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IRCON Rewari Highway Limited April 05, 2021 Ratings Facilities/Instruments Amount Ratings1 Rating Action (Rs. crore) Provisional CARE AA- (CE); Stable Long Term Bank 310.00 [Provisional Double A Minus (Credit Assigned Facilities Enhancement); Outlook: Stable] 310.00 Total Bank Facilities (Rs. Three Hundred Ten Crore Only) Details of instruments/facilities in Annexure-1 *Proposed to be backed by unconditional and irrevocable corporate guarantee of IRCON International Limited till the receipt of first annuity. Rating assigned is provisional and shall be confirmed upon receipt of final sanction letter and execution of financing documents, including unconditional, irrevocable corporate guarantee from IRCON International Ltd, to the satisfaction of CARE Ratings Ltd.

Unsupported Rating 2 CARE A- [Single A minus] Note: Unsupported Rating does not factor in the explicit credit enhancement

Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of IRCON Gurgaon Rewari Highway Limited (IGRHL) primarily factors in the proposed unconditional and irrevocable corporate guarantee of IRCON International Limited (IRCON, rated CARE AAA; Stable/ CARE A1+) till the receipt of first annuity. The rating factors in the inherent strengths of hybrid annuity model (HAM) based road projects such as (i) low project funding risk with inflation-indexed annuity to be received for construction and favourable clauses introduced in the concession agreement (CA) to mitigate project execution challenges (ii) lower post-implementation risk on account of inflation-indexed annuity to be received for operations and maintenance (O&M) of the road and (iii) receipt of bank rate linked interest annuity. The rating also derives strength from the proposed fixed-price engineering, procurement and construction (EPC) contract with IRCON, which has an established track record of constructing roads and highways. Furthermore, the rating takes into account the credit quality of the underlying annuity receivables from National Highways Authority of (NHAI; rated ‘CARE AAA; Stable’) subsequent to commencement of operations, the proposed liquidity support mechanism such as creation of a debt service reserve account (DSRA) and a major maintenance reserve (MMR), proposed undertaking to be extended by the sponsor, IRCON, to fund any shortfall during the construction period along with articulation by the sponsor, IRCON, that in case of inadequacy of funds at the special purpose vehicle (SPV) level, IRCON will make good any shortfall , by extending bank guarantees (BGs) or maintaining fixed deposits (FDs) to the extent of such shortfall, which is proposed to be a part of financing document as well. The above rating strengths are, however, tempered by the inherent construction risk associated with the project execution, susceptibility to changes in operations and maintenance (O&M) cost and interest rate. Rating Sensitivities Positive Sensitivities  Completion of project on or before the scheduled COD and established track record of timely receipt of annuities post commencement of operations thereby leading to build-up of liquidity at the SPV level. Negative sensitivities  Deterioration in the credit profile of sponsor (IRCON) or counterparty (i.e. NHAI)

Detailed description of the key rating drivers

1 Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 2 As stipulated vide SEBI circular no SEBI/ HO/ MIRSD/ DOS3/ CIR/ P/ 2019/ 70 dated June 13, 2019. As per this circular, the suffix ‘CE’ (Credit Enhancement) is assigned to the ratings with explicit external credit enhancement, against the earlier used suffix ‘SO’ (Structured Obligation). 1 CARE Ratings Limited

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Proposed Corporate guarantee from IRCON International Limited till the receipt of first annuity The detailed rationale of the corporate guarantee provider, IRCON is available on www.careratings.com.

As per the proposed corporate guarantee (CG), IRCON unconditionally and irrevocably guarantees that till the receipt of first annuity, in the event of any default on the part of IGRHL in payment/repayment or in the event of any default to comply with any of the terms, conditions and covenants contained in the facility agreements, they will pay to the lenders all the amounts payable under the facility agreements. With this limited-period guarantee, construction and other risks that may materialize till the commissioning of the project gets transferred to the guarantor, thereby providing comfort to the rating.

Hybrid annuity structure of the project, with favourable clauses in concession agreement to address execution challenges The concession agreement (CA) – in line with the model CA for HAM projects – includes clauses that serve to partially secure the project and its lenders against construction risks, including delays in land acquisition. Such clauses include stipulating the achievement of at least 80% right-of-way (RoW) as a precedent condition for declaring appointed date (AD) for the project. Besides, there is a provision for granting deemed completion of the project in case 100% of the work is completed on the RoW which becomes available to it within 182 days of the appointed date. In addition, stringent clauses for levy of damages, encashment of performance security as well as requirement of additional performance security in case of delay in execution due to reasons attributed to the concessionaire act as significant disincentives against slippages in execution. The HAM model also entails lower sponsor contribution during construction period considering 40% construction support from NHAI and availability of 10% mobilization advances on bid project cost (BPC). BPC and O&M cost shall be inflation indexed (through a Price Index Multiple [PIM]), which is the weighted average of Wholesale Price Index (WPI) and Consumer Price Index (CPI) in the ratio of 70:30. The inflation-indexed BPC protects the developers against price escalation to an extent.

Cash flow visibility due to the annuity nature of the revenue stream linked to inflation-indexed O&M annuity and bank rate linked interest annuity During the operational phase, the project’s cash flow is assured in the form of annuity payments from NHAI on semi- annual basis covering 60% of the project completion cost along with interest at ‘bank rate plus 3%’ on reducing balance and inflation indexed O&M annuity.

Low counterparty credit risk Incorporated by the Government of India (GoI) under an Act of the Parliament as a statutory body, NHAI functions as the nodal agency for development, maintenance and management of the National Highways in the country. The outlook on NHAI, as symbolized in its rating, reflects its significance for the GoI and, consequently, the abiding direct and indirect support expected from it for the agency. Fixed-price EPC contract with sponsor, IRCON The company proposes to enter into a fixed price EPC contract with IRCON, which has executed nation building infrastructure projects in roads, buildings, electrical substation and distribution, airport construction, commercial complexes, metro and railway segment. The sponsor has long experience in the construction and infrastructure sector and are ably supported by a team of qualified engineers with significant expertise in road and highway construction.

Maintenance of surplus for meeting exigencies in the operational period and proposed DSRA The sponsor has proposed an upfront creation of a debt service reserve account (DSRA) for three months of interest servicing requirement, on the receipt of the first annuity. Additionally, based on articulation by IRCON, the SPV will retain surplus funds out of annuity receipt in the form of fixed deposits at all the times to make good towards any shortfall which may occur towards debt servicing for the period ahead. Further, in case of any inadequacy of funds at SPV level, IRCON shall be extending bank guarantees (BGs) to the extent of such shortfall, which is proposed to be a part of financing document.

Key Rating Weaknesses Inherent project execution risk

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IGRHL is exposed to the inherent construction risk attached with road projects given the construction on the project has not commenced yet as the AD has not been declared by NHAI. Nevertheless, demonstrated track record of IRCON as an EPC contractor in executing large sized projects mitigate the execution risk to an extent.

Inherent O&M risk associated with project While the inflation-indexed O&M annuity partly mitigates O&M risk, the disparate movement in inflation index (70% WPI; 30% CPI) and the O&M cost heads poses a risk. Besides, the company could face the risk of a sharp increase in the O&M cost in the event wear and tear on the road is more than the levels envisaged during bidding. However, IGRHL proposes to enter into fixed-price and fixed-time O&M contract (including routine and major maintenance) with the sponsor mitigating O&M risk to an extent.

Inherent interest rate risk IGRHL is exposed to inherent interest rate risk considering the floating rate of interest. Reimbursement of the interest cost in the form of interest annuity payable by NHAI biannually at bank rate plus three per cent mitigates the risk only to an extent, since there could be disparity between movements in bank rates and in lenders’ benchmark rates.

Liquidity: Adequate The financial closure for the project in underway and appointed date (AD) is awaited.

Analytical Approach: Proposed credit enhancement in the form of unconditional and irrevocable corporate guarantee to be provided by IRCON International Limited, which would be valid till the receipt of first annuity. Unsupported Rating: Standalone while factoring sponsor’s undertaking and strong linkages with IRCON International Limited.

Applicable Criteria Criteria on assigning Outlook to Credit Ratings CARE's Policy on Default Recognition Financial Ratios – Non-Financial Sector Rating Methodology - HAM Road Projects Rating Methodology - Factoring Linkages in Ratings Liquidity Analysis of Non-Financial Sector entities Criteria for Rating Credit Enhanced Debt CARE's Policy of Assigning Provisional Rating

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About the Company IRCON Gurgaon Rewari Highway Limited (IGRHL), incorporated in December 2020, is a special purpose vehicle (SPV) promoted by IRCON International Limited. IGRHL has entered into 17 years concession agreement (CA; including construction period of 24 months from appointed date) with National Highways Authority of India (NHAI, rated ‘CARE AAA; Stable) for upgradation of Gurgaon--Rewari Section of NH-352W from km 0.00 to km 43.87(Design Length 46.11 km) as a feeder route on Hybrid Annuity Mode under Bharatmala Pariyojana in the State of . The bid project cost of the project is Rs.900 crore. The project is scheduled to be completed within 730 days from the receipt of appointed date.

About the Guarantor IRCON International Ltd (IRCON) was incorporated in April 1976 as Indian Railway Construction Company Limited mainly for the purpose of construction of railway projects in India and abroad. IRCON is a Mini Ratna Category – I Public Sector Undertaking since 1998. It is a Central Government company under Section 617 of the Companies Act, 1956, with 89.18% shareholding held by the Government of India. The company has diversified into roads, buildings, electrical substation and distribution, airport construction, commercial complexes and metro segments but majorly earns revenue from the railway segment. The company raised funds through an Initial Public Offer in September 2018 through offer for sale and was listed on BSE and NSE on September 28, 2018.

Covenants of rated instrument / facility: Not applicable as term loan facility is proposed

Brief Financials-IRCON Gurgaon Rewari Highway Limited: Not Applicable as the project is under implementation phase

IRCON International Limited (Guarantor) Brief Financials (Rs. crore) FY19 (A) FY20 (A) Total operating income 4636.83 5398.68 PBILDT 568.39 670.76 PAT 444.68 489.78 Overall gearing (times) 1.51 1.18 Interest coverage (times) 40.43 31.52

Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable Rating History for last three years: Please refer Annexure-2

Annexure-1: Details of Instruments/Facilities Size of the Rating assigned Name of the Date of Coupon Maturity Issue along with Rating Instrument Issuance Rate Date (Rs. crore) Outlook Fund-based - LT-Term Provisional CARE - - - 310.00 Loan AA- (CE); Stable Un Supported Rating- Un Supported Rating - - - 0.00 CARE A- (Long Term)

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Annexure-2: Rating History of last three years Current Ratings Rating history Name of the Type Rating Date(s) & Date(s) & Date(s) & Date(s) & Sr. Amount Instrument/Bank Rating(s) Rating(s) Rating(s) Rating(s) No. Outstanding Facilities assigned in assigned in assigned in assigned in (Rs. crore) 2020-2021 2019-2020 2018-2019 2017-2018 Provisional Fund-based - LT-Term CARE AA- 1. LT 310.00 - - - - Loan (CE); Stable Un Supported Rating- 2. Un Supported Rating LT 0.00 CARE A- - - - - (Long Term)

Annexure-3: Complexity level of various instruments rated for this company Sr. Name of the Instrument Complexity Level No. 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. Contact us

Media Contact Name: Mr. Mradul Mishra Contact no. – +91-22-6837 4424 Email ID – [email protected]

Analyst Contact Name – Mr. Harish Chellani Contact no. - +91-11-4533 3222 Email ID- [email protected]

Relationship Contact Name: Ms. Swati Agrawal Contact no.: +91-11-4533 3200 Email ID: [email protected]

About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices.

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Disclaimer CARE’s ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE’s ratings do not convey suitability or price for the investor. CARE’s ratings do not constitute an audit on the rated entity. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to the users of CARE’s rating.

Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility and sharp downgrades. **For detailed Rationale Report and subscription information, please contact us at www.careratings.com

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