Detailed Rationale

CRISIL Ratings has converted the provisional rating assigned to the non-convertible debentures (NCDs) of Ashoka Concessions Limited (ACL) from ‘Provisional CRISIL AA-(CE)/Stable’ to 'CRISIL AA-(CE)/Stable'. CRISIL Ratings has also reaffirmed its ‘CRISIL AA-(CE)/Stable’ rating on the Rs 150 cr NCDs of ACL.

 

CRISIL Ratings has now received the final executed documents for the transaction. These executed documents are in line with terms of the transaction when provisional rating was assigned. Hence CRISIL Ratings has converted the provisional rating to a final.

 

As required, CRISIL Ratings has received the following final executed documents:

• Debenture trustee deed
• Corporate guarantee from the guarantor

 

The rating centrally factors in the unconditional and irrevocable corporate guarantee extended by the parent, Ashoka Buildcon Ltd (ABL; rated ‘CRISIL AA-/Stable/CRISIL A1+’). The guarantee covers the principal, interest, and other monies payable towards the rated NCDs in a timely manner. Any adverse movement in ABL’s credit risk profile and non-adherence to the payment mechanism are key rating sensitivity factors.

Analytical Approach

For arriving at the rating on the ACL NCDs, CRISIL Ratings has applied its criteria on rating instruments backed by guarantees. The CE suffix indicates credit enhancement by way of extension of an unconditional and irrevocable corporate guarantee by ABL. The guarantee covers the payment structure that is designed to ensure full and time-bound payment to the debenture holders.

 

While looking at the unsupported ratings of ACL, CRISIL Ratings has also consolidated ACL with its special purpose vehicle, Ashoka Sambalpur Baragarh Tollway Ltd (ASBTL; rated CRISIL A-(CE)/Stable) as ACL has provided unconditional and irrevocable guarantee for the bank facilities of ASBTL.

 

For arriving at ABL’s ratings, CRISIL Ratings has moderately consolidated ABL with its special purpose vehicles (SPVs), ACL, and Unison Enviro Pvt Ltd (UEPL). The debt in ABL's SPVs is non-recourse to ABL, and in line with CRISIL Ratings’ moderate consolidation approach, the investment requirement, expected cost overrun in under-implementation projects, as well as cash flow mismatches in operational projects of ABL, have been factored into the financials of ABL. ABL is expected to extend equity and support towards cashflow mismatches in ACL and UEPL. CRISIL Ratings has also consolidated the debt of ACL guaranteed (unconditional and irrevocable) by ABL and expected debt in UEPL which is proposed to be guaranteed (unconditional and irrevocable) by ABL, while assessing the credit risk profile of ABL. Furthermore, interest-bearing mobilisation advances (~Rs 150 crore as on March 31, 2021) have been treated as debt.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Unconditional and irrevocable corporate guarantee extended by ABL

NCDs of Rs 150 cr have been being refinanced by raising fresh NCDs. The new NCDs of Rs 250 cr is also backed by unconditional and irrevocable corporate guarantee from ABL. The guarantee covers all the repayment obligations of the NCDs in a timely manner. ACL shall ensure that the redemption amount or amounts due or any other payment due as per the debenture trust deed shall be deposited in the debenture holders’ account three calendar days prior to the interest payment date or redemption date (deposit date). If ACL fails to deposit the redemption amount and/or the interest or any other amounts due, on or prior to the deposit date, then the debenture trustee shall on the same day, issue a demand notice to ABL, requiring it to deposit the amount on or before one calendar day prior to the Redemption Dates or Interest Payment Dates. ABL undertakes that it shall unconditionally and irrevocably pay on demand to the Debenture Trustee such amount stated in the Demand Notice, without any demur or protest and without any set off or lien on or before one calendar day prior to the Redemption Dates or Interest Payment Dates, as the case may be. Further, if any date of deposit of payment of redemption amounts and amounts due falls on a day which is not a business day, then the deposit must be made on the immediately preceding business day. Also, the guarantee is continuing and covers the entire facility.

 

For the new NCDs of Rs 250 crore, in case of rating downgrade events of the Guarantor or Issuer, payment notice of 33 days is given and the payment mechanism for other event of default other than rating downgrade or payment default (of interest/redemption amount on the due date) includes an acceleration notice with a payment timeline of 5 days.         

 

• Established track record of ABL in executing engineering, procurement, construction (EPC) contracts and build-operate-transfer (BOT) road projects

ABL has experience of over two decades in the EPC business and established relationships with state government departments, National Highways Authority of India (NHAI; rated 'CRISIL AAA/Stable'), and the Ministry of Road Transport and Highways should continue to support the business.

 

The company was one of the early entrants in BOT road projects in India, and won its first project in 1997. Along with ACL, it currently has 25 such projects, of which 17 are operational, 6 under construction, 2 are in the process of achieving financial closure (FC). Over 10,000 lane kilometre (km) has been constructed so far and nine completed projects have been successfully handed over.

 

Of the portfolio of 25 projects, 13 (5 BOT toll and 8 hybrid annuity model [HAM]) are housed under ACL. Out of the total ten HAM projects with the group, two have achieved Provisional Commercial Operations Date (PCOD), six projects are under construction and the balance two are in the process of achieving FC. Few under-construction HAM projects are progressing at a slow pace due to Right of Way (ROW) issue but these are expected to complete on time given the strong track record of EPC contractor, ABL and expectation of additional three months of extension of time due to covid induced lockdown (3 months extension has already been received). Nonetheless, progress of HAM projects will remain a key monitorable.

 

ABL’s strong project execution capabilities are reflected in successful completion of projects within the scheduled time and budgeted cost. The strong in-house EPC division undertakes all project implementation for the BOT/HAM road projects. The group also manufactures readymade concrete and high-grade bitumen, which supports operating efficiency, reflected in a moderate operating margin of 12-15% in the past five fiscals through 2021.

 

• Robust order book of ABL providing strong revenue visibility

The company had orders of Rs 8,166 cr as on March 31, 2021 and post Mach it has won/L1 for orders worth Rs 1,950 cr. Order book to revenue ratio of the company is over 2.3 times, providing healthy revenue visibility over the medium term. Around 76% of orders (as on March 31, 2021) are from the road segment, while 17% and 7% are from power transmission and distribution (T&D), and railways and commercial gas distribution (CGD) segments, respectively. Of the road orders, HAM and EPC account for 56% and 44%, respectively.

 

• Sound financial risk profile of ABL

Operating income registered a de-growth of around 4% and was at around Rs 3,800 cr in fiscal 2021. This was due to lower execution in Q1’21 on account of covid induced lockdown. Flattish revenue and higher fixed cost has resulted in 200bps decline in operating margin which was at 13.6% in fiscal 2021.

 

Adjusted debt stood at around Rs 740 crore as on March 31, 2021. Healthy networth and low debt has kept the capital structure comfortable. Adjusted gearing has improved to 0.25 time as on March 31, 2021 from 0.30 time as on March 31, 2020. Adjusted total outside liabilities to adjusted networth (TOL/ANW) also remains comfortable at 0.8 times as on March 31, 2021 (1.02 times as on March 31, 2020). The company’s debt level is likely is remain at similar level in fiscal 2021, thereby helping it retain its capital structure.

 

Healthy profitability and moderate debt levels have helped maintain comfortable debt protection metrics: the adjusted interest and finance coverage and net cash accrual to adjusted debt ratios were around 8.94 times and 0.7 time, respectively, in fiscal 2021. Debt protection metrics are expected to be sustained on the back of stable debt and profit.

 

About 80% of ABL’s networth is locked in investments made in the underlying BOT and HAM portfolio. Further, the company is expected to invest around Rs 500 crore over fiscals 2022 and 2023, towards equity commitment of ongoing HAM projects and investments in CGD business along with financial support for meeting cash flow mismatches at the underlying SPVs. Major maintenance works in two projects were completed in fiscal 2021 and is being taken up for four BOT projects in fiscals 2022 and 2023, which would entail support requirements. This support is over and above the surplus generated from Jaora Nayagaon Toll Road Company Pvt Ltd and Viva Highways Ltd, which would be used towards supporting ABL’s SPVs.

 

ABL has been infusing the entire equity commitment towards HAM projects under ACL. ACL in September 2019 had raised Rs 150 cr NCDs which was used to pay off unsecured loan from ABL to the extent of equity infusin done by ABL on behalf of SBI Macquarie. Post that additional Rs 100 cr has been infused by ABL in ongoing HAM projects. ACL has raised Rs 250 cr which has been used to refinance existing NCDs and balance has been used to pay off unsecured loans from ABL. ABL will be infusing entire balance equity commitment in the ongoing HAM projects till the new investor is identified.

 

The company had been negotiating to monetise its stake in the BOT and HAM portfolio, however talks on the same were stalled because of the Covid-19 pandemic. The monetisation process is in advanced stage and is likely to conclude by Q2’2022. Funds received from new investor will help curtail the funding from ABL towards equity and support requirement in the projects. Any delay in fructification of monetisation plan in the near term is likely to increase debt levels, which can impact the credit profile of the company. Timely monetisation of assets in near term, to unlock its capital, will remain a rating sensitivity factor.

 

Weaknesses:

• Working capital-intensive operations

Working capital requirement of ABL is inherently large in the EPC industry, given the high dependence on state and central government authorities for receipt of payments. Further, in the power T&D segment, working capital requirement is higher because 20% of the payment is received once the project is operationalised, which usually takes two years and 10% of the contract value is held as retention money until the expiry of the warranty period that usually takes five years. The working capital cycle has been impacted in fiscals 2016 and 2017, on account of large inventory requirement in the power T&D segment.

 

Working capital cycle has been improving over the past three fiscals, with gross current assets (GCA, net off cash) at around 200 days as on March 31, 2021 (266 days as on March 31, 2017), aided by lower inventory on account of collection of working capital advance for NHAI road projects which has improved the billing cycle in fiscal 2021 and lower execution in power T&D segment.

 

• Susceptibility to intense competition and cyclicality in the construction industry

76% ABL;s outstanding orders as on March 31, 2021 comprised projects from roads and highways, and the remaining from the power T&D, railways and CGD segments. Although the company executes projects across various modes (BOT/EPC/HAM) in the roads segment, revenue is susceptible to changes in government regulations and economic conditions. Limited diversity in revenue will keep it susceptible to intense competition and cyclicality inherent in the construction industry.

Liquidity: Strong

Liquidity is strong derived from credit enhancement available in the form of an unconditional and irrevocable corporate guarantee by ABL. ABL is likely to provide financial support in the event of an exigency in a timely manner. ABL is expected cash accrual of over Rs 400 crore per annum over the medium term, should suffice to cover the maturing debt of Rs 90-120 crore each in fiscals 2022 and 2023. Fund-based bank limit utilisation of ABL remained low at 10% during the 12 months through May 2021. The company primarily uses non-fund-based facilities for meeting working capital requirement. Utilisation of these facilities averaged 67% for the 12 months through May 2021. Furthermore, an established relationship with suppliers results in a long credit period and hence, lower dependence on own funds. Unencumbered cash and equivalents of ABL stood at Rs 97 crore as on March 31, 2021.

Outlook: Stable

The rating of ACL is based on that of the guarantor, ABL. The ratings will remain sensitive to any change in CRISIL Ratings’ credit view on ABL.

 

CRISIL believes ABL's business risk profile will remain healthy over the medium term, driven by moderate growth in revenue, in turn led by strong outstanding orders and execution capabilities. The financial risk profile is expected to remain comfortable, marked by healthy capital structure and debt protection metrics.

Rating Sensitivity factors

Upward factors:

• Sustained revenue growth of more than 15% and profitability upwards of 15% while maintaining the capital structure
• Improvement in working capital management
• Significant improvement in performance of operational BOT projects strengthening overall credit profile

 

Downward factors:

• Sustained weakening in TOL/ANW ratio to 1.5 times or more
• Delay in monetisation plan beyond September 2021
• Delays in project implementation or deterioration in performance of operational BOT projects, leading to higher-than-expected support requirement

Adequacy of credit enhancement structure

The rating on NCDs centrally factor in the unconditional and irrevocable corporate guarantee extended by the parent, ABL. The guarantee covers all the repayment obligations of the NCDs in a timely manner. ACL shall ensure that the redemption amount or amounts due or any other payment due as per the debenture trust deed shall be deposited in the debenture holders’ account three calendar days prior to the interest payment date or redemption date (deposit date). If ACL fails to deposit the redemption amount and/or the interest or any other amounts due, on or prior to the deposit date, then the debenture trustee shall on the same day, issue a demand notice to ABL, requiring it to deposit the amount on or before one calendar day prior to the Redemption Dates or Interest Payment Dates. ABL undertakes that it shall unconditionally and irrevocably pay on demand to the Debenture Trustee such amount stated in the Demand Notice, without any demur or protest and without any set off or lien on or before one calendar day prior to the Redemption Dates or Interest Payment Dates, as the case may be.  Further, the guarantee is continuing and covers the entire facility.

Unsupported Ratings CRISIL A-

CRISIL Ratings has introduced the 'CE' suffix for instruments having explicit credit enhancement feature in compliance with the circular of Securities and Exchange Board of India dated June 13, 2019.

Key drivers for unsupported ratings

• ACL’s portfolio remains well-diversified with a healthy mix of BOT toll and HAM projects
• Moderate implementation risk of the under-construction HAM projects given the low funding risk and strong EPC contractor in the form of ABL.
• No additional debt planned to be raised in ACL except the guaranteed debt supporting the moderate financial risk profile
• Support from ABL to ACL continues in case of cash flow mismatches or for meeting equity commitments and support requirements for underlying projects in ACL

About the Company

ACL was set up in November 2011, as a subsidiary of ABL, which transferred seven BOT projects to the former. SBI Macquarie infused Rs 800 crore through a stake dilution of 34% (which may go up to 39% based on shareholding agreement terms at the time of the actual conversion of compulsorily convertible debentures to equity) in ACL, which acts as an exclusive BOT project developer for both ABL and SBI Macquarie.

 

ACL currently holds six operational toll road projects, and seven HAM projects. In addition, the company handles its own portfolio of toll collection contracts from NHAI and other authorities. Toll collections of project SPVs under ACL are all managed on their own, by the SPVs.

About the Guarantor

ABL, incorporated in 1993, engineered and constructed residential, commercial, industrial, and institutional buildings until 1997. The company won its first BOT project in 1997. Currently, operations comprise BOT and EPC road projects, EPC power T&D projects, collection of toll on roads and bridges owned and constructed by third parties, and manufacturing of ready-mix concrete. The company also ventured into the commercial gas distribution business in 2016 by winning its first order to build and operate a gas distribution network in Ratnagiri district, Maharashtra. Additionally, the company entered into executing smart city construction projects in 2016.

 

ABL is listed on both the Bombay Stock Exchange and National Stock Exchange. ABL has significant experience in executing road projects across India and has constructed more than 10,000 lane km till date. This is also reflected in its outstanding BOT/HAM portfolio of 25 projects. In the EPC division, ABL constructs roads and bridges for its own BOT projects as well as for third parties. It also executes EPC projects in the power distribution space for various state governments.

Key Financial Indicators of ACL:- CRISIL Ratings adjusted

Financials as on / for the period ended March 31		2021*	2020
Revenue	Rs crore	70	59
Profit after tax (PAT)	Rs crore	-178	-220
PAT margin	%	-256	-374
Adjusted debt/adjusted networth	Times	0.84	0.55
Interest coverage	Times	0.30	0.25

*Detailed financials not yet available

PAT is low due to exceptional expenses of Rs 110 crore and Rs 155 crore in FY21 and FY20 respectively

 

Key financial indicators of ABL:- CRISIL Ratings adjusted

Financials as on / for the period ended March 31		2021	2020
Revenue	Rs crore	3818	3937
Profit after tax (PAT)	Rs crore	408	387
PAT margin	%	10.7%	9.8%
Adjusted debt/adjusted networth	Times	0.25	0.3
Interest coverage	Times	8.94	8.75

 

List of covenants for Rs 150 crore NCD (has been paid off)

This is as per the financing document

• ABL to hold at least 51% of the equity share capital in the ACL and have management control of the company
• Current promoters of ABL to hold at least 45% of the equity share capital in the ABL and have management control of the company

 

Financial covenants for ABL

• Fund based standalone debt cap (excluding shortfall but including all corporate guarantee given to ACL by ABL) not to exceed Rs 1150 crore
• Ratio of fund based standalone debt cap (excluding shortfall but including all corporate guarantee given to ACL by ABL) to EBITDA not to exceed 2x
• Fund based standalone debt cap (including all corporate guarantee and all types of shortfall/sponsor undertaking given to lenders by ABL) not to exceed Rs 4850 crore
• Loans and advances from ABL to any of its subsidiaries /group companies for existing projects of the group to be capped at Rs 800 crore on any day after March 2019 post end use of NCD proceeds (which will exclude interest accrued from March 31, 2019 onwards) excluding CGD business. Any incremental funding to be used in HAM projects will be carved out from these limits.
• Further no more new additional undertaking or corporate guarantee to be given by ABL to any lenders
• Additional funding from ABL (directly or indirectly) for CGD business to be capped at Rs 100 crore during the tenor of NCDs. Each year, amount is capped at Rs 40 crore

 

Financial covenants for ACL

• Fund based standalone debt not to exceed Rs 200 crore
• ACL should not be negative EBITDA company during the tenor of NCDs

 

List of covenants for Rs 250 crore NCD

• ABL to have management control of the company, ACL
• Current promoters of ABL to hold at least 45% of the equity share capital in the ABL and have management control of the company

 

Financial covenants for ABL

• Fund Based Standalone Debt and corporate guarantees (including Bank guarantees issued for MMRA, DSRA & Disputed claims) shall not exceed Rs 1,800 crore during the tenure of NCD. 
• Ratio of Fund Based Standalone Debt (excluding shortfall undertaking but including all corporate guarantee (including Bank guarantees issued for MMRA, DSRA & Disputed claims) given by Guarantor) to EBITDA shall not exceed 3.0x.
• Fund Based Standalone Debt (including all corporate guarantees, Bank guarantees issued for MMRA, DSRA & Disputed claims, all types of shortfall/ sponsor undertaking given to lenders by Promoter but excluding letter of comfort) shall not exceed Rs. 7500 crores in FY22, Rs 8500 in FY23 and Rs 9500 in FY24
• The bank guarantees, letter of credit standby letter of credit and any NFB borrowings at all times will be capped at 125%of total turnover/total revenue of the preceding yearly audited financials.
• Interest Cost of the Guarantor: not to exceed 3.5% of its total Revenue.
• Guarantor’s net worth cannot be less than the latest audited net worth, except in case of reduction of net worth due to exit offered to Private Equity Investors.
• Guarantor should achieve positive profit after tax on an annual basis throughout the tenor of the Debentures, except in case of negative profit after tax due to reduction resulting from exit offered to Private Equity Investors.

 

Financial covenants for ACL

• Fund based standalone debt not to exceed Rs 300 crore

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate %	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
INE641N08045	Non-convertible debentures	04-Sep-19	10.45%	25-Apr-22	150.0	Complex	CRISIL AA-(CE)/Stable
INE641N08052	Non-convertible debentures	01-Jul-21	9.01%	23-Dec-22	50.0	Complex	CRISIL AA-(CE)/Stable
INE641N08060	Non-convertible debentures	01-Jul-21	9.11%	23-Jun-23	50.0	Complex	CRISIL AA-(CE)/Stable
INE641N08078	Non-convertible debentures	01-Jul-21	9.21%	22-Dec-23	50.0	Complex	CRISIL AA-(CE)/Stable
INE641N08086	Non-convertible debentures	01-Jul-21	9.24%	21-Jun-24	100.0	Complex	CRISIL AA-(CE)/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated with ACL	Extent of Consolidation	Rationale for Consolidation
ASBTL	Full	ACL has extended an unconditional and irrevocable corporate guarantee to ASBTL to support the project over the entire tenure of the loan.

 

Entity consolidated with ABL	Extent of consolidation	Rationale for consolidation
ACL	Moderate	Support to the extent of equity and cash flow mismatches. Guaranteed debt of Rs 250 crore to be raised at ACL is fully consolidated with ABL
UEPL	Moderate	Support to the extent of equity; Expected debt which is proposed to be guaranteed is fully consolidated with ABL
Ashoka GVR Mudhol Nipani Pvt Ltd	Moderate	No recourse of project debt to ABL; expected support towards cash flow mismatches during operations
Ashoka Bagewadi Saundatti Road Ltd	Moderate	No recourse of project debt to ABL; expected support towards cost overrun on pending construction and cash flow mismatches in operations
Ashoka Hungund Talikot Road Ltd	Moderate	No recourse of project debt to ABL; expected support towards cost overrun on pending construction and cash flow mismatches in operations
Ashoka Kandi Ramsanpalle Road Pvt Ltd	Moderate	No recourse of project debt to ABL; expected support towards cost overrun on pending construction and cash flow mismatches in operations
Ashoka Banwara Betadahalli Road Pvt Ltd	Moderate	No recourse of project debt to ABL; expected support towards cost overrun on pending construction and cash flow mismatches in operations