December 03, 2020 Jharkhand Central Railway Limited: [ICRA]BBB+ (Stable) assigned Summary of rating action Current Rated Amount Instrument* Rating Action (Rs. crore) Proposed Term Loans 1,259.75 [ICRA]BBB+ (Stable); Assigned Total 1,259.75 *Instrument details are provided in Annexure-1 Rationale The rating assignment factors in Jharkhand Central Railway Limited’s (JCRL’s) long-term concession agreement with the Ministry of Railways (MoR), which provides earnings visibility to its upcoming railway project, and the approval to charge an inflated mileage from users, which would make the project’s return indicators attractive. ICRA notes that Central Coalfields Limited (CCL, JCRL’s parent, owning 64%1 of the shareholding) plans to significantly ramp-up coal production in the North Karanpura coalfield over the medium term, which, along with shorter lead distances, faster rake turn-around times, and lower trip costs following the commissioning of JCRL’s railway line, partly mitigates the traffic fluctuation risk. Moreover, given the strategic importance of the rail corridor to CCL's expansion plans, the operational synergies between CCL and JCRL remains high, which supports JCRL’s business risk profile. In addition, JCRL’s credit profile benefits from the strong financial profile of its parent CCL, as well as IRCON International Limited (IRCON), which has a target shareholding of 26% in JCRL. JCRL’s rating also factors in the fixed revenue share clause with MoR for providing reserve services, which partly mitigates risks associated with inadequate increase in freight rates to cover for rising operation and maintenance (O&M) costs. The rating, however, is tempered by JCRL’s exposure to high project implementation risks, leading to risks of time and cost over-runs, and the company’s sizeable dependence on external borrowings, which is likely to lead to modest debt coverage metrics during the initial years post commissioning. JCRL’s rating is also constrained by the extended receivable period from the Indian Railways, which increases the risk of working capital blockage. ICRA notes that around 62% of the estimated network traffic in the Shivpur – Kathautia line is expected to come from coal supply to the 5X660 MW Barh super thermal power station of NTPC. The planned traffic flow to Barh via JCRL’s network is, however, dependent on timely commissioning of the Koderma – Tilaiya leg of an under-construction railway line by East-Central railway, and any delay in its commissioning beyond the scheduled commissioning date of JCRL’s railway line, could have an adverse impact on the expected traffic. The rating also reflects the project’s high sectoral concentration risk owing to its dependence on a single commodity (coal). The Stable outlook on the [ICRA]BBB+ rating reflects ICRA’s opinion that JCRL will benefit from the demonstrated track record of IRCON, which would help in commissioning the Shivpur – Kathautia railway line project within the budgeted time and costs. Moreover, ICRA expects JCRL to achieve the desired traffic targets, supported by CCL’s plans of ramping up coal production in the North Karanpura coalfields. 1 As on March 31, 2020, JCRL’s shareholding stood at CCL (58.08%), IRCON (23.59%) and Government of Jharkhand (18.33%). The ultimate shareholding at the time of commissioning of the ongoing railway line would be CCL (64%), IRCON (26%) and Government of Jharkhand (10%) 1 Key rating drivers and their description Credit strengths Long-term concession agreement provides earnings visibility – On December 4, 2018, JCRL signed a 30-year concession agreement (including 3-year construction period and 27-year operating period) with MoR. Though there is no long-term contract, which assures a guaranteed traffic, JCRL would benefit from the parentage of CCL and IRCON, who can direct the coal supply from CCL’s mines in the North Karanpura area to the long-term fuel supply agreement (FSA) customers through JCRL’s network. JCRL’s parentage, and the 30-year concession agreement, provide earnings visibility to the upcoming Shivpur – Kathautia railway line project. Inflated mileage makes project return indicators attractive – As per the concession agreement signed with MoR, JCRL would have access to three revenue streams: a) 50% of the user fee (calculated based on actual distance traversed on JCRL’s network), with the balance 50% being retained by MoR for providing reserved services, b) 60% inflated mileage to be collected from the users and retained entirely by JCRL. This would entitle JCRL to receive an extra revenue stream by charging an additional distance of 60% of the actual distance traversed in JCRL’s network, and c) terminal charge to be collected from private siding owners, such as NTPC, for connecting its siding to JCRL’s network. As per letter dated June 13, 2018, MoR has approved the inflated mileage for a period of five years, and ICRA understands that this would be reviewed for extension by MoR thereafter. ICRA notes that the inflated mileage would account for ~37%-38% of JCRL’s overall annual revenue and is a key reason behind the project’s attractive return indicators (post-tax project IRR of 18.7% and post-tax equity IRR of 27.3%). Moreover, the inflated mileage reduces the capacity utilisation hurdle rate required to meet debt service obligations. Consequently, the break-even system utilisation levels (for DSCR=1) stand at a moderate 37% in the initial two years post CoD2 and 65% in the third year. Moreover, in the base case scenario of the inflated mileage being available for the entire concession duration, the cumulative debt service coverage ratio (DSCR) of the project remains at a comfortable 2.2 times and the minimum DSCR at 1.4 times (in the first year of operations). Significant planned ramp-up in production from CCL's North Karanpura coalfield partly mitigates traffic fluctuation risks – As per CCL’s capacity expansion plans, the North-Karanpura coalfield in future would account for over two-third of CCL’s production. The mines of Magadh (51 mtpa3 peak rated capacity) and Amrapali (25 mtpa peak rated capacity) are steadily ramping up production, and in July 2020, CCL invited MDO4 contract for the development of the 20 mtpa Sanghmitra greenfield coal block. In addition, CCL also plans to commence mining from the 15 mtpa Pachra (Chandragupta) greenfield coal mine in the medium term. The feasibility for the Shivpur – Kathautia single track line has been prepared factoring in a traffic of around 21.5 mtpa (~1,075 million MT-km) mostly to the eastern power plants in Bihar and Jharkhand. However, CCL is looking to ramp-up coal production in the area to 80-100 rakes/day (~110 mtpa) over the medium term, which, along with shorter lead distance, faster rake turn-around time, and lower trip costs following the commissioning of JCRL’s railway line, partly mitigates traffic fluctuation risks. Apart from CCL’s own expansions in the North Karanpura coalfields, the rail corridor is also expected to benefit from the traffic generated from NTPC’s captive blocks. As per plan, NTPC is expected to connect its Urda coal siding with JCRL’s Kharika station through a 11.5 km track. The Urda coal siding will be used for evacuating coal from NTPC’s upcoming mines of Chatti Bariatu (7 mtpa) and Kerendari A (6 mtpa), leading to movement of coal from JCRL’s lines. Moreover, NTPC’s 15 mtpa Pakri Barwadih operational coal mine could also use the Tori-Shivpur-Kathautia rail corridor to despatch coal to its plants in Bihar and other Eastern states. In addition, in June 2020, the Government put up a list of five coal 2 Commercial operation date 3 Million tonne per annum 4 Mine development operator 2 blocks from the North Karanpura coalfield for private commercial mining, which has a cumulative peak rated capacity of 25 mtpa. This includes Chakla (5.3 mtpa), Chitarpur (3.5 mtpa), Gondulpara (4.0 mtpa), North Dhadu (8.2 mtpa), and Seregarha (4.0 mtpa). In the base case scenario, ICRA has assumed only a fraction of the traffic potential that could emanate from NTPC’s captive blocks and has not factored in any traffic from these upcoming coal blocks that would be operated by private commercial miners. Fixed revenue share with MoR for reserve services partly mitigates risks associated with inadequate increase in freight rates to cover for rising O&M costs – Bulk of the operating cost for a railway line SPV is fixed in nature. JCRL would be responsible for O&M of tracks, overhead equipment and signaling. Indian Railways on the other hand would be providing reserved services, which include the supply of rakes, wagons, locomotives; crew for locomotives and station operation management; and, fuel/ traction power for rake movement. ICRA notes that charges for reserved services would account for ~78%-87% of the overall operating cost for JCRL. For providing these services, Indian Railways would deduct a flat 50% of the base user fee (excluding the inflated mileage). This would effectively mean that ~80% of JCRL’s operating costs would be variable in nature, being directly correlated to the revenue earned, partly mitigating the risk to JCRL’s earnings arising out of a delay in freight tariff revision. Strong financial profile of shareholders; strategic importance of the rail corridor to CCL's expansion plans provides operational synergies – The rating factors in the strong financial profile of JCRL’s shareholders (CCL with 64% ultimate shareholding, and IRCON with 26% ultimate shareholding). Moreover, the ratings factor in the synergies between the operations of JCRL and CCL, with the former’s railway network playing an enabling role in helping CCL achieve its target of increasing its annual coal production to 145 million tonne (mt) in FY2024 from 66.9 mt in FY2020.