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Baharampore Farakka Highways Limited February 15, 2021 Ratings Amount Facilities Rating1 Rating Action (Rs. crore) Rating removed from ISSUER NOT Long-term Bank Facilities CARE B; Stable COOPERATING category and 696.34 (Term loan) (Single B; Outlook: Stable) Revised from CARE D; (Single D); Stable outlook assigned 696.34 Total Facilities (Rs. Six hundred and ninety six crore and thirty four lakh only) Details of facilities in Annexure-1

Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of Baharampore Farakka Highways Limited (BFHL) has been revised on account of demonstrated delay free track record in debt servicing since September 2020. i.e. five months. Consequent to submission of requisite information to CARE, the ratings have also been removed from Issuer Not Cooperating category. The rating continues to derive strength from the favorable demand prospects for traffic in the project corridor, receipt of provisional commercial operation certificate for part of the stretch leading to commencement of toll collections since May 2014 along-with collection of healthy overloading charges translating into higher toll revenue. However, the aforementioned rating strengths are tempered by significant delays in completion of the project, mainly due to delayed receipt of Right of Way (RoW) and the consequent cost over-run to be incurred due to delay in project completion. The company’s cash flows are exposed to the inherent revenue risk associated with toll-based projects and fluctuations in interest rate risk. The rating also factors in the provisions in the financing documents that permit the SPV to repatriate surplus funds to the sponsors (Hindustan Construction Company, rated CARE D for bank facilities and instruments) after the covenants are met. Favorable and timely release of arbitration award by NHAI are precursor for construction completion within the envisaged timelines and are hence critical from credit perspective.

Rating sensitivities Positive Factors - Factors that could lead to positive rating action/upgrade:  Appointment of fixed price O&M and MM contractor with moderate to strong credit profile for longer tenor  Creation of adequate DSRA and MMRA reserves  Higher than estimated Revenue growth on a sustained basis, resulting in improved DSCR

Negative Factors- Factors that could lead to negative rating action/downgrade:  Non receipt of arbitration award, thereby distancing revenue improvement  Deterioration in the credit profile of NHAI  Significant and sustained de-growth in the traffic, leading to weak DSCR  Any systemic risk or regulatory changes impacting revenue profile

Detailed description of the key rating drivers Key Rating Strengths Delay free track record The company has availed moratorium of six months for the period of March – August, 2020, as per RBI circular dated March 27, 2020 and May 23, 2020. During due diligence, the lenders confirmed that all the irregularities were cleared in September, 2020 and there has been timely debt servicing of the long-term bank facilities of BFHL. There has been no instances of delays towards payment of interest or principal amount post moratorium period and as on February 2021, the company has demonstrated a delay free track record since September, 2020 i.e. five months.

Favorable demand prospects for traffic in the project corridor The project is on the existing Kolkata-Dalkhola section of NH-34 which is a busy stretch. NH-34 that runs through Baharampore, Farakka, Malda and Raiganj acts as the primary conduit for the transport of passengers as well as freight traffic amongst the states of Uttar Pradesh, Jharkhand, Bihar and West Bengal. The project highway is an important corridor for the movement of agricultural commodities, automobile, oil and mineral water. Presently, the existing highway is facing congestion and is

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

Press Release saturated in terms of the carrying capacity. The project stretch is strategically located and the traffic composition includes mainly freight traffic followed by others such as passenger cars, LCVs, buses, thus providing substantial revenue visibility.

Overloading charges levied resulting in additional revenue As per the notification issued by Ministry of Road and Transport dated December 16, 2013 relating to amendment of National Highway Fees (Determination of Rates and Collection) Rules, 2008, the company is entitled to collect additional toll up to 10 times the normal toll charges for overloaded vehicles. It has been 6.5 years the project is collecting overloading charges and has been consistent since then. The collection of overloading charges has thus positively contributed to the toll collections of the company. BFHL generated overload revenue of Rs.69.6 crore during FY20 (approx. 93% of normal toll revenue) as compared to Rs.56.4 crore during FY19 (approx. 86% of normal toll revenue). Going forward too, it is expected to generate healthy overload revenue thus boosting the company’s cash flows.

Fixed-price lump-sum engineering, procurement and construction (EPC) contract executed with HCC, albeit increase in cost owing to delay in completion of the project and weak credit profile of the EPC contractor The project awarded involves widening of the existing roads (from 2-lanes to 4-lanes) and construction of complex structures such as four major bridges, twelve minor bridges, one bypass, four ROBs and to carry out the subsequent operations and maintenance of the stretch. However, the contractor – HCC could not complete the four laning of the project, on account of delay in grant of RoW in respect of remaining land by the authority in accordance with the CA and EPC contract. The parties (BFHL and HCC) entered into multiple supplementary agreements to address the cost escalations. As on January 31, 2021, the revised EPC contract is yet to be executed. However, the weakened credit profile of HCC is expected to impact timely completion of the project.

Well-experienced operation and maintenance (O&M) contractors combined with fixed-price nature of the contract, albeit weak credit profile BFHL has entered into a fixed price O&M contract with one of HCC’s group company – HCC Operations and Maintenance Limited (HOML). Accordingly, any expenses over and above the scheduled ones will be effectively borne by HCC. HCC group has demonstrated technical expertise in operating and maintaining various road projects. The O&M contract is a fixed price contract with a variable component of 50% of the increase in Wholesale Price Index (WPI) and Consumer Price Index (CPI). HOML is a wholly owned subsidiary of HCC Limited, rated CARE D. This has resulted in weaker credit profile of HOML.

Key Rating Weaknesses Poor credit and financial risk profile of the sponsor – HCC limited The sponsor company i.e. Hindustan Construction Company Limited (HCC, rated CARE D) already defaulted in servicing its debt obligation due to high debt burden and resultant finance costs being incurred along with stressed working capital cycle on account of delayed receipt of dues and claim settlement from customers. Hence, no credit comfort is derived from the sponsor.

Delays in completion of the project resulting in cost overrun albeit receipt of PCOD As per the initial schedule, the company had projected to complete the entire project by August 1, 2013. However, due to delays in receipt of right of way (RoW), and pending clearances at various levels, the project suffered sustained delay in commissioning. However, in the meanwhile, in May 2014, BFHL has received the provisional commercial operations certificate for 75.45 km (i.e. 75% of the total physical stretch) and has accordingly commenced tolling on May 14, 2014 for the said part of stretch. The applicable toll rates are presently at 60%, which are expected to increase to 72% upon achievement of PCOD-II and 100% upon completion of bypass construction. The project work was stopped since February, 2020 due to outbreak of Covid-19 pandemic, followed by monsoon. As on November 30, 2020, the cumulative physical and financial progress accomplished was approximately 80% of the revised project costs. The construction activities has resumed on the site since December 1, 2020. BFHL has received the pending RoW from the authority. However, few hindrances in the form of pending Utility shifting works continue which are expected to be resolved by July 2021. The company estimates to receive PCOD-2 on account of completion of non-bypass section of the project by February, 2021 with an estimated cost of Rs.25-30 crore. Accordingly, timely completion of the pending project work amidst delay in utility shifting works remains key rating monitorable.

Additional debt availed to fund increase in project cost The original project cost of Rs.1,169 crore has been funded through an equity infusion from promoters amounting to Rs.216 crore, grant received from NHAI of Rs.393 crore and term loan facility availed of Rs.561 crore. However, owing to delays in completion of the project, the project cost has been revised to Rs.2050 crore. The is expected to be funded through the receipt of arbitral award receivable from NHAI (subject to placing the required bank guarantees) amounting to Rs.320 crore while the balance Rs. 70 crore is to be funded through internal accruals generated by the project. Accordingly, timely sanctions of bank guarantee facility from the existing consortium members and receipt of arbitral award from NHAI forms a key rating sensitivity.

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Non-creation of DSRA and MMRA reserves As stipulated in the facility agreement, BFHL has to maintain DSRA and MMRA during the entire loan tenor. The common loan agreement (CLA) requires BFHL to maintain a DSRA equivalent to next one quarter’s interest and debt repayment obligations to be created on achieving COD. The company is also required to maintain MMRA as per the terms and conditions of the CLA, thereby ensuring minimal burden on the cash flows during the year of major maintenance activity. However, the company has not maintained any DSRA and MMRA reserves. The company has requested the lenders to defer the requirement of DSRA and MMRA creation till the project achieves final COD, so the company can utilize the project cash flows for completion of the project on a priority basis. In view of the healthy internal accruals generated by the project, BFHL is expected to build up and maintain the required MMRA reserves in due course.

Revenue risk associated with toll based project The major component of the tollable traffic is freight traffic. The tollable traffic composition for FY20 includes 2-axle/ 3-axle vehicles contributing around 28% to total traffic, multi-axle-vehicles contributing 25%, light commercial vehicles contributing around 10%, and passenger vehicles around 37%. Moreover, there are no existing alternate/competing roads to the project stretch and the CA prevents construction of a competing road and additional tollway for 10 years from the appointed date. The toll rates to be charged are mentioned in the CA and are to be revised annually by a fixed increase of 3% (adjusted proportionately for the number of years since fixed escalation is considered) and a variable component of 40% of the increase in Wholesale Price Index (WPI). Notwithstanding the above, there is an average revenue risk faced by BFHL due to the inherent risks of toll based projects arising from traffic fluctuations and toll rate revision translating into variations in cash inflows.

Liquidity: Stretched CARE had revised the ratings of BFHL to CARE D; Issuer Not Cooperating on May 21, 2020. BFHL has not created any DSRA and MMRA till January 31, 2021. The estimated cost of completing the construction of the project to achieve COD is estimated at Rs. 350 crore. As on January 31, 2021, the company has a cash and bank balance of Rs.10.5 crore and Rs.12 crore in the form of bank fixed deposit as against debt servicing requirement of Rs.19.05 crore and Rs.19.03 crore for Q4FY21 and Q1FY22, respectively.

Analytical approach: Standalone

Applicable Criteria Criteria on assigning ‘outlook’ and ‘credit watch’ to Credit Ratings CARE’s Policy on Default Recognition Project Stage entities Rating Methodology – Toll Road Projects Financial Ratios – Non-Financial Sector

About the Company Incorporated on March 11, 2010, BFHL is a special purpose vehicle (SPV) incorporated by HCC Ltd. (rated CARE D - for its bank facilities and instruments) and HCC Concessions Limited (HCL) - step-down subsidiary of HCC, to undertake the augmentation of the existing stretch of 100.6 km in the state of West Bengal. The said stretch is on the Baharampore - Farakka section of NH-34 from 191.42 km to 294.68 km in the state of West Bengal on Design, Build, Finance, Operate and Transfer (DBFOT) – Toll basis under National Highway Development program (NHDP) Phase III. The concession agreement (CA) was executed between BFHL and National Highways Authority of India (NHAI) on June 28, 2010 and for a concession period of 25 years from the appointed date i.e. on February 3, 2011. As per the initial schedule, the company had envisaged to complete the entire project by August 1, 2013. However, the project completion date has been extended to Q4FY23. Some of the pertinent issues causing a delay in the project completion are some hindrances due to pending Utility shifting works on the RoW received for the complete stretch of land which are expected to be resolved by July 2021. The original cost of the project was estimated at Rs.1169 crore. However, with all the delays the project is expected to receive the final COD by Q4FY23. The revised total project cost is Rs.2049 crore.

Brief Financials (Rs. crore) FY19 (A) FY20 (A) Total operating income 170.9 216.47 PBILDT 76.00 91.63 PAT 2.55 12.60 Overall gearing (times) 5.11 4.66 Interest coverage (times) 1.88 1.99 A: Audited; Financials classified as per CARE’s internal standards

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Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Covenants of rated facility: Detailed explanation of covenants of the rated facilities is given in Annexure-3

Complexity level of various instruments rated for this company: Annexure 4

Annexure-1: Details of Facilities Size of the Rating assigned Name of the Date of Coupon Maturity Issue along with Rating Facilties Issuance Rate Date (Rs. crore) Outlook Fund-based - LT-Term Loan - - - 696.34 CARE B; Stable

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

1)CARE BB; 1)CARE BB; Stable; ISSUER 1)CARE D; Negative; NOT 1)CARE BBB- CARE B; ISSUER NOT Fund-based - LT- ISSUER NOT COOPERATING* ; Positive 1. LT 696.34 Stable COOPERATING* Term Loan COOPERATING* (06-Mar-19) (25-Apr-17) (21-May-20) (24-Jul-19) 2)CARE BBB-;

Stable (04-Apr-18)

Annexure-3: Detailed explanation of covenants of the rated facilities Bank Facilities Detailed explanation A. Financial covenants I. DSCR ( Debt Service Coverage Ratio) Greater than 1.15X B. Non-financial covenants I. Debt Shortfall Undertaking and Sponsor shall retain management control and meet any shortfall for Sponsor Undertaking meeting debt servicing of the facility during the entire tenor and/or any deviation in the major maintenance cost from the base case business plan.

Annexure 4: Complexity level of various instruments rated for this company Sr. No. Name of instrument Complexity level 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. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications.

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Contact us Media Contact Mradul Mishra Contact no. – +91-22-6754 3573 Email ID – [email protected]

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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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