Rating Rationale
July 31, 2020 | Mumbai
Karnataka Neeravari Nigam Limited
Rating Reaffirmed
 
Rating Action
Rs.500 Crore Bonds - Series VIII  CRISIL AA-(CE)/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-(CE)/Stable' rating on the bonds of Karnataka Neeravari Nigam Limited (KNNL).
 
The rating continues to reflect the unconditional and irrevocable guarantee from the Government of Karnataka (GoK), and a trustee-administered payment mechanism for the bonds. The rating, therefore, reflects the credit risk profile of GoK. The servicing of the bonds is through a budgetary allocation along with a long T-structure of T-30 days, ensuring adequate time for funding the bond servicing account.
 
GoK has healthy economic management, a superior financial risk profile, and a robust tertiary sector. These strengths are partially offset by modest socio-economic indicators and dependence on rains for irrigation, thus requiring larger state support during a weak monsoon.

Analytical Approach

For arriving at the rating, CRISIL has applied its criteria on rating instruments backed by guarantees.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy economic management by the Government of Karnataka:
The state government is committed to ensuring fiscal discipline with healthy liquidity management. The state has revenue surplus through a combination of good tax efforts and prudent expenditure. The gross fiscal deficit (GFD) has consistently remained below 3% of the gross state domestic product (GSDP) since 2011. Borrowings are mainly to fund capital outlays, thereby ensuring moderate debt levels. The state government has not resorted to any borrowing under the ways and means advances till May 2020, indicating healthy liquidity management.
 
* Financial risk profile of the Government of Karnataka remains comfortable:
The state is self-reliant in terms of revenue with its own tax and non-tax revenue forming around 61% of the receipts. Revenue in fiscal 2020 (revised estimates) however, declined by 2.5% from the budget estimate mainly on account of lower devolutions from the centre. While the goods and services tax (GST) collections were also subdued in fiscal 2020, any shortfall is met by the centre through higher GST compensation. The state government continues to have strong control over committed expenditure (salaries, interest and pension), which is around 40% of revenue expenditure and is significantly lower compared with other states. This provides flexibility to increase spending in key focus areas such as education, irrigation and other agricultural activities. The state has maintained revenue surplus of Rs 285 crore for fiscal 2020 (revised estimates), in line with budgeted estimates.
 
The borrowings by the state are mainly used to fund productive capital outlays, mainly irrigation and development of roads and bridges. The GFD as a percentage of GSDP is expected to remain at 2.3% based on fiscal 2020 revised estimates, well below the limit recommended by Fiscal Responsibility and Budget Management norms. Subsequently, the debt-plus-guarantees-to-GSDP ratio remained moderate at 20.5%, which is marginally higher than historical levels.
 
For fiscal 2021, revenue receipts will be lower because of reduction in the state government's share in central taxes to 3.646% as recommended by the 15th Finance Commission, compared with 4.713% recommended for previous fiscals. In addition, tax revenue for the state (accounts for about 58% of revenue receipts), including state GST, state excise, stamps and registration duties, and motor vehicle tax, will be lower because of the nationwide lockdown imposed to contain the Covid-19 pandemic. On the other side, allocations for expenditure, especially in social sectors such as health, sanitation, drinking water, and subsidised distribution of food are expected to go up.
 
* Healthy economic structure of the state government:
The robust tertiary sector accounts for 64% of GSDP, against all-India average of 55%. It is supported by Bengaluru's position as the information technology hub of India, and is the main driver of economic growth for Karnataka. There was a healthy compound annual growth rate of 12.9% over fiscals 2016-2020 in nominal GSDP.
 
Weaknesses:
* Dependence of the state government on monsoon for irrigation; modest socio-economic indicators:
A poor monsoon could negatively impact the state's agricultural output, with only 34% of the cropped area being irrigated. The state is taking steps to reduce vulnerability to the monsoon by investing in irrigation projects. The capital outlay towards irrigation has been increasing with 40% of capital outlay budgeted in fiscal 2021 towards various irrigation and flood control projects, against 35% in fiscal 2020 (revised estimates).
 
Moreover, socio-economic indicators are modest. Literacy rate is 75% (national average is 74%); the maternal mortality rate is 108 per 1,00,000 births (national average is 130); 21% of the population is below the poverty line (national average is 22%); and the Human Development Index rank is 12 among Indian states. This would necessitate higher social sector expenditure to improve social parameters.
Liquidity Strong

Liquidity is primarily driven by state government support and forms a part of the budgetary allocation. The principal and interest obligation for fiscal 2021 stands at around Rs 978 crore, which will be serviced using funds released by the state government.

Outlook: Stable

CRISIL believes the state government will maintain its healthy economic management and financial risk profile over the medium term. 

Rating Sensitivity factors
Upward factors:
* Improvement in socio-economic indicators of the state and,
* Sustained revenue surplus, coupled with fiscal deficit below 3.0% of GSDP
 
Downward factors:
* Consistent increase in fiscal deficit beyond 3.0% of GSDP.
* Non adherence to the T-30 structure
Adequacy of credit enhancement structure

The guarantee provided by the state government is unconditional, irrevocable, and covers the entire rated amount for bonds. A trustee-monitored payment mechanism is in place to ensure timely payment of the interest and principal for the bonds.
 
The state government supports KNNL through budgetary allocation, which is adequate to cover the interest and principal payments and operational expenses. With minimal standalone cash accrual, the entire debt servicing is met through budgetary support from the state government. However, the support required by KNNL from the Karnataka government remains less than 5% of the latter's revenue receipts.

Unsupported ratings:  CRISIL A

CRISIL has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL has considered the strategic importance of KNNL for implementation of irrigation projects and achievement of social objectives of the state. While the company does not generate sufficient revenue from its own operations, there is a budgetary allocation, which is adequate to meet interest and principal payments, as well as other operational expenses. The rating also takes into account the long track record of timely payments by the state government.

About the Company

KNNL was incorporated to implement and complete irrigation projects in the Krishna Basin excluding the Upper Krishna Project being built by Krishna Bhagya Jala Nigam (rated 'CRISIL AA-(CE)/Stable'), the Varahi Project, and other major irrigation works in Uttar Kannada district.

Key Financial Indicators - Government of Karnataka- reported financials
Particulars Unit 2019 2018
Revenue receipts Rs crore 1,64,979 1,47,000
Revenue surplus Rs crore (679) 4,517
GFD Rs crore 38,437 31,105
GFD/GSDP % 2.5% 2.37
Debt*+Guarantees/GSDP % 20.0% 19.2
Revenue receipts/Interest Times 10.7 10.6
*CRISIL adjusted debt
^Accounts
List of covenants

The material covenants of the instruments are as follows:

  1. At least 30 calendar days prior to the forthcoming due date for interest and/ or principal (T-30), KNNL shall credit the requisite funds in the Trust and Retention Account (TRA) for servicing the bondholders on the forthcoming due date ('T') and communicate it to the Trustee.
  2. The funds credited to TRA may be put as short term fixed deposit (FD), only with banks having rating equivalent to 'AA' from CRISIL, with a lien on the FD in favour of the trustee. At least five days prior to the due date, the amount invested in FD shall be transferred to the TRA and the interest earned thereon will be credited to the current account of KNNL. After making payment to the bond holders, any amount lying in the credit of TRA may be withdrawn by KNNL
  3. In case KNNL does not deposit the funds into the TRA, the company shall communicate, at least 30 calendar days prior to forthcoming due date (T-30 ), in writing to the Finance Department GoK with a copy to the trustee and CRISIL:
  1. The forthcoming due date 'T', and
  2. The amount payable to the bondholders as interest and/ or principal on the due date 'T'
  1. If KNNL fails to intimate GoK as required by point 3 above, the trustee shall intimate GoK at least 25 calendar days prior to the forthcoming due date (T-25)
  2. If GoK fails to ensure funds in the TRA at least seven business days prior to the due date (T-7), the trustee shall invoke the guarantee issued by the GoK on T-7 and inform the credit rating agency accordingly
  3. On invocation of the guarantee, GoK will deposit the necessary funds to the TRA at least three days prior to the due date (T-3).
  4. The amounts due shall be paid to the bond holders on the due date (T Day) through RTGS/NEFT/funds transfer. Wherever such facilities are not available, cheques/DDs will be dispatched to the investors at least five days prior to the due date (T-5)

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon
Rate (%)		 Maturity Date Issue Size
(Rs Cr)		 Complexity Level Rating Assigned
with Outlook
INE262F07071 Bonds - Series VIII 31-Mar-15 8.75% 31-Mar-25 500.00 Complex CRISIL AA-(CE)/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  500.00
31-07-20  		CRISIL AA-(CE)/Stable      07-09-19  CRISIL AA-(CE)/Stable  16-10-18  CRISIL AA-(SO)/Stable      CRISIL AA-(SO)/Stable 
            30-07-19  CRISIL AA-(SO)/Stable  02-01-18  CRISIL AA-(SO)/Stable       
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating Criteria for State Governments
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support
Understanding CRISILs Ratings and Rating Scales

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