September 27, 2017 Kannur Municipal Corporation Summary of Rated Instruments Instrument* Amount Rating Action (Rs. crore) Issuer Rating Nil IrBB+(Stable) ; Assigned *Instrument details are provided in Annexure-1 Rating action ICRA has assigned the long-term issuer rating of IrBB+ (pronounced I R double B plus) to the Kannur Municipal Corporation (KMC/municipality).1 The outlook assigned to the long-term rating is Stable. Rationale The assigned rating takes into consideration the importance of the KMC as the sole agency responsible for providing civic services in Kannur city and stable transfers from the State Government of Kerala (GoK). The rating is also supported by the revenue surplus position of the corporation in the recent years and the KMC’s above average service standards especially in solid waste management and surfaced road network. The rating, however, is constrained by the limited revenue base of the KMC at present, growth of which is negligible and a significant increase in the services area of the corporation. The rating is also impacted by the risk associated with the execution of large projects under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), given the KMC’s lack of track record in handling such projects in the past. Nevertheless, ICRA believes that the KMC will derive support from the GoK for funding the projects and for capacity-building of the municipal staff. This is likely to mitigate the risks related to execution of any large projects. Key rating drivers and description Credit strengths Importance of the corporation to the state government: The KMC provides basic civic services in Kannur city, which also serves as headquarter for Kannur district. As a sole agency responsible for providing civic services in a district centre, KMC’s role is important for the state government. Stable transfers from the state government: The state government provides strong financial support to the KMC in the form of various grants, both revenue as well as capital. A majority of such grants are based on the recommendation of the State Finance Commission and therefore are rule based and stable in nature. A rule based and stable transfer of grants from the state government provides a comfort to the liquidity position of the corporation to an extent. Revenue surplus position: The corporation generated a substantial revenue surplus in FY2016 and FY2015. A surplus in revenue account provides flexibility to the corporation in executing capital projects, which are required to improve/maintain the service standards in the town. Above average service standards in some areas, scope for improvement remains: A majority of the households in the town have a compost unit in their backyards, in which organic waste is treated and only inorganic/recyclable waste is collected by the corporation. While more than 70% of the roads are surfaced in the town, coverage of street lights and drains is low at present. Overall the corporation has above average service standards in terms of waste collection and surfaced roads. However, scope for improvement remains in street light and drainage. Also, maintaining the existing service standards, especially in solid waste management, would remain a challenge for the KMC going forward. 1 For complete rating scale and definitions, please refer to ICRA’s website www.icra.in or other ICRA Rating Publications. Credit weaknesses Weak information systems: The information system of the corporation remains weak with instances of inconsistency in data and absence of accrual based audited accounts. Successful implementation of key reforms related to e-governance in property tax and grievance redressal, and effective accrual based accounting system would be critical for the KMC. Moderate size and low growth of own revenues: The revenue income of the corporation has remained at moderate level in the past years. Moreover, in the absence of any upwards revision in key taxes and charges, the growth in revenue income has been negligible. While the current collection efficiency of property tax remained high at around 85%, the arrear collection efficiency remained low. Considering the consistent increase in the cost of operations, growth in revenues would be critical for the KMC. Significant increase in the scope of services: The status of the Kannur Municipality was upgraded to a Municipal Corporation in 2015 along with an expansion in its jurisdictional area by merging five village panchayat with it. Consequently, the scope of the services provided by the KMC increased significantly. However, as per the estimates of the KMC officials, a substantial increase in its revenues was unlikely. Although the service standards of the newly merged areas are at satisfactory levels, the corporation would need additional funds as well as municipal staff to maintain them at desired levels. Risk related to execution of large projects: The size of capital projects executed by the corporation in the past years has been small, thereby limiting its ability to execute large projects. The KMC is exposed to the risk associated with the timely execution of the proposed projects, which are quite large in comparison to the current size of its operations. Analytical approach: For arriving at the ratings, ICRA has applied its rating methodologies as indicated below: Links to applicable criteria: Rating Methodology for Urban Local Bodies Rating Methodology for State Government Finances Entity Profile: The Kannur Municipal Corporation (KMC), established in 1860 as a Municipality and upgraded to a Municipal Corporation in 2015 is governed under the Kerala Municipality Act 1994 (Act). The corporation manages the civic services in Kannur city, which serves as headquarter of Kannur district in Northern Kerala. According to Census 2011, the city had a total population of 232,486 and an area of 78.35 sq. km. The urban agglomeration (UA) of Kannur, which includes outer growth areas as well as adjacent villages and towns, had a total population of 4.98 lakh. The city is well connected by rail network since British rule. The city serves as the centre for trading of agriculture products for the district. Also, the presence of cantonment board in the city supports the growth in economic activities within the city. The KMC is the provider of the basic civic services and amenities to the inhabitants of the town and the key services extended by the Corporation are construction and maintenance of roads and drains, solid waste management, street lights and amenities such as shopping stalls, community hall, playgrounds, parks/gardens etc. In FY2016, as per the receipt and payment statement, the KMC generated a revenue surplus of Rs. 6.11 crore2 on a total revenue receipt of Rs. 27.82 crore as compared to a revenue surplus of Rs. 11.86 crore on a total revenue receipt of Rs. 22.81 crore in FY2015. Key Financial Indicators: Particulars FY2015 FY2016 Revenue income (Rs. crore.) 22.8 27.8 Revenue expenditure (Rs. crore) 11.0 21.7 Revenue balance (Rs. crore) 11.8 6.1 Overall balance (Rs. crore) 2.9 -7.9 Revenue balance / Revenue income (%) 51.71% 21.95% (Principal + Interest) / Revenue income (%) - - (Revenue balance + Interest)/ (Interest +Debt repayment) 15.10 18.11 (%) Debt / Revenue income (%) - - Source: KMC and ICRA research Status of non-cooperation with previous CRA: Not applicable Any other information: Not applicable Rating history for last three years: Table: Rating History Chronology of Rating Current Rating S. History for the past 3 years Instrument No. Rated amount FY2018 FY2017 FY2016 FY2015 Type (Rs. crore) September 2017 -- -- -- Issuer Long 1 NA IrBB+(Stable) -- -- -- Rating Term 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 2 100 lakh = 1 crore = 10 million Annexure-1 Details of Instrument Name of the Date of Coupon Maturity Size of the issue Current Rating instrument issuance rate Date (Rs. crore) and Outlook Issuer rating on - - - NA IrBB+(Stable) long-term scale Name and Contact Details of the Rating Analyst(s): Jayanta Roy Manish Pathak +91 33 7150 1120 +91 124 4545 397 [email protected] [email protected] Nishant Lakkar +91 33 7150 1122 [email protected] Name and Contact Details of Relationship Contacts: Mr. Jayanta Chatterjee +91-80-43326401 [email protected] About ICRA Limited: ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services companies as an independent and professional investment Information and Credit Rating Agency. Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company, with its shares listed on the Bombay Stock Exchange and the National Stock Exchange. The international Credit Rating Agency Moody’s Investors Service is ICRA’s largest shareholder. For more information, visit www.icra.in © Copyright, 2017, ICRA Limited. All Rights Reserved Contents may be used freely with due acknowledgement to ICRA ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. An ICRA rating is a symbolic indicator of ICRA’s current opinion on the relative capability of the issuer concerned to timely service debts and obligations,