Ashoka Ranastalam Anandapuram Road Limited: Rating Reaffirmed

August 06, 2020

Ashoka Ranastalam Anandapuram Road Limited: Rating reaffirmed

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Fund Based – Term Loan 415.00 415.00 [ICRA]A-(Stable); Reaffirmed Total 415.00 415.00 *Instrument details are provided in Annexure-1

Rationale The rating reaffirmation favourably factors in the inherent benefits of hybrid-annuity based nature of Ashoka Ranastalam Anandapuram Road Limited’s (ARARL’s) project including upfront availability of right of way (RoW), automatic de-scoping of RoW pending beyond 180 days from the appointed date, inflation-linked1 revisions to bid project cost during construction period and relatively lower equity mobilisation risk with 40% of the project cost to be funded by the authority during construction period in the form of grant. ICRA notes that the company has received all the five payment milestones totalling to Rs. 521.29 crore. Heavy rains in the project region in Q2 and Q3 of FY2020, non-availability of pond ash material (to fill underpass approaches) and lockdown imposed by the Central Government on account of the COVID-19 pandemic in March 2020 has resulted in delays in the project execution. As against scheduled commercial operations date of May 14, 2020; the project has achieved 92.16% physical progress as on May 31, 2020. However, ICRA notes that the project is expected to get extension of timeline by three to six months on account of COVID. The rating takes into account the strong sponsor profile of Ashoka Concessions Limited (ACL, rated [ICRA]A(Stable)), a holding company of road assets of Ashoka Buildcon Limited (ABL). Furthermore, ACL has provided an undertaking towards financial support in case of cost overrun during the construction phase, any shortfall in operations and maintenance (O&M) expenses, and debt servicing in operational phase. The rating also factors in the stable revenue stream post commissioning, with 60% of the remaining project cost being paid out as annuity (adjusted for inflation) over the concession term by the project owner and annuity provider, the National Highway Authority of India (NHAI, rated [ICRA]AAA(Stable) - a key Central Government entity entrusted with the development and maintenance of India’s national highway programme. The rating further draws comfort from ABL’s presence as the fixed-price engineering, procurement and construction (EPC) contractor for executing the project, which has a demonstrated track record of project execution within budgeted time and cost. The total project cost of Rs. 1039.99 crore is being funded in the debt- equity ratio of 3.78:1 times net of the NHAI grant. As on June 30, 2020, the promoters infused 95.3% of their contribution, which stood at Rs. 109.8 crore.

The rating, however, remains constrained by the residual execution risks in the project, given that the project is in construction phase, with ARARL achieving ~92.16% physical progress as on May 31, 2020. However, ARARL is a low complexity project where the implementation risk is mitigated to an extent by the availability of 98.75% of encumbrance free land for construction, a fixed-price, fixed-time contract and the strong project execution capabilities of ABL. ICRA notes the possibility of some amount of construction work getting descoped on account of delays in the land acquisition by the authority. This pertains to the land on which a flyover is to be built connecting the project stretch to the proposed

1 Based on annual change in price index multiple (PMI) from the base year; PMI is the weighted average of wholesale price index (WPI) and consumer price index (CPI) (IW) in the ratio of 70:30

Bhogapuram airport. The company’s ability to commission the project in a timely manner and within the budgeted costs and revised timelines would remain important from a credit perspective. Post commissioning, the company would have to ensure a healthy lane availability to avoid any deductions from the annuity amount. Timely support from the promoters to fund any shortfall due to delays in grant or any cost overruns during the construction phase will remain crucial. ARARL’s cash flows are exposed to interest rate risk, given the floating nature of interest rates for the project loan. Further, the prevailing low bank rate2 would also adversely impact the projected coverage metrics and IRRs for HAM projects as ~40-45% of total annuity inflows for a HAM project are contributed by interest on annuities.

The Stable outlook on the rating reflects ICRA’s opinion that ARARL will continue to benefit from the strong execution capabilities of the ultimate sponsor and EPC contractor—ABL.

Key rating drivers and their description

Credit strengths Strong profile of sponsor - ARARL is a wholly-owned subsidiary of ACL, which is a part of the Ashoka Buildcon Group having strong presence in the road segment. Further, ARARL has entered into a fixed-price EPC contract with ABL, which has a two-decade long expertise in the construction business, and a track record of project execution within the budgeted time and cost. Any cost overrun within the scope of the EPC contract will be borne by ABL.

Benefits of executing project under hybrid-annuity model (HAM) - The inherent benefits of hybrid-annuity project include upfront availability of right of way, automatic de-scoping of RoW pending beyond 180 days from the appointed date, inflation linked revisions to bid project cost during the construction period and relatively low equity mobilisation risk with 40% of the project cost to be funded by the authority during the construction period in the form of grant. ICRA notes that the company has received all the five payment milestones totalling to Rs. 521.29 crore. The project will have a stable revenue stream post-commissioning as 60% of the remaining project cost will be paid out as annuity (adjusted for inflation) over the term of the concession by the project owner and annuity provider, the NHAI, which is a key central government entity entrusted with the responsibility of development and maintenance of India’s national highway programme.

Undertaking from sponsor - ACL has provided an undertaking towards financial support in case of cost overrun during the construction phase, any shortfall in O&M expenses, and debt servicing in operational phase as per lender’s approved base case business plan.

Credit challenges Running delays in execution and residual execution risks - The project is exposed to residual execution risks, given it is in construction phase, with ARARL achieving ~92.16% physical progress as on May 31, 2020. However, ARARL is a low complexity project where the implementation risk is mitigated to an extent by the availability of 98.75% of encumbrance free land for construction, a fixed-price, fixed-time contract and the strong project execution capabilities of ABL. ICRA notes the possibility of some amount of construction work getting descoped on account of delays in the land acquisition by the authority. This pertains to the land on which a flyover is to be built connecting the project stretch to the proposed Bhogapuram airport. The company’s ability to commission the project in a timely manner and within the budgeted costs would remain important from a credit perspective.

2 The current RBI Bank Rate stood at 4.25% as against 6.75% at the time of bidding

Project returns exposed to changes in inflation and interest rate risk - ARARL’s cash flows are exposed to interest rate risk, given the floating nature of interest rates for the project loan. Further, the prevailing low bank rate would also adversely impact the projected coverage metrics and IRRs for HAM projects as ~40-45% of total annuity inflows for a HAM project are contributed by interest on annuities.

Lane availability to be ensured for annuity payments - ARARL’s source of income is annuities, interest on outstanding annuities, and annual O&M payments from the NHAI. Hence, ensuring proper maintenance of roads and thereby, no deduction in annuity receipts will be a key credit sensitivity for ARARL, going forward.

Liquidity position: Adequate The liquidity position of ARARL is adequate. The total project cost of Rs. 1,039.99 crore is expected to be funded through equity of Rs. 109.79 crore (10.56% of project cost), equity towards PMI adjustment of Rs. 40.37 crore (3.88%), term loan of Rs. 415 crore (39.9%) and the NHAI’s grant of Rs. 474.84 crore (45.66%). The debt repayment is expected to commence from FY2021. Further, as part of the financial closure, interest obligations and O&M expenses for the first six months post COD have been built into the project cost.

Rating sensitivities Positive triggers – ICRA could upgrade ARARL’s rating on receipt of COD and a track record of receiving semi-annuity payments in a timely manner on a sustained basis.

Negative triggers – Negative pressure on ARARL’s rating could arise if there is a delay in achieving COD beyond the EOT provided by NHAI on account of COVID pandemic resulting in delayed annuities and/or any cost over runs. Further, any weakening in linkages with sponsor or weakening of sponsor’s credit profile would be a credit negative.

Analytical approach

Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Rating Methodology for BOT (Hybrid Annuity Model) Roads Impact of Parent or Group Support on an Issuer’s Credit Rating Parent/Group Company: Ashoka Concessions Limited (ACL, rated [ICRA]A(Stable)) The rating of ARARL factors in the undertaking provided by ACL towards financial Parent/Group Support support in case of cost overrun during the construction phase, any shortfall in O&M expenses, and debt servicing in operational phase as per lender’s approved base case business plan. Consolidation/Standalone Standalone

About the company Ashoka Ranastalam Anandapuram Road Limited is a 100% subsidiary of ACL, a holding company of road assets and subsidiary of ABL. The special purpose vehicle (SPV) was formed to undertake construction, operation and maintenance of the six-laning of NH 16 from Ranastalam to Anandapuram (Visakhapatnam) from 634.000 km to 681.000 km (~47 km) in Andhra Pradesh, under the NHDP Phase V (Package II) on design, build, operate and transfer (hybrid annuity) basis.

The project received its appointed date on November 16, 2017, with a construction period of 30 months and an operation period of 15 years after achieving commercial operation date. The total project cost is Rs. 1,039.99 crore, to be funded through equity of Rs. 109.79 crore (10.56% of project cost), equity towards PMI adjustment of Rs. 40.37 crore (3.88%), term loan of Rs. 415 crore (39.9%) and the NHAI’s grant of Rs. 474.84 crore (45.66%). The financial closure was achieved in September 2017 and as on June 30, 2020, Rs. 308.00 crore of debt was drawn down. Annuity and interest on outstanding annuities will be received on a semi-annual basis along with the O&M receipts, with the first-year O&M receipt of Rs. 11.72 crore to be adjusted for inflation from bid date

Key financial indicators Key financial indicators are not applicable as ARARL is a project stage company.

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years Current Rating (FY2021) Rating History for the Past 3 Years Instrument Rating FY2020 FY2019 FY2018 Type Amount Rated Amount Outstanding 03-Aug-2020 27-May-2019 04-Apr-2018 - 1 Term Loan Long Term 415.00 * [ICRA]A- (Stable) [ICRA]A- (Stable) [ICRA]A- (Stable) - Amount in Rs. crore *Rs. 308 crore drawn down as on June 30, 2020

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 click here

Annexure-1: Instrument details Date of Amount Issuance / Coupon Maturity Rated Current Rating ISIN Instrument Name Sanction Rate Date (Rs. crore) and Outlook October NA Term Loan NA June 2033 415.00 [ICRA]A-(Stable) 2017 Source: ARARL

Analyst Contacts Shubham Jain Rajeshwar Burla +91 124 4545 306 +91 40 4067 6527 [email protected] [email protected] Shreyans Talawat +91 22 6169 3368 [email protected]

Relationship Contact L Shivakumar 022 6169 3304 [email protected]

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