October 16, 2020

Shapoorji Pallonji Capital Company Private Limited: Ratings downgraded

Summary of rating action Previous Rated Current Rated Instrument Amount Amount Rating Action (Rs. crore) (Rs. crore) [ICRA]BBB+(CE)@; downgraded from [ICRA]A+(CE), ‘negative’ outlook removed, Non-fund based limits 462 50 and rating placed under watch with negative implications [ICRA]BBB(Negative); downgraded from Non-fund based limits^ 500 500 [ICRA]A(CE)(Negative) [ICRA]BBB(Negative); downgraded from Fund based-Term Loan 915 722 [ICRA]BBB+(Negative) Long-term rating: [ICRA]BBB(Negative); Fund based limits downgraded from [ICRA]BBB+(Negative); (sub-limit of non-fund (100) (50) based limits) Short-term rating: [ICRA]A3+; downgraded from [ICRA]A2 Long-term rating: [ICRA]BBB(Negative); downgraded from [ICRA]BBB+(Negative); Non-fund based limits 2,125 250 Short-term rating: [ICRA]A3+; downgraded from [ICRA]A2 Fund based – Short term [ICRA]A3+; downgraded from [ICRA]A2 135 25 Loan Total 4,137 1,547 *Instrument details are provided in Annexure-1 @: Rating under watch with negative implications; ^Instrument was earlier rated based on margin guarantee provided by its parent company and is now rated on standalone basis.

Rationale For the [ICRA]BBB+(CE)@ rating The above rating is based on the strength of unconditional and irrevocable corporate guarantee provided by Shapoorji Pallonji and Company Private Limited (SPCPL), the parent of Shapoorji Pallonji Infrastructure Capital Company Private Limited (SPICCPL) (Borrower), for the Rs. 50 crore non-fund based facility. The revision in rating of structured debt programme follows the revision in the long-term rating of SPCPL (Guarantor) to [ICRA]BBB+ from [ICRA]A+ and have been placed under watch with negative implications and negative outlook has been removed.

Adequacy of credit enhancement For arriving at the rating, ICRA has assessed the attributes of Corporate Guarantee provided by SPCPL in favour of the rated instrument. The guarantee is legally enforceable, irrevocable, unconditional, covers the entire amount and tenor of the rated instrument. Given these attributes, the guarantee provided by SPCPL is adequately strong to result in an enhancement in the rating of the said instrument to [ICRA]BBB+(CE) against the rating of [ICRA]BBB without explicit credit enhancement. In case the rating of the guarantor was to undergo a change in future, the same would reflect in the rating of the aforesaid instrument as well.

Salient covenants related to the credit enhancement, as specified in the transaction documents

» Total indebtedness (fund based and non-fund based) of the borrower shall not exceed Rs.3,000 crore

» SPCPL shall maintain management control and not dilute shareholding in SPICCPL below 51%

For the [ICRA]BBB(Negative)/[ICRA]A3+ rating The ratings downgrade primarily reflects the deterioration in credit profile of Shapoorji Pallonji Infrastructure Capital Company Private Limited’s (SPICCPL) parent company, Shapoorji Pallonji and Company Private Limited (SPCPL)1. The ratings downgrade also factors in the equity mobilisation risk given the inability of the company to tie-up equity requirements through structured equity transaction, constrained financial flexibility and stretched liquidity position of the promoters. While the company has been able to successfully divest 258 MW of domestic operational solar projects and 50MW solar project in Egypt in the current fiscal which would support the equity requirements and debt obligations of SPICCPL, to an extent; the ability of SPICCPL to realise the proceeds in a timely manner remains critical. Given the current weak economic environment, ICRA expects delays in other asset monetisation plan of the company. The equity commitments stand at Rs. 1,675 crore as on September 30, 2020, to be infused over the next three years (including Rs. 531 crore in H2FY2021), the debt repayment obligations stand at Rs. 83 crore in H2FY2021 and Rs. 365 crore in FY2022 (out of which Rs. 340 crores is due in March, 2022). The equity commitments and debt obligations for H2FY2021 can be largely met through mix of proceeds from the divestment of domestic solar and Egypt solar project. The ratings remain constrained by the execution risks for SPICCPL’s projects which are in nascent stages and the ability of the company to commission the projects in a timely manner within the budgeted costs, especially the port, LNG terminal and road project, would remain important. ICRA will continue to monitor the progress on SPICCPL's divestment plans and progress of the under-construction projects.

The Rs. 500 crore non-fund based facility is backed by an unconditional and irrevocable margin guarantee by SPCPL. ICRA has assessed the attributes of the guarantee issued by SPCPL for the said facility, however, in ICRA’s opinion, the rating of this facility does not benefit from the said credit enhancement and therefore the instrument is now rated on standalone basis. The rating could be downgraded if lenders invoke event of default due to breach of covenants.

The long-term ratings continue to have negative outlook. ICRA believes the financial risk profile of SPICCPL will remain under pressure due to elevated debt levels, high equity commitments and slow pace of asset monetisation.

The ratings, however, derive comfort from Shapoorji Pallonji (SP) group’s strong execution capabilities, the extensive experience of the promoters, and the expertise of its managerial and technical personnel heading the key business verticals. The rating also factors in the diversified portfolio mix comprising of transportation, port, power and resource segment.

Key rating drivers and their description

Credit strengths Part of : SPICCPL is the wholly owned subsidiary of SPCPL and acts as the infrastructure holding company of SP Group’s infrastructure business having presence in transportation, port, power and resource segment. The Rs. 50 crore non-fund based facility is backed by an unconditional and irrevocable corporate guarantee from SPCPL.

Diversified portfolio of projects: SPICCPL has a diversified portfolio mix comprising of roads, power and port projects. Its domestic projects include two road projects (one operational annuity project and one under-construction HAM project),

1 Ratings of SPCPL have been revised to [ICRA]BBB+ from [ICRA]A+ and placed under watch with negative implications

190 MW of solar power portfolio, excluding 258MW which is being divested, (of which 150MW is operational ,including 50MW solar project in Egypt) and 40MW is under-implementation). It is also undertaking a 225MW combined cycle power project in Bangladesh. It is also constructing a port, LNG and LPG terminal.

Credit challenges High equity commitments: SPICCPL has high equity commitments over the next three years. The total equity requirements for the projects under execution stands at ~Rs. 1,675 crore as on September 30, 2020 of which Rs.531 crore is to be infused in H2FY2021. The equity commitments for H2FY2021 can be largely met through mix of proceeds from the recently concluded divestment of domestic solar and Egypt solar project. Ability of the company to realise the divestment proceeds in a timely manner would remain important from credit perspective.

High quantum of external debt and contingent liabilities: SPICCPL’s external debt remains high at Rs. 782 crore as on September 30, 2020, of which Rs.719 crore is term loan having high dependence on asset monetisation for repayment. The company has extended credit support to various subsidiaries and associate companies by way of financial and corporate guarantees for the debt availed by them, in addition to performance guarantees extended for various group projects. As on August 31, 2020, SPICCPL’s contingent liabilities stood at Rs.2,823 crore, of which Rs. 1,937 crore were towards financial guarantees and remaining Rs. 886 crore towards performance guarantees. With repayment of Rs. 129 crore of guaranteed debt and expected repayment of another Rs. 233 crore of guaranteed debt within Q3FY21, the financial guarantees would reduce to that extent.

Exposed to time and cost over-run risks: Given the under-implementation nature of the projects, with some of them in nascent stages, SPICCPL remains exposed to cost over-run risk. Timely infusion of equity would also remain important for scheduled commissioning of the projects.

Liquidity Position For the [ICRA]BBB+(CE)@: Stretched For these limits, SPICCPL derives its strength from SPCPL’s liquidity position which is stretched. SPCPL had free cash balance of ~Rs.800 crore as on May 31, 2020. SPCPL’s estimated cash flow from operations alongwith the existing cash balance would not be adequate to meet the high repayment obligations falling due over the short to medium term. ICRA has taken note that SPCPL has applied for onetime restructuring of its debt exposure. Timely invocation and implementation of the resolution plan in a manner that alleviates the company’s tight liquidity position would be crucial.

For the [ICRA]BBB(Negative)/[ICRA]A3+ rating: Stretched SPICCPL’s liquidity position is stretched. The free cash and bank balance/investments stood at ~Rs. 15 crore as on September 30, 2020 along with unutilised overdraft limit of Rs. 5 crore. The principal repayment obligations for H2FY2021 stand at Rs. 83 crore; there remains high dependence on timely realisation of divestment proceeds to meet the debt servicing obligations.

Rating sensitivities For the BBB+(CE)@ rating The rating assigned to the Rs. 50 crore non-fund based facility would remain sensitive to any movement in the rating or outlook of the guarantor, SPCPL.

For the [ICRA]BBB(Negative)/[ICRA]A3+ rating Positive trigger: Given the rating is on negative outlook the crystallisation of scenarios for rating upgrade is unlikely over the medium term. Outlook may be revised to Stable upon timely completion and realization of asset monetization proceeds. In addition, commissioning of the under-construction projects as per the scheduled timelines and within the budgeted costs could support revision in outlook.

Negative trigger: Downward pressure on the rating could emerge if there is further deterioration in the credit profile of the parent company; delay in realization of divestment proceeds and/or further increase in leverage to meet its equity commitments or delayed commissioning/cost overrun of its under-construction projects or there is significant under performance of operational projects. The rating could also be downgraded if lenders invoke event of default due to breach of covenants thereby resulting in 100% cash collateralisation for the non-fund based facility.

Analytical approach:

Analytical Approach Comments Corporate Credit Rating Methodology Rating Methodology for Holding Companies Applicable Rating Methodologies Impact of Parent or Group Support on an Issuer’s Credit Rating Approach for rating debt instruments backed by third-party explicit support Parent/Group Company: SPCPL The rating assigned to SPICCPL factors in the likelihood of its parent, SPCPL, extending financial support to it because of close business linkages between them. We also expect SPCPL to be willing to extend financial support to SPICCPL out of its need to protect its reputation from the consequences of a Parent/Group Support group entity’s distress. There also exists a consistent track record of SPCPL having extended timely financial support to SPICCPL in the past, whenever a need has arisen. For arriving at the rating for Rs. 50 crore non fund based facility, ICRA has taken into account the unconditional and irrevocable corporate guarantee from SPCPL. For arriving at the ratings, ICRA has used limited consolidation approach, under which only the proposed equity investments/funding commitments to Consolidation / Standalone various subsidiaries have been considered. The list of companies that are consolidated to arrive at the rating are given in Annexure 2 below.

About the company Shapoorji Pallonji Infrastructure Capital Company Private Limited (SPICCPL), is a wholly-owned subsidiary of Shapoorji Pallonji and Company Private Limited. SPICCPL acts as the holding company for the group’s infrastructure asset ownership businesses. The SP Group’s portfolio comprises projects across different verticals, namely transportation, energy, port and resources. Under the transportation vertical, the company has an operational annuity-based road project and an under-construction HAM road project. The domestic solar segment comprises operational projects aggregating to a total capacity of 100-MW and 40-MW capacity under implementation. The overseas power projects comprise of 50MW solar power project in Egypt and 225MW combined cycle power project in Bangladesh. Under the port vertical, the company is executing the port, LNG terminal and LPG terminal projects. Under resource vertical, SPICCPL has acquired a mine in which holds exclusive operating license to extract and sell limestone of high-grade quality which can be used by steel and cement industries and the limestone aggregates/rock can be used for building materials, breakwater, etc.

Key financial indicators of SPICCPL (Standalone) FY2019Audited FY2020Provisional

Operating Income (Rs. crore) 444.0 663.8 PAT (Rs. crore) 21.0 (15.2) OPBDIT/OI (%) 45.3% 27.2% PAT/OI (%) 4.7% (2.3%)

Total Outside Liabilities/Tangible Net-worth (times) 2.02 2.75 Total Debt/OPBDIT (times) 5.65 8.99 Interest coverage (times) 1.24 1.00 Source: Company, ICRA research About the Guarantor: Shapoorji Pallonji and Company Private Limited (SPCPL), is the flagship company of the Shapoorji Pallonji Group (SP Group), which is a diversified industrial comprising of a group of companies held by the Mistry Family. The SP Group has a diversified presence across sectors such as construction (SPCPL, Afcons Infrastructure Limited), mechanical electrical and plumbing (Sterling & Wilson Private Limited), contracting (Sterling & Wilson Private Limited), water purification (Eureka Forbes Limited), infrastructure development (Shapoorji Pallonji Infrastructure Capital Company Private Limited), solar power generation and contracting (Sterling & Wilson Private Limited and Shapoorji Pallonji Infrastructure Capital Company Private Limited ), floating production storage and offloading (FPSO) vessels (SP Oil & Gas Private Limited) etc.

SPCPL, which is held by Mistry family through various group companies, functions as the holding-cum-operating company of the SP Group. The company holds stakes in various listed and unlisted companies, within and outside the SP Group, and also has significant investments in properties that have high market value. SPCPL is one of ’s leading construction companies, with a heritage of more than 150 years. Over the years, SPCPL has built diverse civil and structures such as factories, stadiums and auditoriums, airports, hospitals, housing complexes, and power plants.

For detailed rating rationale on Shapoorji Pallonji and Company Private Limited, click here referring to the latest release published on ICRA website.

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for last three years:

Rating (FY2021) Rating History for the past 3 years

Current Amount FY2020 FY2019 FY2018 Rated Amount rating Instrument Type O/s 16-Oct-2020 16-Dec-2019 10-June-2019 3-Dec-2018 3-Oct-2018 4-Jun-18 6-Apr-18 10-July-2017 1 NCD Long Term 200 - - - - Withdrawn [ICRA]A [ICRA]A [ICRA]A [ICRA]A (Stable) (Stable) (Stable) (Stable) 2 CP Short Term 50 - - [ICRA]A2 and [ICRA]A2+ [ICRA]A1& [ICRA]A1 [ICRA]A1 [ICRA]A1 [ICRA]A1 withdraw 3 Term loan Long Term 722 719 [ICRA]BBB [ICRA]BBB+ [ICRA]A-& [ICRA]A& [ICRA]A [ICRA]A [ICRA]A [ICRA]A (Stable) (Negative) (Negative) (Stable) (Stable) (Stable) 4 Fund based Long Term 50 - [ICRA]BBB [ICRA]BBB+ [ICRA]A-&/ [ICRA]A&/ [ICRA]A [ICRA]A [ICRA]A - limits (sub-limit & Short (Negative)/ (Negative)/ [ICRA] A2+ [ICRA] A1& (Stable)/ (Stable)/ (Stable)/ of non-fund Term [ICRA]A3+ [ICRA]A2 [ICRA] A1 [ICRA] A1 [ICRA] A1 based limits) 5 Non-Fund Long Term 250 - [ICRA]BBB [ICRA]BBB+ [ICRA]A-&/ [ICRA]A&/ [ICRA]A [ICRA]A [ICRA]A [ICRA]A based limits & Short (Negative)/ (Negative)/ [ICRA] A2+ [ICRA] A1& (Stable)/ (Stable)/ (Stable)/ (Stable)/ [ICRA] Term [ICRA]A3+ [ICRA]A2 [ICRA] A1 [ICRA] A1 [ICRA] A1 A1 6 Non-Fund Long Term 500 - [ICRA]BBB [ICRA]A(CE) [ICRA]A+ [ICRA]AA- [ICRA]AA [ICRA]AA - - based limits (Negative) (Negative) (SO)& (SO)& (SO)(Stable) (SO)(Stable) 7 Non-Fund Long Term 50 - [ICRA]BBB+ [ICRA]A+(CE) [ICRA]AA- [ICRA]AA [ICRA]AA+ - - - based limits @ (Negative) (SO)& (SO)& (SO)(Stable) 8 Fund-based – Short term 25 15 [ICRA]A3+ [ICRA]A2 ------Short term loan loan @: Rating under watch with negative implications; &: Rating under watch with developing implications

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 www.icra.in

Annexure-1: Instrument Details Amount Date of Rated Issuance / Coupon Maturity (Rs. ISIN No Instrument Name Sanction Rate Date Crore) Current Rating and Outlook NA Term Loan FY2017 - FY2023 722 [ICRA]BBB(Negative) Fund Based Limits NA (sub-limit of non- - - - 50 [ICRA]BBB(Negative)/[ICRA]A3+ fund based limits) Non-fund based NA - - - 250 [ICRA]BBB(Negative)/[ICRA]A3+ limits Non-fund based NA - - - 500 [ICRA]BBB(Negative) limits Non-fund based NA - - - 50 [ICRA]BBB+(CE)@ limits NA Short term loan - - - 25 [ICRA]A3+ Source: SPICCPL @: rating under watch with developing implications

Annexure-2: List of companies where limited consolidation has been used to arrive at the ratings

Ownership Consolidation Company Name Approach Global Energy Projects Holdings 100% Limited Consolidation Global Energy Ventures Mauritius 100% Limited Consolidation Global Infra FZCO - Limited Consolidation HPCL Shapoorji Energy Private Limited 50% Limited Consolidation Musandam Rock LLC 100% Limited Consolidation Nutan Bidyut Bangladesh Limited 100% Limited Consolidation Radiance Solar Private Limited 100% Limited Consolidation Shapoorji Pallonji Pandoh Takoli Highway Private Limited - Limited Consolidation Simar Port Private Limited 100% Limited Consolidation SP Cement Private Limited 100% Limited Consolidation SP Road Private Limited 100% Limited Consolidation SP Solar Holding Private Limited 100% Limited Consolidation Suryoday One Energy Private Limited 100% Limited Consolidation Universal Mine Developers & Service Providers Private Limited - Limited Consolidation Atnu Solar Private Limited 51% Limited Consolidation Auriko Energy Private Limited 51% Limited Consolidation

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