Key Rating Drivers & Detailed Description
Strengths
Robust debt protection metrics, supported by favourable location of stretches and moderate leverage
IndInfravit Trust’s current portfolio comprises of 13 assets: 5 assets acquired from L&T Infrastructure Development Projects Ltd (L&T IDPL) and 8 from SIPL. Projects are being undertaken on a public-private partnership basis.
- 11 projects have signed concession agreements with NHAI and two have state entities as the concessioning authorities.
- These projects have a healthy track record of operations; 12 have been operational for over five years
- Around 90% of revenue is generated from 11 toll projects while the balance comes from two annuity projects
The toll projects are situated along major industrial and tourist hubs and connect major cities such as Hyderabad, Chennai, Delhi, and Mumbai and ports such as Kandla, Mundra, and Chennai. Overall, revenue is well diversified. Furthermore, the stretches are spread across six key states that drive India’s gross domestic product (GDP). The Trust thus benefits from healthy traffic potential. A few of the projects act as feeder routes to others in the portfolio, providing traffic synergies. Also, 8 of the 11 toll projects have an annual toll rate escalation with fixed increase of 3% and variable portion equal to only 40% change in wholesale price index (WPI), limiting dependence on WPI, thereby supporting revenue. While the toll revenue growth tapered down to 4.5% in fiscal 2020 (year-on-year), it declined by 5% in fiscal 2021, owing to Covid-induced disruptions. The portfolio has seen good recovery in traffic since easing of the lockdown (the second wave did not have a significant bearing on traffic given lesser restrictions). Although traffic volumes and consequently toll collections were affected in the second half of fiscal 2022, across assets due to heavy and prolonged monsoons, supply chain disruptions and the third pandemic wave, it still grew by 12% year-on-year. Toll collections are expected to remain healthy in the near term primarily driven by higher toll rates (consequent to high WPI inflation) and good traffic potential of the stretches.
Supported by healthy revenue growth DSCR during fiscal 2022 was comfortable at 2.1 times (CRISIL Ratings adjusted). Additionally, the Trust along with its SPVs had unencumbered cash of more than Rs 660 crore as on March 31, 2022. This cash is over and above the three month DSRA and MMRA being maintained for all external debt in the Trust and its SPVs.
The consolidated DSCR is likely to be strong throughout the tenure of the debt, supported by good toll collection potential and moderate leverage. The ratio of consolidated debt to total enterprise value is currently 42.6%.
Healthy financial flexibility given the cash pool mechanism, creation of DSRA, and tight escrow mechanism with a well-defined payment waterfall
The waterfall mechanism ensures that toll collection/annuity will be escrowed and will be used to meet the costs as per the order below:
- Payment of taxes, statutory dues
- O&M expenses
- Interest and principal obligation of external debt
- Post this, the surplus of each SPV is available to the Trust to service external debt at the Trust level (which includes the rated NCDs)
Moreover, the cash trap check ensures that if the consolidated DSCR is lower than 1.5 times, then cash will not be distributed to unitholders until DSCR is restored to 1.5 times. This is checked quarterly for the trailing 12 months. Furthermore, any transfer to the distribution account (if no cash trap event has occurred) will be made only after meeting debt and maintenance obligations across all SPVs. Financial flexibility is also supported by the maintenance of DSRA for three months of interest and principal obligation of the consolidated debt. Debt terms also stipulate creation of major maintenance reserve (MM) and this has been created in line with requirements.
Experienced developers and strong and reputed investors
Canada Pension Plan Investment Board (CPPIB) and The Ontario Municipal Employees Retirement System (OMERS) together have 63.9% shareholding in IndInfravit Trust. Allianz Capital Partners (ACP), which is Allianz Group’s asset manager, has 22.7% stake. These investors have an extensive track record of investing in the infrastructure sector globally. L&T IDPL is the project manager for its five assets, while SIPL is the project manager for its eight assets transferred to the Trust. Both these developers have considerable experience in developing and maintaining road infrastructure projects. The Trust is in the process of further strengthening the operational structure and monitoring towards the operations and maintenance of the current portfolio.
Weaknesses
Susceptibility of toll revenue to volatility in traffic, or development or improvement of alternative routes
Toll collection, which contributes to about 90% of the portfolio’s revenue, is exposed 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. Toll collection was impacted in Aurangabad Jalna Tollway Ltd. (AJTL) in fiscal 2022 due to traffic diversion to an alternate route (Bidkin-Karmad) which is an untolled state highway. Further diversion is expected in AJTL in the near term. However, AJTL accounts for only about 2% of the Trust’s revenue. Nevertheless, these risks are largely mitigated from the benefits of pooling of multiple assets.
Furthermore, any change in government policy such as the demonetisation in November 2016 and more recently the lockdown due to the Covid-19 pandemic, can impact cash flow and debt protection metrics.
The rating also takes into account the portfolio consisting of two road assets with concessions from state authorities (one toll and one annuity), which expose the Trust to risks pertaining to decisions of these authorities. This includes applicability of toll rates in the case of toll assets and their credit risk profile in case of the annuity project.
Furthermore, the portfolio has a major revenue contributing project, Beawar Pali Pindwara, which also has large back-ended premium payments. Additionally, few projects are expected to receive extension in their concession period. The concession agreement of these projects has provision for such extension in case traffic is lower than the target traffic on a specified target traffic date. Target traffic dates of these projects fall between fiscals 2020 and 2023. Given the existing low traffic volumes and expectation of moderate growth, an extension in the concession period is expected and will remain a rating sensitivity factor.
Susceptibility to volatility in operational 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. Furthermore, the SPVs are not creating any MM reserves (reserves only for expense to be incurred in the subsequent quarter is maintained as reserves), in the absence of which the cash outflows during the major maintenance years could be significant. However pooling of cash flows from 13 projects provides some cushion in terms of meeting such requirements. Operational risk is mitigated by long operational track record and stable expenditure profile of these projects. Furthermore, one of the project SPVs, Krishangiri Walajahpet Tollway Pvt Ltd, has ongoing capex (that could not be completed earlier due to non-availability of land), which exposes it to construction-related risk. However, the Trust is in the process of appointing reputed contractors and has also tied-up the required debt funding for this for the current fiscal.
The interest rate is fixed for the first three years for the Rs 2,150 crore NCDs (Rs 1,675 crore drawn till date) and for the first two years for the Rs 850 crore NCDs, post which it will be reset on a mutually agreed basis by the issuer and the debenture holders, while interest rates on the existing bank loan facilities are floating with annual reset. This exposes the Trust to volatility in interest rates. Although the cushion in the cash flow will partially help to absorb the impact of such fluctuations, it will remain a rating sensitivity factor. Furthermore, the NCDs stipulate that the debenture holders can recall the debentures if the DSCR drops below 1.35 times or if the net debt/earnings before interest, tax, depreciation and amortisation (EBITDA) ratio exceeds 6 times for any 12-month period, thereby exposing the Trust to refinancing risk. In such a scenario, the issuer would have to redeem or refinance the debentures within 90 calendar days of demand, which can be further extended upon payment of additional coupon of 1% per annum. However, CRISIL Ratings takes comfort from the healthy refinancing flexibility of the Trust.