January 06, 2020 Ashoka Mallasandra Karadi Road Private Limited: Rating reaffirmed Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) [ICRA]A-(Stable); Fund based – Term Loan 275.00 275.00 reaffirmed Total 275.00 275.00 *Instrument details are provided in Annexure-1 Rationale The reaffirmation in the rating factors in the inherent benefits of the hybrid-annuity based nature of the project, including an upfront availability of the right of way (RoW), its automatic de-scoping (pending beyond 180 days from the appointed date), the inflation linked revisions to the bid project cost during the construction period, and the relatively lower equity mobilisation risk with 40% of the bid-project cost to be funded by the National Highway Authority of India (NHAI or the authority) during the construction period in the form of a grant. The rating considers the strong sponsor profile, Ashoka Concessions Limited (ACL, rated [ICRA]A(Stable)) which is a holding company of the road assets of Ashoka Buildcon Limited (ABL). Furthermore, ACL has provided an undertaking towards financial support in case of a cost overrun during the construction phase, any shortfall in the operations and maintenance (O&M) expenses and debt servicing in the operational phase as per the Lender’s approved base case business plan. The rating also factors in the stable revenue stream, post commissioning, with 60% of the inflation-adjusted bid project cost being paid out as annuity, along with an interest at RBI bank rate plus 300 bps and O&M payments (adjusted for inflation) over the term of concession from the project owner. The National Highway Authority of India (NHAI, rated [ICRA]AAA(Stable)), a key Central Government entity entrusted with the responsibility of development and maintenance of India’s national highway programme is the project owner and annuity provider. The rating further draws comfort from the appointment of ABL as the fixed-price engineering, procurement and construction (EPC) contractor for executing the project, which has a demonstrated track record of project execution within the budgeted time and cost. The total project cost of Rs. 740.59 crore is being funded in the debt-equity ratio of 3.89:1 times net of the NHAI grant. As on November 30, 2019, the promoter contribution in AMKRPL stood at Rs. 35.33 crore. Further ICRA notes that the company has received the appointed date of October 15, 2019. The rating, however, remains constrained by the moderate execution risks in the project, given that the construction activity is in nascent stages, with AMKRPL achieving ~3.30% physical progress as on November 30, 2019. However, AMKRPL is a low-complexity project where the implementation risk is mitigated to an extent by the availability of 80.69% of encumbrance free land for construction, a fixed-price, fixed-time contract and the strong project execution capabilities of ABL. The company’s ability to commission the project in a timely manner and within the budgeted costs would remain important from a credit perspective. Post commissioning, the company would have to ensure a healthy lane availability to avoid any deductions from the annuity amount. Timely support from the promoters to fund any shortfall due to delays in grant or any cost overruns during the construction phase will remain crucial. AMKRPL’s cash flows are exposed to interest rate risk, given the floating nature of interest rates for the project loan. Further, any reduction in RBI bank rate would adversely impact annuity payments as the interest on the same is linked with the bank rate. 1 The Stable outlook on the rating reflects ICRA’s opinion that AMKRPL will continue to benefit from the strong execution capabilities of the ultimate sponsor and EPC contractor—ABL. Key rating drivers and their description Credit strengths Strong profile of sponsor – AMKRPL is a wholly-owned subsidiary of ACL which is a part of Ashoka Buildcon Group. The Group has a strong presence in the road segment. Benefits of executing project under Hybrid-Annuity Model (HAM) - The inherent benefits of hybrid-annuity project include upfront availability of right of way, automatic de-scoping of RoW pending beyond 180 days from the appointed date, inflation linked revisions to bid project cost during the construction period and relatively low equity mobilisation risk with 40% of the project cost to be funded by the authority during the construction period in the form of grant. The project will have a stable revenue stream post-commissioning as 60% of the remaining project cost will be paid out as annuity (adjusted for inflation) over the term of the concession by the project owner and annuity provider, the NHAI, which is a key central government entity entrusted with the responsibility of development and maintenance of India’s national highway programme. Established track record of ABL in road construction - AMKRPL has entered into a fixed-price EPC contract with ABL, which has a two-decade long expertise in the construction business, and a track record of project execution within the budgeted time and cost. Any cost overrun within the scope of the EPC contract will be borne by ABL. Undertakings from the sponsor – ACL has provided an undertaking towards financial support in case of a cost overrun during the construction phase, any shortfall in the O&M expenses and debt servicing in operational phase as per the lender’s approved base case business plan. Credit challenges Project exposed to execution risk - The project is exposed to moderate execution risks given that the construction activity is in nascent stages with AMKRPL achieving ~3.30% physical progress as on November 30, 2019. However, AMKRPL is a low-complexity project where the implementation risk is mitigated to some extent by the availability of 80.69% of encumbrance free land for construction as on November 30, 2019, a fixed-price, fixed-time contract and strong project execution capabilities of ABL. The company’s ability to commission the project in a timely manner and within the budgeted costs would remain important from a credit perspective. Project returns exposed to inflation and interest-rate risk – AMKRPL’s cash flows are exposed to an interest-rate risk considering the floating nature of interest rates for the project loan. However, the risk is mitigated to some extent as the interest on the outstanding annuities is linked to the Bank Rate. However, the persistent low rate of inflation would result in lower annuity receipts in future. Lane availability to be ensured for annuity payments – AMKRPL’s source of income is the annuity, the interest on outstanding annuities and the annual O&M payments from the NHAI. Hence ensuring 100% lane availability, and thereby no deductions in annuity receipts, will be the key credit sensitivity for AMKRPL, going forward. 2 Liquidity position: Adequate The liquidity position of AMKRPL is adequate. The total project cost of Rs. 740.59 crore is proposed to be funded by equity of Rs. 70.64 crore (9.54% of project cost), term loan of Rs. 275 crore (37.13% of project cost) and NHAI Grant including PMI adjustment of Rs. 394.95 crore (53.33% of project cost). The debt repayment is expected to commence from May 2022, which can be comfortably met through the annuity receipts. Further, the O&M expenses for the first six months post COD and the debt obligation for the first semi-annual period are funded as part of the project cost. Rating sensitivities Positive triggers –. ICRA could upgrade AMKRPL’s rating if the company achieves COD as per the expected timelines without any cost overrun, and receives the first semi-annuity payment in a timely manner. Negative triggers – Negative pressure could arise if there is a delay in achieving COD resulting in delayed annuities and/or any cost over runs. Further, any deterioration in the sponsor’s credit profile resulting in heightened equity mobilisation risk could also exert pressure on the rating. Analytical approach Analytical Approach Comments Corporate Credit Rating Methodology Applicable Rating Methodologies Rating Methodology for BOT (Hybrid Annuity Model) Roads Impact of Parent or Group Support on an Issuer’s Credit Rating Parent/Group Company: Ashoka Concessions Limited (ACL) Ultimate promoter: Ashoka Buildcon Limited (ABL) The rating assigned to AMKRPL factors in the likelihood of its ultimate Parent/Group Support parent, ABL, extending financial support to it because of close business linkages between them. We also expect ABL to be willing to extend financial support to AMKRPL out of its need to protect its reputation from the consequences of a group entity’s distress. Consolidation/Standalone Standalone About the company Ashoka Mallasandra Karadi Road Private Limited (AMKRPL) is a 100% subsidiary of Ashoka Concessions Ltd (ACL/Sponsor), a holding company of road assets of Ashoka Buildcon Limited (ABL). The special purpose vehicle (SPV) was formed in April 2018 to undertake four-laning of 54.23 km of Tumkur-Shivamogga section (km. 12.310 to km. 66.540) of NH-206 in the State of Karnataka on Hybrid Annuity Model. The construction and operations period for the project is 2 years and 15 years respectively. The project signed Concession agreement on April 20, 2018 and has received the appointed date of October 15, 2019. AMKRPL achieved financial closure in September 2018. The total project cost of Rs. 740.59 crore is proposed to be funded by equity of Rs. 70.64 crore (9.54% of project cost), term loan of Rs. 275 crore (37.13% of project cost) and NHAI Grant including PMI adjustment of Rs. 394.95 crore (53.33% of project cost). The annuity and interest on outstanding annuities will be received on a semi-annual basis along with the O&M receipts, with first year O&M receipt of Rs.