Rating Rationale
January 23, 2019 | Mumbai
Ahmedabad Municipal Corporation
'CRISIL AA+(SO)/Stable' Converted from Provisional Rating to Final Rating for Taxable Bonds
 
Rating Action
Rs.200 Crore Taxable Bonds  CRISIL AA+(SO)/Stable (Converted from Provisional rating to Final rating)
Rs.200 Crore Tax-Free Bonds  CRISIL AA/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has converted the provisional rating assigned to the taxable bonds of Ahmedabad Municipal Corporation (AMC) to a final rating of 'CRISIL AA+(SO)/Stable'. CRISIL has also reaffirmed its rating on the tax free bonds of AMC. CRISIL has received the final legal documents executed for the transaction. The executed documents are in line with the transaction terms at the time of provisional rating. Hence, CRISIL has converted the provisional rating to final rating.
 
As required, CRISIL has received the following final legal documents:
* Debenture trust agreement
* Debenture trust deed
* Escrow agreement
* Representations and warranties letter
 
The rating reflects strong creditworthiness and low performance risk of originator, high DSCR leading to low impact of future flow on originators other obligations, additional security in form of DSRA created before pay in, presence of a payment structure and recourse to the originator. Performance linkage is low as the inflows are dependent on property taxes and user charges. Typically property taxes see an increase over time reducing risk from inflows. CRISIL estimates DSCR to be adequately high at over 14 times, which coupled with strong inflow and low debt will have minimal impact on financial profile of the AMC. The bonds have a well-defined structure of escrow account, payment structure and points of recourse in case of shortfalls. The rating continues to reflect the corporation's strong financial risk profile and operating efficiency driven by consistently healthy revenue surplus, adequate liquidity, a strong economic base, sound project management ability, and focus on reforms. These strengths are partially offset by heavy reliance on state goevrnment grants and large capital expecditure (capex) requirements.

Analytical Approach

For arriving at the ratings, CRISIL has applied its criteria on future flow securitisation.

Key Rating Drivers & Detailed Description
Strengths:
* Strong operating performance, reflected in healthy operating surplus
Revenue profile includes income from collection of property tax, water and conservancy tax, income from other taxes, octroi compensation, other revenue grants, and non-tax income. Revenue surplus is robust, backed by strong property tax collection, and steady receipt of grants from the state government in lieu of octroi and non-tax income comprising town development income.

Year ended March 31st  

2014

2015

2016

2017

2018

Revenue receipts Rs crore 2538 2891 3432 3406 3567
Revenue expenditure Rs crore 1886 2045 2235 2423 2771
Operating surplus Rs crore 653 846 1197 983 796

* Strong financial position supported by comfortable liquidity and debt protection metrics
Liquidity is backed by cash and bank balance, including liquid investments of Rs 767 crore as on March 31, 2018, against outstanding debt of Rs 204 crore. Operating surplus to debt ratio was comfortable at 3.90 times for fiscal 2018: the corporation generated Rs 796 crore of operating surplus against term debt obligation (existing debt) of around Rs 46 crore and Rs 41 crore in fiscals 2019 and 2020, respectively.
 
* Improving service delivery
The corporation has an adequate civic infrastructure and robust delivery systems. High infrastructure quality is reflected in strong water supply coverage, adequate road and improving sewerage networks, and robust solid waste management practices.
 
* Strong administrative setup and project management abilities
Project management abilities are driven by a structured administrative setup and strong execution skills, as reflected in a favourable track record in completing complex projects such as Sabarmati River Front Development (SRFD) and Bus Rapid Transit System (BRTS). There is a dedicated team to monitor projects implemented under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM); 31 projects worth Rs 3,200 crore have been implemented under this scheme since fiscal 2008 without any significant cost overrun. In the recent past, AMC has also completed the implementation of enterprise resource planning.
 
* Healthy economic base
Ahmedabad's robust industrial base, favourable location, strategic importance in the state, and high per capita income have led to a strong economic base. Industries in Gujarat have flourished due to favourable state government policies, affordable cost of living, surplus labour, and lower transportation cost.
 
Weaknesses
* High dependence on state government grants
Although the share of grants and compensation from the state government has reduced to 39% in fiscal 2018 from 55% in fiscal 2012, it continues to be a major portion of total revenue receipts. Since the abolition of octroi in fiscal 2008, AMC has been receiving compensation from state government consistently. However, during fiscal 2016, increased compensation inclusive of 15% hike was provided. During fiscal 2018, AMC received Rs 1,038 crore as octroi compensation. With rise in property tax rates and non-tax revenue, dependence on government grants is likely to reduce further over the medium term.
 
* Large capital expenditure (Capex requirement
There is large capex requirement over the medium term for implementing the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and Smart City schemes, in addition to the ongoing SRFD and BRTS projects. The estimated project cost under these schemes is Rs 2,840 crore, spread over five years. Apart from raising money through bonds of around Rs 200 crore in fiscal 2019, the corporation is contemplating monetising part of the huge land parcels in its jurisdiction area to part-fund capex of around Rs 2,500 crore. Any significant increase in capex, leading to substantial incremental debt, will remain a key rating sensitivity factor.
 
* Modest pace of implementing reforms
The double-entry system of accounting is likely to be implemented in the next few months; however, some key reforms - such as Geographical Information System and the linking of this to property tax computation and a collection process - are under process and may take some time to complete. Metering of water connections is another area where limited progress has been made. However, once done, it will lead to significant improvement in tax collection efficiency and maintenance of cost recovery.
Liquidity

Liquidity is ample, driven by healthy operating surplus of over 20% annually over the past fiscals, and unencumbered cash and bank balance of Rs 767 crore as on March 31, 2018. Operating surplus was Rs 796 crore in fiscal 2018 against term debt obligation of around Rs 46 crore and Rs 41 crore in fiscals 2019 and 2020, respectively. AMC is likely to maintain unencumbered cash and bank balance and continue to generate healthy operating surplus that will be sufficient to meet debt obligation and part-fund capex.

Outlook: Stable

CRISIL believes AMC will continue to generate high operating surplus over the medium term, while maintaining comfortable debt protection metrics.
 
Upside scenario:
* Significant improvement in undertaking key reforms and service arrangements
* Enhancement in services currently provided, such as water supply, sewerage, and solid waste management
* Increased collection efficiency in existing own revenue sources and generation of income from additional sources
 
Downside scenario:
* Significant decline in collection of property tax
* Weakening of capital structure and debt protection metrics
* Decline in support from state government in terms of adequacy and timeliness of octroi compensation, and availability of funds under AMRUT and Smart City schemes and other grants

About the Corporation
AMC is the largest municipal corporation in Gujarat and is governed by the Bombay Provincial Municipal Corporation Act, 1949, as amended by the Government of Gujarat. It has jurisdiction over 464.16 square kilometres, and provides a range of civic services to around 70 lakh residents. Majority of these include water supply, sewerage disposal, solid waste management, primary education, public safety, transportation, and slum improvement.

Key Financial Indicators
As on / for the period ended March 31 Units 2018 2017
Revenue receipts Rs crore 3567 3406
Revenue surplus Rs crore 721 907
Revenue surplus/ revenue receipts % 20% 27%

Any other information:
Broad contours of the escrow structure pertaining to the current Rs 200 crore taxable bond issue are as follows:
a) The tenure is 5 years with coupon half-yearly payment frequency
b) Full redemption at the end of 5 years
c) Escrow of property tax and user charges collected by and due to AMC eligible bondholders and lenders shall have first and pari-passu charge over the escrow account, debt service account (DSA), and the collection account(s).
d) Establishing separate DSRA, interest payment account (IPA), and sinking fund accounts (SFA) with the escrow banker as per the terms of each series. Bondholders/lenders of particular series have first and pari-passu charge over DSRA, IPA, and SFA for respective series.
e) In case of any shortfall from transfer from escrow account to DSA, AMC shall make good the shortfall from the funds from other account(s) to DSA.

Interest payment mechanism
T ' Interest Payment Date
Day  
T-25 The trustees shall check the amount lying to the credit of interest payment account. In case of any shortfall in amount, the trustees shall intimate AMC of the shortfall
T-15 AMC shall make good the shortfall in the IPA, if applicable
T-14 In case of shortfall, trustees shall trigger the payment mechanism and instruct bank to transfer the shortfall amount from the DSRA to the IPA
T-10 Bank shall transfer the shortfall amount, if applicable*
T Interest payment is done
* Any amount drawn from the DSRA should be deposited back in the account
 
Redemption mechanism
T ' Redemption date
Day  
T-25 The trustees shall check the amount lying to the credit of the SFA. In case of any shortfall in amount, the trustees shall intimate AMC of the shortfall
T-15 AMC shall make good the shortfall in the SFA
T Redemption payment in done
 
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Type of instrument Date of allotment Coupon Maturity date Issue Size (Rs crore) Rating Assigned with Outlook
INE117E24018 Taxable bonds 15-Jan-2019 8.7% 15-Jan-2024 200 CRISIL AA+(SO)/Stable
NA Tax-free bonds^ NA NA NA 200 CRISIL AA/Stable
^Not yet placed
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
-  CCR    --    --  06-03-18  Withdrawal  06-02-17  CCR AA/Stable  11-11-16  CCR AA-  CCR AA-/Stable 
                    27-01-16  CCR AA-/Stable   
Bond  LT  200.00
23-01-19  		CRISIL AA+(SO)/Stable| CRISIL AA/Stable      18-12-18  CRISIL AA/Stable| Provisional CRISIL AA+(SO)/Stable  06-02-17  CRISIL AA/Stable  11-11-16  CRISIL AA-/Stable  CRISIL AA-/Stable 
            08-10-18  CRISIL AA/Stable      27-01-16  CRISIL AA-/Stable   
            06-03-18  CRISIL AA/Stable           
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Municipal and Urban Local Bodies

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