [ICRA]AA(SO) NA convertible Debenture - - - 250.00 (Stable) Programme Source: PMRDA

ANALYST CONTACTS Jayanta Roy Manish Pathak +91 33 2287 6617 +91 124 454 5397 [email protected] [email protected]

Sankha Banerjee Anshuman Bharati +91 22 6114 3420 +91 22 6169 3351 [email protected] [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-124-2866928 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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