Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the long-term bank facilities and non-convertible debentures (NCDs) of Highways Infrastructure Trust (HIT) and ‘CRISIL A1+’ rating on commercial paper (CP) of Rs 275 crore. CRISIL Ratings has also withdrawn its rating on CP of Rs 275 crore based on HIT’s request as it has been fully redeemed. The withdrawal is in line with CRISIL Ratings’ policy.

 

CRISIL Ratings’ notes HIT’s announcement on September 20, 2024 regarding the receipt of letter of award (LOA) for operating a road project (TOT-16) in the state of Telangana on toll, operate and transfer basis.

 

TOT-16 is a 252-kilometer (km) section of north-south corridor between Nagpur and Hyderabad which is a part of national highway (NH) 44. The entire project stretch is in the state of Telangana and has 5 toll plazas. National Highways Authority of India (NHAI, rated CRISIL AAA/Stable) has awarded this TOT bundle under a 20-year concession for an upfront concession fee of Rs 6,661 crore and the appointed date is expected to be received in the last quarter of fiscal 2025. Majority of the traffic on the project stretch is contributed by commercial vehicles aided by transport of commodities such as parcels, agricultural produce, industrial products and equipment, automobiles, consumer items, etc. The traffic growth on the project stretch is healthy with compounded annual growth rate of 12.8% in the last five fiscals. The actual toll collection for fiscal 2024 stood at Rs 474 crore (considering discounted toll rates at Manoharabad toll plaza due to ongoing six laning construction work for 27 km out of total 61.5 km stretch which is expected to be completed by December 2025; equivalent toll collection of Rs 593 crore considering normal toll rates for fully constructed project stretch). The TOT-16 transaction is expected to be funded through debt of up to Rs 4,300 crore at the trust level and balance through unitholders’ infusion.

 

Over and above the existing 13 assets, HIT had signed SPA to acquire 13 road SPVs. One HAM project of H.G. Infra Engineering Ltd (HG Infra; part of the transaction from which three HAM assets have been acquired) is expected to be concluded in fiscal 2025. Also, 56.8% stake in GRICL owned by Macquarie group was acquired in January 2024, while 26.8% stake is yet to be acquired. HIT is also in the process of acquiring 100% shareholding in 11 hybrid annuity model (HAM) and one toll road asset special purpose vehicles (SPV) owned by PNC Infratech Ltd and PNC Infra Holdings Ltd (collectively ‘PNC’). The trust had entered into a share purchase agreement (SPA) for the same in January 2024. This transaction is also expected to be completed in fiscal 2025 and will be financed by a mix of debt and unitholders’ infusion with debt quantum of Rs 5,400 crore.

 

On a consolidated basis, the trust currently has debt of Rs 3,700 crore which translates to net debt-to-enterprise value (EV) of ~34% as of June 2024. With addition of one HAM of HG Infra, TOT-16 and PNC assets, consolidated net debt-to-EV of HIT is expected to increase to 50-55%. Nevertheless, HIT’s debt protection metrics are expected to remain comfortable. CRISIL Ratings will continue to engage with HIT’s management to get further details on these developments.

 

The ratings continue to reflect favourable location and geographic diversity of the existing stretches and the stretches to be acquired, and healthy revenue visibility given strong track record of toll collection and annuity receipt. The rating also factors in strong debt protection metrics, supported by tight escrow mechanism with a well-defined payment waterfall mechanism and creation of a debt service reserve account (DSRA) and a major maintenance reserve account (MMRA). The rating also derives strength from the experience of Highway Concessions One Pvt. Ltd (HC1) and HC One Project Manager Pvt. Ltd (HC1 PM) as the investment manager and the project manager providing services to the assets respectively. The trust is sponsored by Galaxy Investments II Pte. Limited (Galaxy), which is invested in by funds, vehicles and/or entities managed and/or advised by Kohlberg Kravis Roberts & Co. LP and/or its affiliates (collectively ‘KKR’).

 

These strengths are partially offset by susceptibility of toll revenue to volatility in traffic volume, development or improvement of alternative routes or modes of transportation that could impact revenue and in turn debt service coverage ratio (DSCR). The DSCR will also remain susceptible to volatility in operations and maintenance (O&M) costs and interest rates. Going forward, philosophy of debt funding and its impact on leverage of the trust will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of HIT with its underlying SPVs. This is because the trust is expected to have direct control over these SPVs and will infuse funds in them (in the form of shareholder debt) to prepay outstanding debt. Furthermore, the SPVs will distribute their surplus cash to the infrastructure investment trust (InvIT), in the form of interest and repayment (on debt provided by the InvIT/debentures), dividend or return of capital through capital reduction, leading to highly fungible cash flows. Also, as per the financing terms, the cap on borrowings has been defined at a consolidated level.

 

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:

Healthy operational track record of assets with geographic diversification

The existing portfolio comprising of thirteen SPVs (excluding project SPVs to be acquired) in different states benefits from asset and geographical diversification. Additionally, the projects have strong counter parties – NHAI for 10 project SPVs and Ministry of Road Transport and Highways, Madhya Pradesh Road Development Corporation Ltd and govt. of Gujarat for one project SPV each. The toll road projects have long tolling track record ranging from 8 to 22 years, while the annuity projects have track record of receiving 28 and 21 semi-annual annuities without any material deduction. All three HAM projects have achieved commercial operations date (COD) and received 3-4 annuity payments. The portfolio will further benefit from diversification after the proposed acquisitions of one toll and twelve HAM assets.

 

The toll stretches are situated along major industrial and tourist hubs and connect important cities such as Godhra, Jodhpur, Indore, Bhopal, Ahmedabad and Chennai to major ports on the western (Kandla and Mundra) and eastern (Chennai, Puducherry and Krishnapatnam) seaboards. The stretches are spread across nine key states (presence in ten states including proposed acquisitions) that contribute substantially to the total gross state domestic product. HIT will, thus, benefit from healthy traffic potential. Balance concession period of the projects ranges from 3 to 20 years. While the concession for three of the six initial stretches is expected to be over in next 3-4 years, their contribution to the initial portfolio was expected to be 35-40%. Hence, long term revenue visibility is driven by other three assets having larger share of revenue in the initial portfolio of 6 assets. Furthermore, the trust is in the process of acquiring new assets and will continue to look for new opportunities of adding assets and hence, further diversifying the portfolio over the medium term.

 

Three toll projects out of eight have an annual toll rate escalation with a fixed increase of 3% and a variable portion equal to only 40% change in the wholesale price index (WPI), limiting dependence on WPI, thereby supporting revenue. One project has a fixed toll rate hike of 7%, one is directly linked to the consumer price index (CPI) and the remaining three are linked directly to the WPI. For the proposed PNC toll asset, toll escalation rate is linked 3% plus 40% change in WPI.

 

Toll revenue for the initial portfolio of 4 assets grew by ~13% to Rs 640 crore in fiscal 2024 from Rs 564 crore in fiscal 2023 driven by healthy traffic growth of ~7% on average. Traffic and toll collection is expected to remain healthy going forward as well.

 

Strong debt protection metrics, with provision for cash sweep and creation of DSRA and MMRA

Financial risk profile is healthy with existing outstanding debt of Rs 3,700 crore at InvIT level as of June 2024 translating into net debt-to-EV of ~34%. HIT is expected to utilise part of undrawn debt of Rs 475 crore out of Rs 1,900 crore rupee term loan at the time of acquisition of one HAM project (received provisional COD recently) of H.G. Infra Engineers Ltd (H.G. Infra). With addition of one HAM of HG Infra, TOT-16 and PNC assets, net debt-to-EV of HIT is expected to increase to 50-55%. Nevertheless, the resultant average DSCR is expected to remain strong with cash flows remaining sufficient to service incremental debt as well as premium payments.

 

The terms for existing debt also require adequate liquidity cushion in form of three months DSRA and six months MMRA. As per existing terms, cash trap will be triggered if DSCR falls below 1.40 times, while there will be a cash sweep in case of negative impact on tollable traffic on account of an alternate route to the project roads. The structure also stipulates that any transfer to the distribution account will be made only post meeting debt obligation, DSRA and MMRA requirement, and transfer to the cash sweep account, if required.

 

While the covenants for DSCR and leverage were relaxed, DSCR for the rated debt instruments is expected to remain comfortable and well above the covenants throughout the debt tenure, supported by healthy toll collection and moderate leverage. Hence, CRISIL Ratings believes that relaxation in financial covenants will not have a material impact on HIT’s credit risk profile. However, increase in debt from current levels, in the absence of commensurate cash inflows, will remain a key rating sensitivity factor.

 

The existing NCDs have a tenor of 3 years 3 months, 7 years and 3 years for tranche-1, tranche-2 and tranche-3, respectively, exposing the trust to refinancing risk. Nevertheless, the risk is mitigated by a long tail at the end of tenure of NCDs, ability and track record of the sponsors in refinancing, and healthy revenue potential of the road stretches.

 

Experienced management team

HIT will benefit from the experience of Highway Concessions One Pvt. Ltd (HC1) and HC One Project Manager Pvt. Ltd (HC1 PM) as the investment manager and the project manager who have a long track of managing these assets. The trust is sponsored by Galaxy, which is invested in by funds, vehicles and/or entities managed and/or advised by KKR, which in turn has strong experience in the infrastructure space, including in India. While this is Galaxy’s first investment in Indian roads, it benefits from KKR’s experience in renewable energy and transmission sector in India.

 

Weaknesses:

Susceptibility of toll revenue to volatility in traffic, or development or improvement of alternative routes

Toll collection is a major source of revenue and is susceptible to volatility because of toll leakages, competing routes, lack of timely increase in toll rates, fluctuation in WPI-linked inflation, seasonal variations in vehicular traffic, and economic downturns. For instance, traffic and toll collection across stretches was affected due to government policies like demonetisation in fiscal 2017 and the nation-wide lockdown following the Covid-19 pandemic in fiscal 2021 and 2022.

 

While the stretches do not face any substantial threat from alternate routes as of now, improvement of these routes or development of new alternate routes may affect traffic and diversion, if any, on account of any of these will be a key rating sensitivity factor.

 

Susceptibility to volatility in O&M and major maintenance costs and interest rates

The trust is exposed to risks related to maintenance of the projects in the underlying SPVs as per the specifications and within the budgeted costs. While the SPVs are expected to maintain six months equivalent MMRA, any significant dip in toll collection or unplanned maintenance activity could result in cash flow shortfall during years of such maintenance and will remain a rating sensitive factor.

 

The interest rate for the rupee term debt shall be floating with a quarterly reset linked to benchmark. This exposes the trust to volatility in interest rates. Although part of the debt raised through bonds has fixed rate the cushion in the cash flow, will partially help to absorb the impact of any fluctuations in rate of interest, but it will remain a rating sensitivity factor.

Liquidity: Superior

Toll collection and annuity receipts will be adequate to meet operational expenses and debt servicing obligation of Rs 400-500 crore per annum over the three fiscals through 2027. Furthermore, DSRA equivalent to interest and principal obligations of three months will be maintained along with MMRA equivalent to six months of major maintenance expenses. The limited amortising structure of the NCDs with substantial bullet repayments in fiscals 2026, 2027 and 2030 exposes the trust to refinancing risk. Nevertheless, the risk is mitigated by the long tail at the end of the tenure of the NCDs, the ability and track record of the sponsors in refinancing, and healthy revenue potential of the road stretches. HIT had cash and equivalents (including DSRA) of Rs 283 crore as of July 2024.

Outlook: Stable

CRISIL Ratings believes that HIT will continue to generate healthy toll revenue over the medium term, backed by good traffic potential on the project stretches.

Rating Sensitivity Factors

Downward Factors:

• Lower-than-expected toll revenue by more than 10% on sustained basis or higher-than-expected maintenance cost affecting DSCR
• Higher-than-expected incremental borrowings significantly impacting the coverage metrics
• Non-adherence to the structural features of the transaction or non-maintenance of adequate liquidity reserves in the form of DSRA and MMRA
• Acquisition of weak assets with high debt and low revenue potential impacting overall DSCR

About HIT

HIT is registered as an irrevocable trust under Indian Trust Act, 1882, and as an InvIT under the Securities and Exchange Board of India’s, InvIT Regulations, 2014 since December 23, 2021.

 

HIT is an InvIT of road sector assets sponsored by Galaxy, which is invested in by funds, vehicles and/or entities managed and/or advised by KKR, with HC1 as its investment manager, HC1 PM, a 100% subsidiary of HC1, acting as project manager and Axis Trustee Services Ltd acting as trustee. KKR is a leading global investment firm with approximately US$ 519 billion of assets under management as of June 30, 2023. HIT has a portfolio of thirteen operational road project SPVs — eight toll, two annuity and three HAM.

 

The broad details of the assets held by HIT, are provided below:

 

Jodhpur Pali Expressway Pvt. Ltd (JPEPL)

The 71.5 km stretch is the shortest route connecting Jodhpur to Pali. It achieved PCOD in fiscal 2015 and COD in fiscal 2018 and has a track record of more than eight years with balance concession life of around 21 years. Traffic registered compound annual growth rate (CAGR) of 3.0% between fiscals 2015 and 2023. The stretch has four alternative routes, but these are either two lane or longer than JPEPL’s stretch and do not impact the traffic movement on the project road.

 

Godhra Expressways Pvt. Ltd (GEPL)

The 87.1 km stretch provides connectivity for traffic plying from the Kandla and Mundra ports and moving towards central and east India. It achieved PCOD in fiscal 2014 and COD in fiscal 2017 and has a track record of over nine years with balance concession life of around 20 years. Traffic registered a CAGR of 9.1% between fiscals 2015 and fiscal 2023. The stretch has no alternate routes.

 

Dewas Bhopal Corridor Pvt. Ltd (DBCPL)

This 140.8 km stretch is the shortest route between Indore (through Dewas) and Bhopal, two major cities of Madhya Pradesh. The project achieved PCOD in fiscal 2009 and COD in fiscal 2011 and has a track record of over 13.5 years with balance concession life of around 10.5 years. Traffic registered a CAGR of 6.7% between fiscals 2015 and 2023. The stretch has no alternate routes.

 

Ulundurpet Expressways Pvt. Ltd (UEPL)

The 72.9 km stretch connects Chennai to the southern, eastern and western parts of Tamil Nadu. The project achieved COD in fiscal 2010 and has a track record of three years with balance concession life of around four years. Traffic registered degrowth in CAGR of 0.6% between fiscals 2015 and 2023. There are no alternate routes to the project road.

 

Nirmal BOT Private Ltd (NBPL)

This road stretch connects Kadtal to Armur in Telangana and has balance concession life of around five years. The project has track record of timely receiving 28 semi-annual annuities without any material deduction.

 

Shillong Expressway Pvt. Ltd (SEPL)

This project is part of the Shillong bypass in Meghalaya and has balance concession life of around three years. The project has track record of timely receiving 21 semi-annual annuities without any material deduction.

 

Udupi Tollway Pvt. Ltd (UTPL)

It has two four-lane stretches — 74.8 km Kundapur-Surathkal section and 15.3 km Mangalore-Kerala border section — on NH-66 in Karnataka. The project achieved PCOD in fiscal 2017 and has a track record of over six years with balance concession life of around 12 years. Traffic registered CAGR of 6.4% between fiscals 2017 and 2023. The stretch has no alternate routes.

 

Ateli Narnaul Highway Pvt. Ltd (AN)

This is the 40.8 km Ateli-Narnaul section of NH-11 in Haryana operating on HAM basis. The project has track record of timely receiving 3 semi-annual annuities without any material deduction.

 

Gurgaon Sohna Highway Pvt. Ltd (GS)

It is a 12.7 km Gurgaon-Sohna section of NH-248A in Haryana operating on HAM basis. The project has track record of timely receiving 3 semi-annual annuities without any material deduction.

 

Rewari Ateli Highway Pvt. Ltd (RA)

This is the 30.5 km Rewari-Ateli section of NH-11 in Haryana operating on HAM basis. The project has track record of timely receiving 4 semi-annual annuities without any material deduction.

 

Swarna Tollway Pvt. Ltd (STPL)

It has two stretches – 110.8 km Tada-Nellore section of NH-16 and 48.0 km Nandigama to Ibrahimpatnam section of NH-65 – in the state of Andhra Pradesh. It achieved COD in July 2005. Traffic registered CAGR of 4.6% for Tada-Nellore section and 3.1% for Nandigama to Ibrahimpatnam section between fiscals 2015 and 2023. The stretch has no alternate routes.

 

Gujarat Road and Infrastructure Co Ltd (GRICL)

It has two stretches – 51.6 km Ahmedabad-Mehsana section of SH-41 and 31.7 km Vadodara-Halol section of SH-87 – in the state of Gujarat. It achieved COD in July 2005. Traffic registered CAGR of 5.7% for Ahmedabad-Mehsana section and 19.5% for Vadodara-Halol section between fiscals 2018 and 2023. The stretch has no alternate routes.

 

Bangalore Elevated Tollway Pvt. Ltd (BETPL)

It is a four lane 24.7 km elevated road from Silk Board Junction to Attibele section of NH-7 in the state of Karnataka. It achieved COD in June 2011. Traffic registered CAGR of 4.4% between fiscals 2017 and 2023. The stretch has no alternate routes. The asset was acquired by the trust in June 2024.

 

Over and above the existing assets, HIT had signed SPA to acquire thirteen road SPVs. One HAM project of H.G. Infra (part of the transaction from which three HAM assets have been acquired) is expected to be concluded in fiscal 2025. Also, 56.8% stake in GRICL owned by Macquarie group was acquired in January 2024, while 26.8% stake is yet to be acquired.

 

Regarding HIT’s SPA for acquisition of 100% shareholding in 11 HAM SPVs and a toll SPV owned by PNC, the enterprise value is around Rs 9,006 crore (inclusive of any conditional earnout and subject to adjustments in accordance with the terms of the SPA) with the transaction being subjected to certain regulatory and customary conditions and receipt of relevant approvals from regulators, lenders and other corporate authorities. The target portfolio comprises road projects with around 3,800 lane km across the states of Rajasthan, Uttar Pradesh, Madhya Pradesh and Karnataka. The HAM projects have concessions from National Highways Authority of India (NHAI, rated ‘CRISIL AAA/Stable), while the toll project has concession from Uttar Pradesh State Highways Authority (UPSHA). All the 12 projects are operational as on date and expected to be acquired by fiscal 2025 with receipt of requisite approvals from NHAI.