Rating Rationale

Strengths:
* Healthy traffic potential of project backed by strategic location and sound operational track record:
The project traverses National Highway (NH)-21 (erstwhile NH-11) that connects Agra to Jaipur through the three stretches of Agra'Bharatpur, Bharatpur'Mahua, and Mahua'Jaipur. While Jaipur and Agra are important tourist destinations, 75% of the project revenue is from commercial vehicles (CVs). About half the commercial traffic is due to CVs transporting consumption goods, specifically construction material, which is expected to remain steady over the near term. Furthermore, the construction material industry is expected to grow at a steady rate of 6-8% per fiscal over the medium term, supporting the growth of CV traffic. The growth in industrial activity has increased the number of multi-axle vehicles, contributing to higher revenue growth, and the trend is expected to continue. Toll revenues grew by a compound annual growth rate (CAGR) of 13% between fiscals 2011 and 2018.

However, toll revenue for fiscal 2019 stood at Rs 67.9 crore, 5.9% lower fiscal-on-fiscal, as construction activity on a feeder stretch (Dausa to Lalsot on NH-11A) led to diversion in traffic to an alternate stretch. Traffic has also been impacted by the ban on sand mining in Rajasthan (from November 2017). This may get corrected partly, by the second half of fiscal 2020, once construction on the feeder route is completed. While there has been some revival in toll revenues from December 2018, this is due to higher collection from overloaded vehicles, after weigh bridges were installed at toll plazas in October 2018. Timely completion of the feeder route, along with lifting of the sand mining ban, leading to increased traffic on the project stretch, will be a rating sensitivity factor. While the debt service coverage ratio (DSCR) is expected to be impacted in fiscal 2020, average DSCR is expected to remain healthy around 2 times over the tenure of the NCDs.

The stretch is expected to have healthy traffic due to industry-backed traffic, leading to revenue growth. The growth will be supported by development of feeder routes to the project stretch including the Agra and Jaipur Ring roads and the Agra Lucknow Expressway.

* Strong debt protection metrics, supported by low debt
Average DSCR is expected to be around 2 times over the tenure of the NCDs (inclusive of senior and subordinate tranches), backed by healthy cash flow generating capacity of the project and low annual debt.

The project stretch saw toll revenue grow 13% in compounded terms between fiscals 2011 and 2018, supported by 7% CAGR in traffic volume. The toll rate is linked to the wholesale price index (WPI), and revised every year on July 1, based on WPI of March of that year. Traffic remained subdued in fiscal 2019, and is expected to revive only after completion of the feeder route in the second half of fiscal 2020; this remains a key rating sensitivity factor.

The total debt-to-toll revenue ratio was healthy at 2.7 times as on March 31, 2019, excluding shareholder NCDs, with a balance tenor of 11 years for senior debt and 1.5 years for subordinate debt, thereby spreading out principal repayment and reducing annual debt obligation.

The company commenced the ongoing major maintenance in December 2018. The earlier budgeted cost of Rs 66 crore would be funded through project cash flows apportioned to the MMRA. Additional expenses of Rs 19.15 crore, towards preventative maintenance, will be funded through surplus cash of Rs 21 crore (which could have been repatriated to shareholders) as on March 31, 2019, and hence will not impact DSCR for fiscal 2020.

Debt protection metrics should remain strong over the tenure of the debt, given the adequate cushion in cash flow and steady growth in toll revenue. Any additional debt undertaken will remain a rating sensitivity factor.

* Experienced management team
The sponsor, Cube Highways and Infrastructure Pte Ltd (Cube Highways), has an efficient team of professionals to manage routine toll plaza affairs and for maintenance of the road. MBEL's senior management consists of a veteran traffic consultant who has experience of over 30 years in conducting traffic studies of prominent stretches, a professional with considerable expertise in toll management, and officials with sound understanding of the technical specifications and advanced methods of operations and maintenance (O&M) to proactively tackle the maintenance of road projects. This is supported by an experienced finance and legal team.

The sponsor uses advanced road-testing mechanisms to prioritise maintenance options on the basis of the life-cycle cost of the assets. With respect to MBEL, the sponsor had infused Rs 74.2 crore in the fourth quarter of fiscal 2016 and the first quarter of fiscal 2017 to complete the first major maintenance of the road project, which was not done by the earlier sponsor. Even in the ongoing major maintenance, the company will spend an additional Rs 19.15 crore as part of its proactive maintenance strategy to enhance pavement life and reduce costs going forward. This additional spending is not required to meet maintenance standards as prescribed by the concession agreement.

The use of advanced technology and the extensive experience of the management will help in stringent monitoring of toll operations, effective maintenance, and avoidance of structural damage to the road. Moreover, Cube Highways is also operating an adjoining stretch from Jaipur to Mahua (Jaipur Mahua Tollway Limited, JMTL) thereby resulting in a continuous 166 kilometre (km) stretch along NH-11 and providing significant operational synergies.

* Tight escrow mechanism with a well-defined payment waterfall and creation of DSRA and MMRA
A waterfall mechanism ensures that the toll collection will be escrowed and used to meet the NCD principal and interest payments after payment of taxes, statutory dues, and O&M expenses. Moreover, a DSRA equivalent to nine months of debt servicing obligation is being maintained in the form of a bank guarantee. This has to be maintained on an ongoing basis till the end of the tenor of the NCDs. The structure also stipulates the creation and reinstatement of a MMRA. Furthermore, the structure stipulates that if the DSCR drops below 1.5 times, the entire surplus generated by the asset will be trapped in the cash retention account. The DSCR will be checked quarterly for the trailing 12 months. In addition, the funds will be transferred quarterly to the distribution account only once the amount equivalent to the semi -annual debt obligation is provided for or paid. As of March 2019, surplus funds of Rs 21 crore in the escrow account, have not been repatriated to shareholders. These funds would be utilised for additional major maintenance expenditure in fiscal 2020, and the balance would be maintained in the company, till completion of the major maintenance. As of March 31, 2019, the company has transferred Rs 54.5 crore to the MMRA, of which Rs 34.15 has been expensed and the balance is being maintained as cash.

Weaknesses:
* Susceptibility of toll revenue to volatility in traffic volume or change in tolling policy
The company started toll collection in May 2009, and had toll revenue of Rs 72 crore for fiscal 2018. Toll income is its only revenue source, and hence, any volatility in collection because of factors such as toll leakage, lack of timely increase in rates, seasonal variations in vehicular traffic, and economic downturns could adversely impact cash flow. Furthermore, any change in government policy such as demonetisation in November 2016 may impact cash flow and debt protection metrics. This has been recently witnessed in this project, with the ban on sand mining and construction of the feeder route impacting toll collection in fiscal 2019. Hence, both volatility in traffic volumes and change in tolling policy will remain key rating sensitivity factors.