November 15, 2019 L&T Sambalpur-Rourkela Tollway Limited: Rating reaffirmed Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]BBB+(Stable); Fund based - Term Loans 1016.4 990.98 reaffirmed Total 1016.4 990.98 *Instrument details are provided in Annexure-1 Rationale The reaffirmation of the rating assigned to L&T Sambalpur-Rourkela Tollway Limited (SRTL) takes into account the project’s stable performance with gradual improvement in toll collections (except the recent months in which the traffic de-grew due to monsoons), and regular receipt of operational grant from the Government of Odisha (GoO). Notwithstanding the recent de-growth trends, the project witnessed healthy growth in toll collections since the commencement of tolling with effect from March 13, 2018 led by rise in traffic, higher toll rates applicable for certain commercial vehicles, and increase in toll rates. However, in the last three months, the toll collections moderated primarily due to heavy monsoons impacting traffic. The rating continues to take support from SRTL strong parentage in the form of L&T Infrastructure Development Private Limited (L&T IDPL; rated [ICRA]AA(Positive)/A1+), the operational stage of the project, and the attractive location of the stretch between Sambalpur and Rourkela (two prominent cities in Odisha) connecting various mineral-rich areas in the region with no major alternate route risk. ICRA also draws comfort from the presence of structural features such as escrow mechanism, DSRA in the form of bank guarantee equivalent to around one quarter’s debt servicing obligations. The rating, however, is constrained by moderate debt service coverage ratio in the project due to the relatively shorter debt repayment period compared to the project’s concession life, resulting in asset liability mismatch and dependence on debt-refinancing requirements towards the end of the debt tenure. However, ICRA takes comfort from the long tail period (balance concession period post debt repayment), which provides financial flexibility. The rating is also constrained by the concentration of traffic to the major mineral (coal and iron ore) carrying vehicles. Further, the rating factors in the counterparty credit risk, given the sizeable operational grant to be received from the GoO during the initial years of operations. The project is also exposed to the risk of higher-than-estimated routine and periodic maintenance expenses. The rating continues to be constrained by the risk associated with a toll road project, including users’ willingness to pay tolls, accept toll rate hike, traffic diversion/alternate route risk, traffic growth, inflation-linked toll rate increase as well as regulatory risks that are relatively higher in a state toll road projects. Key rating drivers and their description Credit strengths Strong promoter with long track record of operating BOT road projects – SRTL is promoted by L&T IDPL, which is part of the L&T Group with very strong financial profile (L&T IDPL is rated [ICRA]AA(Positive)/A1+) and a healthy track record of executing BOT projects. The Group has completed over 15 BOT projects, of which five were transferred to Infrastructure Investment Trust. The company benefits from the professional management with experience in handling various road assets. 1 Operational stage of project with gradual improvement in toll collection – The company received the provisional completion certificate for ~98% of the project stretch on March 13, 2018 and has been collecting toll since then. Subsequently, in August 2019, SRTL received provisional completion certificate for the entire project stretch. The toll collections on the project stretch gradually increased since the commencement of tolling, supported by healthy traffic growth, toll rate revision from September 2019 by ~10%, and double tolling of major mineral carrying vehicles plying on the project stretch. However, there was moderation in traffic in the last three months due to the disruption caused by heavy monsoon in the region. Nevertheless, the overall toll collections in 7M FY2020 have been healthy at Rs. 81.4 crore (YoY growth of 13%) compared to toll collection of Rs. 131.1 crore in FY2019. Importance of project stretch – The project is part of Odisha SH-10, which connects Sambalpur and Rourkela, the most prominent cities in Odisha, as well as provides connectivity to Jharsuguda and Sundargarh districts of the state. The road also provides linkage to coal and iron ore mines from other industrial towns in Odisha and the neighbouring states. There is no major competitive road to the project stretch, which makes it the preferred stretch connecting Sambalpur and Rourkela. Credit challenges Moderate debt coverage ratios and asset-liability mismatch – The toll collection in the project, in combination with the operational grant, will be sufficient to meet the operational expenses and debt servicing requirements. However, the coverage ratios are expected to remain modest in the initial years, till the toll collection ramps up further. The debt service coverage ratio will also remain moderate for the loan tenure due to the asset liability mismatch. This will result in high dependence on refinancing requirements towards the end of the debt tenure due to bulky repayments in the last few years. However, ICRA has taken comfort from the long tail period (balance concession period post debt repayment), which provides financial flexibility. Dependence on major mineral mining sector – The road also provides linkage to multiple coal and iron ore mines from other industrial towns in Odisha and the neighbouring states. A major part of the commercial traffic (~35%) using the stretch comprises vehicles carrying these minerals. Given that these vehicles are charged double toll rates and these also have higher PCU factor, these vehicles contribute for around 70% of the total revenue. Hence, SRTL’s toll collection will also be highly dependent on the production in the relevant coal and iron ore mines, as well as any alternate mode of transportation of these minerals. Dependence on timely receipt of grants to avoid cash flow mismatch – The project involves grant from Odisha Work Department (OWD), GoO. Of the grant, Rs. 258.5 crore is to be received during construction, while the remaining Rs. 206.8 crore will be in the form of operations and maintenance (O&M) grant to be received quarterly within the first five years of achieving commercial operation date (COD). About Rs. 15.1 crore of the Rs. 258.5-crore construction grant is yet to be received. The company has received six quarterly O&M grant payments. The timely receipt of grants for construction and O&M in the future would be the key monitorables as a significant delay in the receipt for the same can lead to a cash flow mismatch, resulting in increased dependence on support from the parent entity. Risks associated with toll road project – Like a typical toll road project, SRTL is exposed to risks including user willingness to accept toll rate hikes, alternate route diversion, inflation-linked toll rates, and dependence of traffic growth on the economic activities in the region. Since the project has an operational track record of about 1.5 years, users’ willingness to pay toll is established to an extent. Liquidity position: Adequate The company’s liquidity position is adequate with accruals from operations expected to be sufficient to meet operational expenses and debt servicing obligation over the medium term. This apart, the company has cash and liquid investments of Rs. 113.4 crore as on March 31, 2019 and Rs. 109.5 crore as on July 31, 2019. However, a part of this liquidity is likely to be used to pay off creditors in FY2020. The company has been maintaining debt service reserve in the form of a bank 2 guarantee of Rs. 32.53 crore, equivalent to three months’ debt servicing obligations. ICRA notes that so far, the company has not funded the major maintenance reserve account, which can exert pressure on the cashflows of the company during the years of major maintenance. Rating sensitivities Positive Triggers – The rating could be upgraded if higher toll collections or reduction in interest rate or debt refinancing with elongated repayment tenure results in improvement of cumulative DSCR to more than 1.25 times, along with adequate reserves for major maintenance. Negative Triggers – Downgrade pressure on SRTL’s rating could arise if lower traffic growth or increased O&M expenses result in deterioration of the projected cumulative DSCR. In addition, significant delays in receipt of operational grant or deterioration in credit profile of sponsor could exert negative pressure on its rating. Analytical approach Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies BOT Toll Road Projects in India Impact of Parent or Group Support on an Issuer’s Credit Rating Parent/Group Company: L&T Infrastructure Development Projects Limited The rating assigned to L&T SRTL factors in the reasonable likelihood of its parent, Parent/Group Support L&T IDPL [rated [ICRA]AA(Positive)/A1+], extending financial support to it, if required. Consolidation/Standalone The ratings are based on the standalone financial profile of the company About the company SRTL is a 100% subsidiary of L&T IDPL, which is a part of Larsen & Toubro Limited [L&T; rated [ICRA]AAA (Stable)] Group. It is the holding company for various infrastructure projects being developed by L&T under the public private partnership (PPP) model. SRTL was incorporated in October 2013 as a special purpose vehicle (SPV) to implement the four laning of Odisha’s SH-10 from Sambalpur to Rourkela for a total length of 161.73 km. The project highway is to be constructed under the design- build-finance-operate-transfer (DBFOT) model under the Odisha State Road Project (OSRP). The concession was granted to SRTL for a period of 22 years from the appointed date, i.e.