| L&T Metro Rail (Hyderabad) Limited | ||||
| Ratings Reaffirmed | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AAA(CE)/Stable/CRISIL A1+’ ratings on the existing debt instruments of L&T Metro Rail (Hyderabad) Limited (LTMRHL)
According to the payment mechanism, if LTMRHL does not deposit the requisite amount in a designated account two days before the due date, the guarantor, Larsen and Toubro Ltd (L&T; 'CRISIL AAA/Stable/CRISIL A1+'), will fund the account within one business day from the date of receipt of demand notice from the debenture trustee. The guarantee covers the principal, interest as well as any other amount payable under the guaranteed debt instruments. Thus, the payment structure is designed in a manner that ensures full payment to the lenders in a time-bound manner.
The guarantee will remain unaffected even if LTMRHL faces bankruptcy; in case of dissolution, insolvency, or liquidation; or on winding up proceedings initiated by or against the issuer.
The ratings continue to reflect strong financial support from the parent, L&T, as reflected in the corporate guarantee (CG) and letter of comfort (LoC) extended to the NCDs and commercial paper (CP) programme, respectively. The ratings also factor in the revenue potential owing to the company’s natural monopoly position, long concession life and transit-oriented development (TOD) opportunities. These strengths are partially offset by susceptibility to volatility in passenger traffic and timely implementation of tariff revisions. |
Analytical Approach To arrive at the rating on the NCDs, CRISIL Ratings has applied its criteria on rating instruments backed by guarantees. The suffix (CE) reflects the payment structure which is designed to ensure full and time-bound payment to lenders owing to the presence of a credit enhancement mechanism.
To arrive at the unsupported ratings, CRISIL Ratings has applied its parent notch-up framework to factor in the extent of distress support the company will receive from its parent, L&T. |
Key Rating Drivers & Detailed Description Strengths: Strong financial support from L&T: The parent has extended an unconditional, irrevocable and continuing CG for the NCDs and LoC for the CP programme. Additionally, a cross-default clause on the NCDs ensures the support from L&T for all of the debt as well as any incremental debt. The company was set up to execute the Hyderabad metro project on a design, build, fund, operate and transfer (DBFOT) basis. Starting from project commissioning, the company has received cash support from the parent on an ongoing basis. The parent’s continued support in the near to medium term is likely to continue despite the low strategic importance of the project.
Revenue potential owing to monopoly, long concession life and TOD: The project has a balance concession life of more than 50 years, leading to a natural monopoly. Cash flows of the company are expected to grow gradually and steadily because of routine traffic as the metro is a safe, convenient, and punctual mode of transport, and has a strong edge over competing modes of transport within its serviceable area.
Furthermore, the company received 18.5 million sq ft (MSF) of TOD rights, of which 12.5 MSF belongs to depot land, 3.5 MSF is at Raidurg in Hyderabad and the remaining is in small parcels adjacent to the metro route. As of June 2023, LTMRHL had developed and leased out approx. 1.8 Mn sq ft of the area. Timely monetisation of these developed assets and certain other areas can lead to improvement in project viability.
Weakness: Exposure to traffic risk: Average daily traffic (ADT) was impacted by the two waves of the covid-19 pandemic in April 2020 and May 2021. Following the second wave, ADT has shown strong recovery over the past two fiscals and grew steadily to 3.6 lacs for fiscal 2023 driven by resumption of public mobility. However, given the total investment of around Rs 18,000 crore including debt of over Rs 13,000 crore, the company needs to achieve passenger traffic of around 9 lakh per day to attain profit after tax (PAT) breakeven. Thus, it will continue to rely on parent support for servicing debt.
Susceptibility to tariff revisions: The company’s cash flows are susceptible to timeliness and adequacy of tariff increases over the life of its assets. Timely implementation of tariff increases based on the recommendations of Fare Fixation Committee, in line with rising operating cost, is critical and will be a key monitorable. |
Liquidity: Superior Net cash loss was around Rs 1,002 crore in fiscal 2023 on account of traffic remaining below required level/s and high interest outgo. However, any shortfall in cash flow with respect to debt servicing will be met by the parent by way of inter-corporate deposits. Equity infusion of Rs 1,320 crore and Rs 880 crore was done by L&T in March and April 2023 respectively. Furthermore, the proposed unconditional and irrevocable guarantee and letter of comfort strengthen liquidity. The parent has strong financial flexibility, as indicated by robust unencumbered cash and equivalents (excluding financial services) of around Rs 24,000 crore as of March 2023. Moreover, the value of unencumbered investment in listed subsidiaries adds to the financial flexibility. |
Outlook: Stable CRISIL Ratings believes LTMRHL will continue to receive strong financial support from the parent L&T over the medium term.
CRISIL Ratings believes L&T will maintain its leadership position in the EPC segment in India and is positioned to benefit from the infrastructure spending in India over the medium term. Its profitability is expected to be stable, supported by increasing contribution of the IT business. |
Rating Sensitivity Factors Downward Factors
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Adequacy of credit enhancement structure The rating on the NCDs reflects the unconditional, irrevocable, and continuing guarantee from L&T and the strong payment mechanism. It meets all legal adequacy as per CRISIL Ratings criteria (Please refer CRISIL Ratings criteria “criteria for rating instruments backed by guarantees").
Payment mechanism for NCDs: As per the mechanism, if LTMRHL does not deposit the requisite amount in a designated account two days before the due date, the guarantee shall be invoked. On invocation of the guarantee, L&T will fund the account within one day of the demand raised by the debenture trustees (DTs). Thus, the rating reflects the credit strength of the guarantor, L&T.
CRISIL Ratings has also considered multiple scenarios to test the adequacy of the credit enhancement structure, including stress scenarios where the performance of LTMRHL weakens. CRISIL Ratings believes the instruments will have the highest degree of safety regarding timely servicing of debt even in an extreme stress case scenario at LTMRHL. |
Unsupported ratings: CRISIL A+ CRISIL Ratings has introduced the suffix (CE) for instruments having explicit credit enhancement feature in compliance with the Securities and Exchange Board of India’s (SEBI) circular dated June 13, 2019. |
Key drivers for unsupported ratings For arriving at the unsupported rating, CRISIL Ratings has considered the standalone business and financial risk profiles of LTMRHL. It has also factored in the strong financial support LTMRHL will receive from L&T. |
About the Company LTMRHL, a 99.99% subsidiary of L&T, was incorporated in 2010 to enter into a concession agreement with the Government of Telangana State to execute the project on DBFOT basis for a term of 35 years, which can be extended by 25 years. The total length of the stretch is 69.2 km spread over three corridors. The project ran into time and cost overruns on account of delay in getting right of way. It achieved partial commercial operation date (COD) in November 2017 on completion of two corridors and full COD in February 2020 on completion of the third corridor. |
About the parent/ guarantor Set up in 1938 by Mr H H Larsen and Mr S K Toubro, L&T was incorporated in 1946 and reconstituted as a public limited company in 1950. It is one of Asia’s largest vertically integrated EPC conglomerates, with a strong market position across segments such as infrastructure, power, hydrocarbons, heavy engineering, defense engineering, electrical and automation, IT, IT&TS, metallurgical and material handling, and machinery and industrial products. L&T undertakes infrastructure development projects (roads, metro rail, power and transmission lines) through its SPVs: L&T Infrastructure Development Projects Limited, L&T Power Development Limited and L&T Metro Rail (Hyderabad) Limited. |
Key financials – LTMRHL (CRISIL Ratings-adjusted numbers)
Key financials – L&T (standalone; reported)
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List of covenants There are no material covenants. |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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