Press Release Eagledeep Kolaghat Haldia OMT Project Private Limited January 22, 2019 Ratings Amount Facilities Ratings1 Rating Action (Rs. Crore) Provisional CARE A-; Stable Long term Bank Facilities 106.70 (Provisional Single A minus; Assigned (Proposed) # Outlook: Stable) 106.70 Total facilities (Rupees One Hundred Six Crore and Seventy Lakhs Only) # The above rating is provisional and shall be confirmed upon execution of loan documents and other required documents to the satisfaction of CARE Ratings Limited as follows: a) The sanction debt shall not exceed the rated debt exposure b) The final term of sanction includes tenure of 7 years with ballooning/ telescopic nature of repayment scheduled and liquidity support mechanism c) Sponsor support undertakings. Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The rating assigned to the proposed bank facilities of Eagledeep Kolaghat Haldia OMT Project Private Limited (Eagledeep) derive strengths from the operation, maintenance and transfer (OMT) nature of project having track record of more than 16 months of toll collection, favourable location of the project stretch with no major alternate route, moderate project leverage and adequate debt coverage indicators. The rating also takes into consideration the proposed favourable features of term structure and liquidity support mechanism such as envisaged creation of debt service reserve account (DSRA), major maintenance reserve account (MMRA), and cash sweep along with sponsor support undertakings to meet any cost overrun in overlay expanses and promoters group’s established track record in road construction and toll collection business. Nevertheless, the rating constrained by the inherent traffic risk associated with toll based road projects, operation and maintenance risk associated with OMT project with nascent stage of project maintenance operation. Eagledeep’s ability to complete the road maintenance work within envisaged time & cost parameters along with any major deviation in toll collection would be the key rating sensitivities. Moreover, timely completion of ongoing Road over bridge (ROB) on project site and subsequent revision in toll rates shall also remain key monitorable. Detailed description of the key rating drivers Key Rating Strengths OMT nature of project with established track record of toll collection operations: The project road was awarded under OMT route and hence, risk related to approvals and clearances is very minimal. Eagledeep has already achieved commercial operations date (COD i.e. September 07, 2017) and having established track record of more than 16 months of toll collection. The company has earned a toll collection of Rs.35.40 crore during FY18 and Rs.43.46 crore during 8MFY19 marked by average daily toll collection (ADTC) of Rs.0.17 crore and Rs.0.18 crore respectively. Eagledeep is required to pay concession fees of Rs.32.18 crore to National Highway Authority of India (NHAI; rated: CARE AAA/ CARE A1+) in first year which shall be escalated by 10% per annum in subsequent years. Furthermore, the concession fee would be increased further by 17.20% for the year after handing over the ROB cum flyover at Ranichak at the end of NH – 41. Eagledeep has paid fees of Rs.18.16 crore in FY18 for its 205 days of operation. Established track record of promoters group in road construction and toll collection business: Eagledeep is a Special Purpose Vehicle (SPV) of Eagle Infra India Limited (EIIL; 51%) and Inderdeep Construction Company (ICC; 49%). EIIL has an experience of more than three decades as an EPC contractor. EIIL has a diversified revenue profile with presence in both construction and toll collection segment. During FY18, EIIL derived 22% of its total operating income from construction business and remaining from toll collection. ICC is a partnership firm, incorporated in 1995 by Khubchandani family. ICC is mainly engaged into EPC business and is a class ‘1-A’ contractors with various government departments. Furthermore, Eagledeep has entered into EPC contract agreement with ICC for construction of project facilities as well as for major maintenance work (1st overlay expenses). Favourable stretch location: Project highway comprises of Kolaghat to Haldia (section from Km 0.000 to km 53.472 of NH – 41) in the state of West Bengal. The project road passes through town/ builds up area of Mecheda, Radhamoni, Nandakumar and Brajalachak. Kolaghat is a census town situated on the bank of Rupnarayan River in the Midnapore East 1Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited Press Release district of West Bengal. Kolaghat thermal power station is located here, which is the largest power sector project in the state and managed by West Bengal Power Development Cooperation Limited (WBPDCL), a department of the State Government of West Bengal. Haldia is a city and a municipality in Purba Medinipur in the state of West Bengal. Haldia is being developed as a major trade port for Calcutta (Kolkata), intended mainly for bulk cargoes. The industrial city has several major factories including Asian Petrochemicals Limited (APL), Indian Oil Corporation Limited (IOCL), Tata Chemicals Limited (TCL), Haldia Petrochemicals Limited (HPL) among others apart from that port has major international petrochemical companies like Mitsubishi Chemical Corporation (MCC) which is the 2nd largest terephthalic acid producing plant in Haldia. Haldia is also a base of Indian Coast Guard. Furthermore, there is no major alternate route along the project highway and hence, risk related to alternate route is low. Annual revision in toll rates linked to change in WPI: Eagledeep’s toll model incorporates 3% fixed increase every year plus an annual increase in the toll rates over 2008 toll rates which is linked to 40% change in wholesale price index (WPI) over previous year. However, linkage to change in WPI exposes the company to the risk associated with the recent declining trend of WPI. Furthermore, as per the concession agreement, toll rates would revised by 30% for the year after handling over the ROB cum flyover at Ranichak at the end of NH – 41. Further, it is to be noted that completion of ROB cum flyover is not under scope of Eagledeep. This work has already been assigned to M/s R. Dinesh Chandra Infrastructure Private Limited (DCIPL) since May 27, 2016 on EPC basis and it is expected to be completed by March 2019. However, timely completion of ROB work and handing over that ROB to Eagledeep and subsequently increased in toll collection rates by 30% would remain key monitorable. Moderate project leverage and adequate debt coverage indicators: Total cost of the project of Rs.155.34 crore consists of construction of project facilities of Rs.15.11 crore, overlay expense of Rs.137.56 crore and performance deposits of Rs.2.67 crore which shall be funded through term loan of Rs.80.00 crore and promoter’s contribution including equity capital of Rs.10.00 crore, unsecured loan of Rs.12.17 crore and remaining through internal accruals resulting into moderate debt to equity ratio of 1.06 times. The company is in the process of financial closure. The average debt service coverage ratio is expected to remain adequate at more than 2 times for the projected period in light of strong toll collection and relatively low debt level. Adequate liquidity: The liquidity of the Eagledeep remains adequate with stable cash flow generation (net of concessional fees) from project to meet the operational expenses and relatively low repayment and interest cost during the projected period. Moreover, as confirmed by the management that the proposed term debt would have ballooning/ telescopic nature of repayment spread over 7 years. Apart from this liquidity support mechanism like escrow of future toll collection, cash sweep, maintenance of three months upfront funded DSRA and creation of MMRA is also expected to support the liquidity. Rating Weaknesses Inherent revenue risk associated with toll-based road projects: The financial viability of the highway project is entirely based upon the envisaged toll receipts, growth in traffic and hike in toll rates. The traffic on project road would be dependent upon the progress on agro trade and economic activities in this region. As freight traffic form a major portion (~ 75% to 80%) of the total traffic, any slowdown in the trade/ industrial activity in the region impacts the movement of goods and hence the toll revenue of Eagledeep. Thus toll revenue of Eagledeep will continue to be subjected to inherent risks associated with various macro-economic factors beyond the control of the company. The amount of concession fee committed to NHAI is modest at around 47% of the envisaged toll collection revenue during the concession period of FY19-FY27. The company has relied on internal accruals for its major maintenance expense as well as for repayment of debt payment which is entirely depends of toll revenue from the project hence it raises the cash flow risk for the company if traffic performance is not achieved as envisaged during the concession period. Ability to witness the estimated growth in traffic and toll rate hike will also be crucial. Exposure to maintenance risk and nascent stage of maintenance activity: As per concession agreement, Eagledeep needs to undertake construction of the project facilities as well as maintenance of the project road during the concession period. Currently, the project is at nascent stage marked by completion of overlay expense of Rs.33.44 crore (out of total envisaged cost of Rs.60.43 crore for 1st overlay expense) and construction of project facilities of Rs.4.64 crore (out of total envisaged cost of Rs.15.11 crore) as on November 30, 2018. Furthermore, the company has planning to complete remaining work towards overlay expense and project facilities by March 31, 2019 and would complete its 2nd overlay expense of Rs.77.12 crore in FY23 and in FY24.