Press Release DBL Jaora-Sailana Tollways Limited

Press Release

DBL Jaora-Sailana Tollways Limited March 06, 2020 Ratings Facilities Amount (Rs. crore) Ratings1 Rating Action CARE A-; Negative Reaffirmed and Outlook Long term Bank 78.93 (Single A Minus ; revised from Stable to Facilities (Reduced from Rs. 97.09 Crore) Outlook: Negative) Negative 78.93 Total Facilities (Rupees Seventy Eight Crore and Ninety Three Lakh only) Details of facilities in Annexure - I

Detailed Rationale & Key Rating Drivers The rating of the bank facilities of DBL Jaora-Sailana Tollways Limited (DJSTL) continue to derive strength from its assured cash flow stream in the form of annuity receivable from Madhya Pradesh Road Development Corporation [MPRDC (a GoMP undertaking); rated CARE A (Is); Stable] along with the operational status of its road project with established track record of receipt of annuities. Further, the annuity receipts of DJSTL adequately cover its debt servicing requirements. The rating of DJSTL also continue to take into account divestment of the controlling stake in DJSTL by DBL to Shrem Roadways Private Limited (SRPL; part of Chhatwal Group Trust) and responsibility of DBL for undertaking the requisite operation and maintenance (O&M) and major maintenance (MM) activity of the stretch without any consideration for the same from DJSTL. The above rating strengths are, however, tempered by non-renewal of debt service reserve account (DSRA) which was earlier created in the form of bank guarantee (BG) by Dilip Buildcon Limited (DBL; rated CARE A; Stable/CARE A1). However, DSRA is expected to be reinstated by end of March 2020 as articulated by SRPL. Further the rating strengths continue to remain tempered by performance risk attached with the O&M contractor (i.e. DBL) and inherent interest rate risk.

Outlook: Negative The negative outlook reflects CARE’s expectation of deterioration in the liquidity cushion on account of non-renewal of DSRA bank guarantee. DBL, on behalf of DJSTL, had created and maintained DSRA of Rs.11.45 crore, valid till February 17, 2020, in non-fund based form, in line with the terms of stake sale agreement to maintain DSRA till the currency of the term loan. However renewal of the same is still awaited. As articulated by DBL, SRPL and lender of DJSTL, non-renewal of DSRA bank guarantee was not due to reluctance from lenders and it is mainly attributed to ongoing negotiation for DSRA terms between DBL and SRPL. Further, SRPL’s management has articulated to reinstate DSRA by end of March 2020 in order to adhere with the sanction terms. The outlook shall be revised to stable if DJSTL is able to reinstate DSRA in either non-fund based form or fund based form by end of March 2020.

Rating Sensitivities Positive Factors:  Improvement in the credit profile of MPRDC

Negative Factors:  Deterioration in the credit profile of MPRDC  Non-adherence to the stipulated O&M and MM requirements by O&M contractor leading to delay/deduction in DJSTL’s annuity receipt thereby impacting debt coverage indicators  Non-reinstatement of DSRA bank guarantee by March 2020  Replacement of O&M contractor at higher cost deteriorating the debt coverage indicators  Interest rate movements adversely affecting its debt coverage indicators  Non-receipt or delay in receipt of need-based support from SRPL in case of any shortfall Detailed description of the key rating drivers Key Rating Strengths Operational road project coupled with established track record of receipt of annuity from MPRDC: DJSTL’s annuity project achieved commercial operations date (COD) on May 2014 and the project has a successful operational track record of more than four years for receipt of annuities. DJSTL has received eleven semi-annual annuities (including one bonus annuity) from MPRDC in a timely manner.

1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited

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Low counterparty credit risk: Incorporated on July 14, 2004, MPRDC is wholly owned by GoMP. It is the ‘State Highway Authority’ and facilitator for construction, maintenance and up gradation of state highways and major district roads for GoMP. It receives funds quarterly in advance for meeting viability gap funding (VGF) funding, annuity pay outs and for regular contracts.

Adequate debt coverage indicators: Annuity received from MPRDC adequately covers the debt obligation of DJSTL. Further, as per the terms of sanction of term loan, repayment of term loan shall be due after 30 days from due date of receipt of annuity, thus providing comfort in case of any delay in the actual receipt of annuity. However, timely and need based support from SRPL in case of any exigencies, shall remain crucial from the credit perspective.

Established track record of O&M contractor i.e., DBL in execution and maintenance of road projects: DBL had entered in to a stake sale agreement on March 26, 2018 in lieu of which 100% stake in DJSTL were transferred to SRPL. Post stake sale, DJSTL had entered into an O&M contract with SRPL which in turn has sub-contracted the O&M work to DBL. As per the terms of stake sale and sub-contract agreement, DBL shall be entitled to the toll collection proceeds of its 11 out of 14 State Highway (SH) road SPVs (in Madhya Pradesh and Gujarat) sold to SRPL while simultaneously being fully responsible for undertaking the requisite O&M and MM of all these road SPVs (including DJSTL); and any surplus or deficit arising thereof shall be attributed to DBL. Thereby, the SPV shall continue to benefit from the vast experience and established track record of DBL in O&M of roads. Furthermore, as per the terms of the stake sale agreement, DSRA (in fund based or non-fund based form) shall continue to be provided by DBL until the currency of the term loan.

Liquidity Analysis: Adequate Established track record of steady stream of annuity receipt from MPRDC albeit, non-renewal of DSRA is an area of concern: DJSTL has an established track record of receiving eleven annuities from MPRDC, generally within 15-20 days from the due date while having gap of 30 days between annuity due date and debt repayment due date, thereby providing adequate liquidity cushion to DJSTL’s upcoming debt repayment. As per the terms of sanctioned debt, DJSTL has to maintain DSRA equivalent to six months of debt servicing in fund based or non-fund based form. DBL, on behalf of DJSTL, had created and maintained DSRA of Rs.11.45 crore in non-fund based form in line with the terms of the stake sale agreement to maintain DSRA till the currency of the term loan. However renewal of the same is still awaited due to ongoing negotiation for DSRA terms between DBL and SRPL. As articulated by the management of SRPL, DSRA shall be reinstated either in fund-based or non-fund based form by end of March 2020 which shall be a key rating monitorable.

Key Rating Weaknesses Inherent interest rate risk: The SPV remains susceptible to inherent interest rate risk over the long tenor of the loan considering variable rate of interest and presence of annual reset clause whereas its revenue stream in the form of annuities are fixed in nature. Consequently, any adverse movement in the interest rate may impact the debt coverage indicators of the company. Timely need-based support by SRPL in such an eventuality would be a key rating monitorable.

Performance risk related to O&M contractor along with inherent O&M risk: Although O&M requirement is relatively lower as the project stretch is part of low traffic state highway, DJSTL is still exposed to inherent O&M and MM risk attached to BOT projects as non-maintenance of the road as per the specified standards by DBL may result in delay or deduction in the receipt of annuities. However, the responsibility of undertaking the requisite O&M and MM in DJSTL vests with DBL which has a considerable experience in such activity. Nevertheless, non-adherence to stipulated O&M and MM requirements by O&M contractor shall be a key rating sensitivity.

Analytical Approach: Standalone while factoring the track record and capability of the O&M contractor

Applicable Criteria: Criteria on assigning ‘outlook’ and ‘credit watch’ to Credit Ratings CARE’s Policy on Default Recognition Rating Methodology - Infrastructure Sector Ratings (ISR) Rating Methodology: Factoring Linkages in Ratings Financial Ratios – Non Financial Sector

About the company DJSTL, a special purpose vehicle (SPV) originally incorporated by DBL had entered into a 15 year concession agreement (CA) with MPRDC for the design, build, finance, operate and transfer (DBFOT) of 87.77 km road project in Madhya

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Pradesh on annuity basis. The project was for two laning of Jaora – Piploda – Jalandharkheda & Piploda – Sailana Road, Raipuriya – Patlabad – Bamniya Road, Jawad – Khoh Road and Soyat Pidawa Road. DJSTL achieved commercial operations date ahead of schedule. In August 2017, DBL had signed a term sheet with Chhatwal Group Trust to divest its entire stake in DJSTL and its 23 other SPVs (including the 14 SH SPVs). As on January 31, 2020, SRPL holds 100% stake of DJSTL.

Brief Financials (Rs. crore) FY18 (A) FY19 (A) Total operating income 20.11 19.47 PBILDT 19.87 10.80 PAT 4.70 8.63 GCA 9.56 2.42 Overall gearing (times) 3.40 2.40 Interest coverage (times) 1.93 1.29 A: Audited Note: DJSTL’s financials for FY18 and FY19 are as per IndAS applicable to it, wherein it has recognized financial assets as the present value of annuities receivable under its concession (discounted based on effective interest rate method) and interest income on these assets as it accrues during the period.

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History (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 - - December 2026 78.93 CARE A-; Negative Loan

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) 2019-2020 2018-2019 2017-2018 2016-2017 1)CARE A-; 1)CARE A-; Fund-based - LT-Term CARE A-; 1)CARE A- 1. LT 78.93 - Stable Stable Loan Negative (24-Oct-16) (21-Dec-18) (25-Sep-17)

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.

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Analyst Contact Mr. Maulesh Desai Contact no.: 079- 4026 5605 Email ID: [email protected]

Relationship Contact Mr. Deepak Prajapati Contact no. : 079- 4026 5602 Email ID: [email protected]

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