Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable’ rating on the long-term bank facilities of H.G Raipur Visakhapatnam AP-1 Private Limited (HGRVAP-1PL; a hybrid annuity project of HG Infra Engineering Ltd [HGIEL]).

 

The project is running behind schedule (~40% complete as on May 31, 2023, against 52% planned) due to early monsoon in the first quarter of fiscal 2024, delays in blasting activities and temporary disruptions in material supply, etc. However, the progress is expected to ramp-up substantially in the second half of fiscal 2024, supported by the established track record of HGIEL. During the last monsoon (first half of fiscal 2023), the execution was delayed by 85 days for the first milestone. However, HGIEL sharply ramped up the progress and completed the second milestone with only five days delay. The company has applied for extension of timeline (EOT) for 168 days. The project has so far been largely funded out of five milestone payments from the National Highway Authority of India (NHAI; 'CRISIL AAA/Stable') within due date (Rs 212 crore excluding inflation component), term loans (debt disbursement of Rs 100 crore as on June 14, 2023), mobilisation advances and funds from the sponsor (Rs 89 crore infused).

 

The rating factors in improved availability of right-of-way (ROW) and the project progress which is slightly behind schedule. The rating continues to factor in inherent benefits of the hybrid annuity model (HAM) such as adequate ROW and approvals. The rating also reflects low funding risk, and expected operational and financial support from the sponsor, HGIEL. These strengths are partially offset by exposure to moderate implementation risk inherent in under construction projects.

Analytical Approach

CRISIL Ratings has notched up the standalone rating of HGRVAP-1PL, based on the expectation of strong support from its sponsor, HGIEL, both on an ongoing basis and in the event of distress.

Key Rating Drivers & Detailed Description

Strengths:

Benefits of HAM and receipt of ROW and approvals

The company has received 100% ROW and approvals are also in place, which are critical during the construction phase of the project. Project appointed date (AD) was received on March 31, 2022. Under the HAM concession agreement (CA), 80% ROW has to be handed over at the 3G stage (compensation decided) and major approvals have to be provided for declaration of the AD. The other benefits of HAM include change of project scope if 100% ROW is not provided within 180 days of the AD. Furthermore, the clause on provisional commercial operation date (PCOD), which states PCOD will be issued on completion of construction on the land made available up to 146 days from the AD (thereby allowing for annuities to be paid as if all works of the project have been completed), is also critical during the operational phase. The project also enjoys cost-escalation assurance provided by the NHAI.

 

Moreover, HGRVAP-1PL has signed a fixed-price, fixed-time contract with HGIEL, which has extensive domain expertise and experience of more than three decades in the construction business and track record of project execution within budgeted time and cost.

 

Low funding risk

Total bid project cost (BPC) is Rs 1,060 crore, but the company has achieved financial closure for the project at a cost of Rs 1,028 crore (~97% of BPC), funded by NHAI grant of Rs 424 crore, debt of Rs 452 crore and the balance through equity. Funding risk is low as the company has tied up for the bank loan and has started disbursement.

 

The project had achieved ~40% physical progress till May 31, 2023, which has largely been funded out of five milestone payments from NHAI, term loans, mobilisation advances and funds from the sponsor. The sponsor has brought in nearly 58% of its equity contribution and has taken debt disbursement of Rs 100 crore as on June 14, 2023. Furthermore, HGIEL has given an undertaking to provide financial support in case of cost overrun and cash flow mismatch during the construction and operational phases.

 

Expected operational and financial support from the sponsor

HGRVAP-1PL will benefit from the strong operational and financial support of HGIEL, which has 100% shareholding. Apart from cost overrun, HGIEL will support any increase in operations and maintenance (O&M) expense during the construction phase. Corporate guarantee for the project debt is also available from the sponsor till receipt of the second annuity. HGIEL will also meet any shortfall in debt servicing during the operational phase. Furthermore, any increase in O&M expense beyond the NHAI payout during the operational phase will be met by HGIEL. The sponsor has a track record of more than three decades in the engineering, procurement and construction (EPC) segment. It has the financial flexibility to support its projects, if needed.

 

Weakness:

Moderate implementation risk

The company faces moderate implementation risk as the project has achieved physical progress of ~40% as on May 31, 2023, and is running behind schedule due to early monsoon in the first quarter of fiscal 2024, delays in blasting activities and temporary disruptions in material supply, among other factors. The company has applied for extension of timeline (EOT) for 168 days. Nevertheless, implementation risk is mitigated by availability of 100% ROW with all the approvals in place; fixed-price, fixed-time EPC contract with HGIEL; low technical complexity of the project and strong project execution capability of the sponsor. HGIEL has expertise spanning more than three decades in the construction business and a track record of project execution within the scheduled time and budgeted cost. In case of any delay in the project, HGIEL will provide financial support in line with the sponsor supporting the undertaking. However, any significant delay in project implementation will remain a rating sensitivity factor.

Liquidity: Strong

The project is currently under construction and the first repayment is scheduled after achieving COD. Liquidity is expected to be healthy after project completion as it will receive semi-annual annuities (along with interest) and O&M payout from NHAI. The debt service coverage ratio is expected to be above 1 time throughout the tenure of the debt. Repayment will begin seven months from the scheduled commercial operation date/PCOD, which provides additional cushion. Furthermore, debt service reserve account (DSRA) equivalent to six months of debt servicing will also be created upfront upon COD of the project. DSRA of Rs 31.7 crore has also been included in the total project cost. Furthermore, HGIEL has provided an undertaking to the project for financial support for cash flow mismatches during the construction and operational phases.

Outlook: Stable

HGRVAP-1PL will execute the project within the budgeted time and cost, supported by strong execution capability of its sponsor and fixed-time, fixed-price EPC contract with it. The project also benefits from the undertaking by HGIEL to meet any cost overrun, shortfall in debt servicing and O&M expenses. HGRVAP-1PL will also benefit from the operational and financial support extended by HGIEL.

Rating Sensitivity factors

Upward factors

* Completion of the project on or before time (730 days from AD) within budgeted cost

* Creation of DSRA as per financing documents

 

Downward factors

* Significant delay in receipt of PCOD beyond 2 years from AD

* Significant cost overruns

* Weakening of the credit risk profile of the sponsor, HGIEL

About the Company

HGRVAP-1PL is a special purpose vehicle incorporated on August 19, 2021, for the development of the six-lane Aluru–Jakkuva section of the National Highway 130-CD road from kilometre (km) 365+033 to km 396+800 under Raipur-Visakhapatnam economic corridor in Andhra Pradesh on HAM. The project was awarded by NHAI in July 2021 and the CA was signed on October 14, 2021, for a concession period including construction period of 730 days from AD and fixed operations period of 15 years from COD. The pavement type is fully flexible (bitumen) except for the toll plaza. HGIEL controls 100% of the equity interest in HGRVAP-1PL. The project received its appointed date on March 31, 2022.

 

The BPC is Rs 1,060 crore and O&M bid cost is Rs 4 crore. Both are adjusted for price index variation between the bid date and the milestone date to arrive at the completion cost (for BPC) and each O&M payment (for O&M bid cost). The project will be funded by NHAI to the extent of 40% of adjusted BPC (adjusted for price multiple indexation) during the construction phase, while the balance 60% will be paid out as annuity during the operational phase. The company has tied up funding for the project.

Key Financial Indicators^

Financials as on/for the period ended March 31	Unit	2023	2022
Revenue	Rs crore	NA	NA
Profit after tax (PAT)	Rs crore	NA	NA
PAT margin	%	NA	NA
Adjusted debt/adjusted networth	Times	NA	NA
Interest coverage	Times	NA	NA

^Financials not relevant as the project is under construction

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  levels	Rating assigned with outlook
NA	Rupee term loan#	NA	NA	Mar-37	202	NA	CRISIL A/Stable
NA	Rupee term loan*	NA	NA	Mar-37	250	NA	CRISIL A/Stable

#Mobilisation bank guarantee of Rs 52.11 crore as sublimit of rupee term loan facility; performance bank guarantee of Rs 14.21 crore as sublimit of rupee term loan facility.

*Mobilisation bank guarantee of Rs 64.50 crore as sublimit of rupee term loan facility; performance bank guarantee of Rs 17.59 crore as sublimit of rupee term loan facility.