Rating Rationale
June 28, 2019 | Mumbai
Ashoka GVR Mudhol Nipani Roads Limited
Rating upgraded to 'CRISIL A(SO)/Positive'
 
Rating Action
Total Bank Loan Facilities Rated Rs.280 Crore
Long Term Rating CRISIL A(SO)/Positive (Upgraded from 'CRISIL A-(SO)/Stable')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the long-term bank facilities of Ashoka GVR Mudhol Nipani Roads Limited (AGMNRL) to 'CRISIL A(SO)/Positive' from 'CRISIL A-(SO)/Stable'.
 
The upgrade reflects track record of receipt of three more annuities since February 2018 from the authority i.e. Karnataka State Highways Improvement Project (KSHIP) and maintenance of healthy debt service coverage ratio (DSCR). The project received its first annuity in February 2018 which was delayed due to delays in receipt of full commercial operations date (COD). However, subsequently, second annuity has been received in March 2018. Despite delays in receipt of annuity, the repayment was supported by fund infusion from Ashoka Buildcon Ltd (ABL; rated 'CRISIL AA-/Stable/CRISIL A1+'). The project received third annuity with a delay of around three months and a deduction of Rs 11 crore due to an audit query raised at Government of Karnataka; the same was resolved and the annuity was paid in full subsequently. Fourth annuity has been received in full and fifth annuity is expected to be received shortly.
 
Further, the road quality has been maintained as per the standard and which has supported the receipt of annuity without deduction. Despite delays in annuity payment, strong support from ABL and project's healthy cash flow has supported timely servicing of debt. Further, liquidity is supported by adequate time gap of 50 days between annuity receipt and debt repayment date and, liquidity in the form of debt service reserve account (DSRA), equivalent to 6-months of principal and interest obligation. Track record of timely receipt of future annuities along with maintenance of the road will remain key monitorables.
 
The rating continues to reflect the benefits derived from the annuity nature of AGMNRL's build, operate, and transfer (BOT) project, healthy debt protection metrics and expected need-based operational support from the parent.  These strengths are partially offset by vulnerability to delays in receipt of annuity payments from KSHIP and susceptibility of cash flow to volatility in operational costs and interest rates.
 
The 'SO' suffix for the rating reflects the tight escrow mechanism through which cash flow from annuity payments will be routed and used for meeting operating expenses and debt-servicing obligations.

Key Rating Drivers & Detailed Description
Strengths
* Benefits derived from the annuity nature of the BOT project
Annuity-based BOT projects face lower revenue risks than toll-based projects. Under the annuity-based BOT model, the nodal road agency makes a fixed payment over the concession period to the concessionaire. Therefore, AGMNRL is insulated from risks related to inadequate traffic that may lead to revenue volatility, as a fixed stream of cash flow is ensured from KSHIP.
 
* Healthy debt protection metrics
Debt protection metrics are expected to remain healthy, with adequate cash flow in the form of annuity receipts to meet debt obligation throughout the tenure of the loan. Though the company depended on the support from ABL towards debt servicing till the receipt of first annuity, it has been self-sufficient since then and has been able to service its debt obligation on time and fully. DSCR will remain above 1.0 time throughout the debt tenure, supported by moderate repayment obligation and maintenance expenses. AGMNRL's road stretch is of good quality, with healthy average bump integrator test value of around 1,465 millimetre/kilometre as of April 2019, thereby limiting any significant routine and periodic maintenance expenses over the operational period. Additionally, the project benefits from adequate liquidity, with DSRA equivalent to six months of principal and interest obligations in the form of cash, and a time gap of 50 days between annuity receipt date and maturing debt date, providing a buffer in case the receipt of annuity is delayed.
 
* Need-based operational and financial support from ABL
AGMNRL is likely to benefit from the strong operational and financial support of its parent and single largest shareholder, ABL. Although, the project was being executed in joint venture (JV) with GVR Infra Projects Ltd (GVR), ABL took over the project and supported the construction when GVR faced problems with equity infusion and project execution. ABL also supported the remaining construction, project operations, creation of DSRA and meeting debt service obligations till the receipt of first annuity by extending unsecured loans. Additionally, ABL has provided an undertaking and is expected to support the project in the event of mismatches in debt servicing, DSRA, and higher-than-expected routine and periodic maintenance expenses during operations.
 
Weaknesses
* Vulnerability to delay in receipt of annuity payments
The first two annuities were received in February 2018 (delay of over eight months) and March 2018 (delay of over three months), respectively, due to administrative and procedural postponements from the authority in declaring the full commencement of operation date (COD). Further, third annuity, which was scheduled for June 2018 has been received in September 2018 with a delay of nearly three months. Though the company has received its fourth annuity within 17 days from the scheduled date and had adequate time gap of 50 days between the receipt of annuity payment and the due date of debt servicing obligation, it remained vulnerable to delay in receipt of annuity payment. Any significant delay in receipt of future annuities could impact the project's cash flow and debt servicing capability as annuity is the only source of revenue and, therefore remains a key monitorable.
 
* Susceptibility to volatility in operational costs and interest rates
AGMNRL is exposed to risks related to maintenance of the project stretch. If the prescribed standards are not met, annuity payments may be reduced. Operational costs also depend on inflation. Furthermore, floating interest rate on debt exposes the company to volatility in operational costs and interest rates. Although cushion in the cash flow will help partially absorb the impact of such fluctuations, they will remain rating sensitivity factors.
Liquidity

Liquidity is adequate, supported by receipt of four annuities till date and expected receipt of fifth (in the process of receipt) and future annuities without much delay facilitating comfortable debt servicing and maintenance of the project. Furthermore, liquidity is underpinned by healthy cash and cash equivalents of Rs 53.58 crore as on March 31, 2019, which includes DSRA equivalent to six months of principal and interest obligations of Rs 25.93 crore and major maintenance reserve of Rs 25.87 crore. Additionally, ABL is expected to support if there is any temporary cash flow mismatch related to debt servicing and maintenance expenses. Adequate time gap of 50 days between annuity receipt and debt repayment date also provides some cushion.

Outlook: Positive

CRISIL believes AGMNRL is expected to receive future annuities in full and largely in time, which would help it sustain healthy DSCR level. The rating may be upgraded if there is further track record of timely and full receipt of future annuities and maintenance of the project stretch while maintaining healthy DSCR. Conversely, the outlook may be revised to 'Stable' if there are significant delays or deductions in receipt of future annuities or if higher-than-expected expenses incurred towards operations impacts DSCR or if receipt of need-based support from ABL is not timely.

About the Company

AGMNRL was established by ABL and GVR to implement the project involving reconstruction of the existing State Highway 18 from Mudhol to Nipani (involving a length of 107.937 km), to 2-lane standard, on design build finance operate maintain and transfer on annuity basis. ABL and GVR hold 71% and 29% stakes in the project, respectively. The ABL-GVR JV was the selected bidder for the project, based on semi-annual annuity quoted by them of Rs 39.49 crore. In fiscal 2017, ABL has agreed to acquire 100% stake from GVR, subject to authority approval post the mandatory lock-in period as per the terms of the concession agreement. Though currently ABL has authority and lenders approvals to acquire 100% stake, the stake acquisition is put on hold as GVR is undergoing the National Company Law Tribunal (NCLT) process.
 
The concession agreement between AGMNRL and the Government of Karnataka through the Governor of Karnataka, KSHIP was signed on March 14, 2014. The concession was granted to AGMNRL for 10 years (including a construction period of 731 days) and semi-annual annuity payments of Rs 39.49 crore. The company had received provisional COD with effect from (wef) December 10, 2016, and received COD in January 2018 wef December 10, 2017. The project received four semi-annual annuity payments till March 2019 and is scheduled to receive 12 more semi-annual annuities over the remaining period of the concession.
 
About the Sponsor
ABL's business comprises BOT road projects, engineering procurement construction (EPC) projects, collection of tolls on roads and bridges owned and constructed by third parties, and manufacturing of ready-mix concrete. The Ashoka group has a portfolio of BOT and hybrid annuity projects. In the EPC division, ABL constructs roads and bridges for its own BOT projects and for third parties. It also executes other infrastructure projects in the power transmission and distribution and commercial gas distribution sectors.
 
ABL has significant experience of executing road projects across India and has constructed over 10,000 lane km till date. This is also reflected in its outstanding BOT portfolio of 22 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 - AGMNRL
Financials as on/for the period ended March 31 Unit 2019# 2018
Revenue* Rs crore 47.2 76.6
Profit After Tax (PAT) Rs crore 17.6 25.0
PAT Margin % 37.4 32.7
Adjusted debt/adjusted networth Times 2.13 2.79
Interest coverage Times 2.00 1.57
*Revenue includes the contract revenue incurred in the project as per IND AS accounting requirements
#fiscal 2019 financials are on provisional basis

Any other information: Not applicable

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 Name of Instrument Date of Allotment Coupon Rate % Maturity Date Issue Size
(Rs Cr)		 Rating Assigned with Outlook
NA Term Loan NA NA 01-Feb-2024 265.0 CRISIL A(SO)/Positive
NA Cash Credit* NA NA NA 15.0 CRISIL A(SO)/Positive
*Cash credit of Rs 15 crore is a sub-limit of term loan facility of Rs 280 crore
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
Fund-based Bank Facilities  LT/ST  280.00  CRISIL A(SO)/Positive      22-03-18  CRISIL A-(SO)/Stable  29-05-17  CRISIL BBB(SO)/Stable  24-02-16  CRISIL BBB(SO)/Stable  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 15 CRISIL A(SO)/Positive Cash Credit* 15 CRISIL A-(SO)/Stable
Term Loan 265 CRISIL A(SO)/Positive Term Loan 265 CRISIL A-(SO)/Stable
Total 280 -- Total 280 --
*Cash credit of Rs 15 crore is a sub-limit of term loan facility of Rs 280 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
The Infrastructure Sector Its Unique Rating Drivers
CRISILs criteria for rating annuity roads

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