July 24, 2020 Revised L&T Sambalpur-Rourkela Tollway Limited: Rating upgraded Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]A-(Stable); upgraded Fund based - Term Loans 990.98 964.88 from [ICRA]BBB+(Stable) Total 990.98 964.88 *Instrument details are provided in Annexure-1 Rationale The upgrade of the rating assigned to L&T Sambalpur-Rourkela Tollway Limited (L&T SRTL) takes into account the healthy improvement in toll collections since the commencement of tolling in March 2018 along with regular receipt of operational grant from the Odisha Works Department, Government of Odisha (GoO), and reduction in interest rate which coupled with improved toll collections has resulted in an improvement in its debt coverage indicators. The rating continues to draw comfort from the operational stage of the project, and the attractive location of the project stretch between Sambalpur and Rourkela (two prominent cities in Odisha) connecting various mineral-rich areas in the region with no major alternate route risk, and strong financial flexibility arising from the long tail period (balance concession period post debt repayment) which can be used to refinance the existing debt with longer tenure as well as by virtue of having a strong and experienced parent—L&T Infrastructure Development Project Limited (L&T IDPL, rated [ICRA]AA(Stable)/[ICRA]A1+)—thus imparting financial flexibility to L&T SRTL. ICRA also draws comfort from the presence of structural features such as escrow mechanism, debt service reserve (DSR) in the form of bank guarantee equivalent to around one quarter’s debt servicing obligations, and reserves to be built for major maintenance and bullet payment at the end of the loan tenure. The rating, however, is constrained by the risks associated with a toll road project including lower traffic growth, inflation- linked toll rate increase, and users’ willingness to accept toll rate hike as well as regulatory risks including timely implementation of rate hike, and timely receipt of O&M grant (quarterly instalments to be received till FY2022) that are relatively higher in a state toll road projects. Furthermore, the traffic on the project stretch is concentrated to major mineral (coal and iron ore) carrying vehicles, which exposes it to the risk of any slowdown in the mining activities. ICRA has noted that while the impact of Covid-19 pandemic on toll collections remains a risk in near to medium term, the toll collections have seen a significant ramp up since May 2020 post lockdown relaxations with around 90-95% of pre-Covid- 19 toll collections during June 2020. The company has healthy liquidity cushion. The rating is also constrained due to the high debt repayments at the end of the loan tenure due to relatively shorter debt repayment period compared to the project’s concession life, resulting in an asset-liability mismatch and dependence on debt-refinancing requirements towards the end of the debt tenure. However, ICRA takes comfort from the long tail period which provides financial flexibility. The project is also exposed to the risk of higher-than-estimated routine and periodic maintenance expenses, which can adversely impact the project debt coverage ratios. The rating continues to be constrained by the risk associated with a toll road project, including traffic diversion/alternate route risk, traffic growth. ICRA has noted that the toll rate hike due in April 2020 has not been implemented due to procedural delays due to Covid-19 situation. ICRA notes that the company has availed moratorium for three months from June 1, 2020 to August 31, 2020 under the Reserve Bank of India’s (RBI) Covid-19 relief package. Although, the company has sufficient cashflows and liquidity available for debt servicing during this period, the management has mentioned that it has availed the moratorium to conserve liquidity. 1 Key rating drivers and their description Credit strengths Operational status and importance of project stretch – The company received the provisional completion certificate for ~98% of the project stretch on March 13, 2018 and has been collecting toll since then. Hence, it has a track record of over two years of toll collection. In August 2019, it received provisional completion certificate for the entire project stretch. The project is part of Odisha SH-10, which connects Sambalpur and Rourkela, the most prominent cities in Odisha. It also provides connectivity to Jharsuguda and Sundargarh districts of the state. The road also provides linkage to coal and iron ore mines from other industrial towns in Odisha and the neighbouring states. There is no major competitive road to the project stretch, which makes it the preferred stretch connecting Sambalpur and Rourkela. Improvement in debt coverage indicators and liquidity position – The toll collections have improved since the commencement of tolling in March 2018 supported by healthy traffic growth, toll rate revisions, and double tolling of major mineral carrying vehicles plying on the project stretch. The toll collections grew by 13% in FY2020. Improvement in toll collections coupled with stable O&M expense resulted in a healthy improvement in the company’s debt coverage indicators and liquidity position. While the Covid-19 pandemic is likely to impact the toll collections in near to medium term, the same have seen significant ramp up since May 2020 post lockdown relaxations with around 90-95% of pre-Covid- 19 toll collections during June 2020, providing comfort. The strong liquidity position of the company provides cushion. Moreover, interest rate reduction which is further expected to dip with the reduction in MCLR, the coverage metrics are expected to remain healthy. ICRA also takes comfort from the presence of structural features such as cash flow escrow mechanism, DSR in the form of bank guarantee equivalent to around one quarter’s debt servicing obligations, and reserves to be built for major maintenance and bullet payment at the end of the loan tenure. Healthy financial flexibility – L&T SRTL has healthy financial flexibility arising from the availability of a long tail period (balance concession period post debt repayment) of around six years, which will enable it to refinance the existing debt with longer tenure. Further, L&T SRTL is promoted by L&T IDPL, which is a part of the L&T Group with a strong financial profile (L&T IDPL is rated [ICRA]AA(Stable)/[ICRA]A1+) and a healthy track record of executing BOT projects. The Group has completed over 15 BOT projects, of which five were transferred to Infrastructure Investment Trust. The company benefits from the professional management with experience in handling various road assets. Credit challenges Dependence on major mineral mining traffic – The project road provides linkage to coal and iron ore mines from other industrial towns in Odisha and the neighbouring states. A major part of the commercial traffic using the stretch comprises vehicles carrying these minerals. Given that these vehicles are charged double toll rates, and these also have higher PCU factor, these vehicles contribute a sizeable portion of the total revenue. Hence, L&T SRTL’s toll collection will also be highly dependent on the production in the relevant coal and iron ore mines as well as any alternate mode of transportation of these minerals. High debt repayments towards the end of the loan tenure – The debt availed by L&T SRTL has high debt repayments at the end of the loan tenure (FY2028-FY2030) due to relatively shorter debt repayment period (~10 years) compared to the project’s residual concession life (~16 years), results in asset liability mismatch and dependence on debt refinancing requirements towards the end of the debt tenure. However, ICRA has taken comfort from the long tail period (balance concession period post debt repayment), which provides financial flexibility. Further, the debt sanction involves provision to build reserve for bullet repayment of 25% of total debt, which also provides comfort. 2 Risks associated with toll road project and timely receipt of grant – Like a typical toll road project, L&T SRTL is exposed to risks including user willingness to accept toll rate hikes, alternate route diversion, inflation-linked toll rates, and dependence of traffic growth on the economic activities in the region. Since the project has an operational track record of about two years, users’ willingness to pay toll is established to an extent. The project being a state highway and under concession from the state government authority is also exposed to higher regulatory risks like timely implementation of toll rate hike. ICRA notes that the toll rate hike due in April 2020 has not been implemented due to procedural delays due to the Covid-19 situation. Further, the project involves grant from Odisha Work Department (OWD), GoO. While Rs. 258.5 crore is to be received during construction, the remaining Rs. 206.8 crore will be in the form of operations and maintenance (O&M) grant to be received on a quarterly basis within the first five years of achieving commercial operation date (COD). L&T SRTL has received Rs. 243.4 crore of construction grant (pending Rs. 15.1 crore) and nine quarterly O&M grants (Rs. 116.3 crore) out of total 16 total payments. The timely receipt of grants in the future would be crucial to avoid any cashflow mismatch. However, comfort is drawn from the established track record of receipt of payments in the past, and the liquidity cushion available to fund delays in the receipt of O&M grant. Liquidity position: Strong The company’s liquidity position is strong with accruals from operations expected to be sufficient to meet operational expenses and debt servicing obligation over the medium term. This apart, L&T SRTL has cash and liquid investments of Rs.