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IRCON Gurgaon Rewari Highway Limited August 06, 2021 Ratings Facilities/Instruments Amount Ratings1 Rating Action (Rs. crore) CARE AA- (CE); Stable* 309.68 Final Rating Long Term Bank Facilities [Double A Minus (Credit (Reduced from 310.00) Confirmed** Enhancement); Outlook: Stable] 309.68 Total Bank Facilities (Rs. Three Hundred Nine Crore Sixty-Eight Lakh Only) Details of instruments/facilities in Annexure-1 *Backed by unconditional and irrevocable corporate guarantee of Ircon International Limited (IRCON, rated CARE AAA; Stable/ CARE A1+) valid till 180 days from Commercial operations date or the receipt of first annuity whichever is later. **Final rating has been confirmed on account of receipt of the executed copy of unconditional and irrevocable corporate guarantee of Ircon International Limited (IRCON) and other financing documents 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 unconditional and irrevocable corporate guarantee of Ircon International Limited - a Government of India Enterprise and a Mini Ratna Category – I public sector undertaking (IRCON, rated CARE AAA; Stable/ CARE A1+) valid till 180 days from Commercial operations date or the receipt of first annuity whichever is later, thereby covering the entire construction period. 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 fixed-price engineering, procurement and construction (EPC) contract with IRCON, which has an established track record of constructing roads and highways. Furthermore, the rating factors favourably, the credit quality of the underlying annuity receivables from National Highways Authority of India (NHAI; rated ‘CARE AAA; Stable’) subsequent to commencement of operations and the proposed liquidity support mechanism such as creation of a debt service reserve account (DSRA) and a major maintenance reserve (MMR). The rating also takes into account the undertaking extended by the sponsor, IRCON, to fund any shortfall during the construction period and to cover any deficiencies in O&M and major maintenance for the entire debt tenure. CARE understands that the sponsor IRCON, will ensure adequate surplus funds from the annuity receipts are maintained at the SPV level as a liquidity mechanism besides extending need-based support to IGRHL towards timely debt servicing. Further, lower debt to bid project cost with a tail period of four years is viewed favourably. 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 during the tenure of the project debt.

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 IGRHL. Negative sensitivities  Deterioration in the credit profile of sponsor (IRCON) or counterparty (i.e. NHAI).  Absence of need-based support from IRCON.

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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Detailed description of the key rating drivers Key rating strengths 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 corporate guarantee (CG), IRCON unconditionally and irrevocably guarantees that till 180 days from Commercial operations date or the receipt of first annuity whichever is later, 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 has entered 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.

Comfortable debt coverage indicators on account of low project leverage The project is being financed at a debt-equity ratio of 3:1. The total debt envisaged stands at Rs.309.68 crore against the bid project cost (BPC) of Rs.900 crore, which is relatively lower at 34.41% of the BPC, leading to comfortable debt coverage indicators. The project also has a tail period of four years providing financial flexibility.

Maintenance of surplus for meeting exigencies in the operational period and proposed DSRA As per sanction terms, a debt service reserve account (DSRA) equivalent to one quarter of interest obligation and one half- yearly principal has been proposed to be created up on the receipt of the first annuity, of which the sponsor has provided an undertaking for an upfront creation of three months of interest servicing requirement, on Commercial operation date (COD). Additionally, CARE believes that the sponsor IRCON, will ensure adequate surplus funds from the annuity receipts are maintained at the SPV level as a liquidity mechanism besides extending need-based support to IGRHL towards timely debt servicing. Key Rating Weaknesses Inherent project execution risk IGRHL is exposed to the inherent construction risk attached with road projects given the construction on the project has not commenced yet as the appointed date (AD) has not been declared by NHAI. Nevertheless, demonstrated track record of IRCON as an EPC contractor in executing large sized projects mitigates the execution risk to an extent.

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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. Additionally, presence of sponsors’ undertaking to fund O&M cost in excess of base case estimates, is viewed as a credit positive. Therefore, performing O&M activities within the envisaged cost and timelines as per the base case and timely signing of O&M contract would be crucial.

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 has been achieved and appointed date (AD) is awaited from the authority. The total debt envisaged of Rs.309.68 crore has been sanctioned and the sponsor shall infuse the upfront equity requirement on declaration of appointed date. Further, the various undertakings/corporate guarantees to fund any cost overrun for project completion, operation and maintenance have been executed by the sponsor. The detailed rationale of the sponsor/corporate guarantee provider, IRCON is available on www.careratings.com

Analytical Approach: Credit enhancement in the form of unconditional and irrevocable corporate guarantee to be provided by IRCON International Limited, which would be valid till 180 days of COD or the receipt of first annuity whichever is later. Post validity period of the corporate guarantee, CARE has analysed the project on standalone basis while factoring sponsor’s undertaking and strong linkages with IRCON. 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

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-Pataudi-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 Haryana. 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 73.18% 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: Detailed explanation of covenants of the rated instruments/facilities is given in Annexure-3

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

IRCON International Limited, Guarantor-Standalone Brief Financials (Rs. crore) FY20 (A) FY21 (Abridged) Total operating income 5,398.68 5200.31 PBILDT 650.76 613.59 PAT 489.78 404.56 Overall gearing (times) 1.18 NA Interest coverage (times) 31.51 41.65 A: Audited; NA: Not available 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 CARE AA- (CE); - - July-2034 309.68 Loan Stable Un Supported Rating- Un Supported Rating - - - 0.00 CARE A- (Long Term)

Annexure-2: Rating History of last three years Current Ratings Rating history Date(s) & Date(s) & Date(s) & Name of the Type Rating Date(s) & Sr. Amount Rating(s) Rating(s) Rating(s) Instrument/Bank Rating(s) No. Outstanding assigned assigned assigned Facilities assigned in (Rs. crore) in 2019- in 2018- in 2017- 2020-2021 2020 2019 2018 1)Provisional CARE AA- Fund-based - LT- CARE AA- 1. LT 309.68 (CE); - - - Term Loan (CE); Stable Stable (05-Apr-21) Un Supported Rating- 1)CARE A- 2. Un Supported Rating LT 0.00 CARE A- - - - (05-Apr-21) (Long Term)

Annexure-3: Detailed explanation of covenants of the rated instrument / facilities Term loan Detailed explanation A. Financial covenants I. Debt service reserve account (DSRA) The company shall create and maintain DSRA equivalents to 3 months of interest obligation and one half-yearly principal instalment. II. Debt equity ratio (DER) DER shall not exceed 3:1

B. Non-financial covenants I. Annual financial The company shall submit annual audited financial statements within 120 days from the close of the accounting year

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Annexure-4: 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. Rajashree Murukute Contact no. - +91-22-6837 4474 Email ID- [email protected]

Name – Mr. Harish Chellani Contact no.- +91-11-45333222 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. 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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