Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AAA/Stable' rating on the non-convertible debentures (NCDs) of Swarna Tollway Private Limited (STPL).

 

The Adani group, through Adani Road STPL Ltd (ARSL), a wholly owned subsidiary of Adani Road Transport Ltd (ARTL, a step-down subsidiary of Adani Enterprises Ltd [AEL]) was in the process of acquiring the entire stake in STPL from its existing owners, MAIF Investments India 3 Pte Ltd (MAIF). AEL, through stock exchange intimation dated June 1, 2023, announced the termination of share purchase agreement executed amongst ARTL, MAIF and STPL and the entity is expected to remain under the Macquarie group.

 

CRISIL Ratings, through its releases dated August 30, 2022 and October 6, 2022, had noted the Adani group’s plan to acquire the company. No impact was envisaged on the credit risk profile of STPL as the rated NCDs have a tight-escrow mechanism with a well-defined payment waterfall which would continue to prioritise servicing of the existing debt. Only surplus cash flows were expected to be up streamed post meeting reserving requirements as stipulated in the financing agreements as well as satisfaction of the restricted payment conditions and cash trap triggers, thereby maintaining seniority of the existing debt at STPL.

 

STPL’s rating continues to reflect moderate traffic potential of the company’s project, backed by its strategic location and long operational track record. The rating also factors in strong debt protection metrics, supported by low debt, tight escrow mechanism with a well-defined payment waterfall mechanism and creation of a debt service reserve account (DSRA) and a major maintenance reserve (MMR). These strengths are partially offset by susceptibility of toll revenue to variations in traffic volume or changes in tolling policy.

 

Operating income grew 24.4% in fiscal 2023 supported by healthy toll rate hike of 15.0% (linked fully to wholesale price index [WPI] as of March 2022) from July 1, 2022. Traffic volume also continued to witness healthy growth. Given strong toll revenue growth coupled with low debt, debt protection metrics should continue to remain comfortable.

Analytical Approach

For arriving at the rating, CRISIL Ratings has taken a standalone view of the business and financial risk profiles of STPL.

Key Rating Drivers & Detailed Description

Strengths:

• Moderate traffic potential of the project, backed by strategic location and operational track record: The project roads traverse sections of National Highway (NH)-16 and NH-65, which connect Chennai to Kolkata, and the east coast to Pune, Maharashtra, respectively. The Tada-Nellore section in Andhra Pradesh (AP) on NH-16 provides connectivity for the ports in Chennai and Krishnapatnam to the rest of India and has no competing or alternate route. The road stretch also provides connectivity to tourist destinations, such as Tirupati and Pulikat Lake.

 

NH-65 connects ports on the eastern coast of India to the rest of AP and Maharashtra. The road stretch between Nandigama and Vijayawada is the shortest stretch connecting Hyderabad to Vijayawada. There are two alternate routes for traffic to connect between NH-16 and NH-65. However, the diversion from these routes is already reflected in the current traffic plying on the stretch.

 

The project has been operational since May 2004. Growth in toll revenue was healthy at 11.4% compound annual growth rate (CAGR) till March 2023. Good traffic movement between ports on NH-16 and connectivity to Vijayawada and Amravati will continue to support the traffic volume, and hence, revenue over the medium term.

 

• Strong debt protection metrics, supported by low debt: The debt service coverage ratio (DSCR) was around 11.86 times (CRISIL Ratings adjusted) for fiscal 2023 and is expected to remain comfortable over the tenure of the NCDs. This is driven by low debt servicing obligation. The total debt-to-toll revenue ratio was comfortably below 1.0 time as on March 31, 2023.

 

The debt has remaining tenure of five years, thereby spreading out principal repayment and reducing annual debt obligation. Additionally, the debt has a tail period of four years with the concession period ending in fiscal 2032. Although, the company is permitted to borrow incremental debt of Rs 175 crore, no incremental debt is expected to be drawn down. Given the healthy cash flow cushion available for meeting the debt servicing obligation and the steady toll revenue, the debt protection metrics are expected to remain strong over the tenure of the debt, even after factoring incremental debt, if any, and this will remain a rating sensitivity factor.

 

• Tight escrow mechanism, with a well-defined payment waterfall and creation of DSRA and MMR: The waterfall mechanism ensures that the toll collection will be escrowed and used to meet principal and interest obligation after the payment of taxes and statutory dues, and meeting maintenance expenses. DSRA equivalent to principal and interest obligation due for the next six months is also available. The company completed the latest major maintenance activity in June 2019, through internal cash accrual and the expense was largely in line with the business plan and has started provisioning for upcoming major maintenance. The company has made a provision of Rs 113.42 crore as on March 31, 2023 towards MMR. The structure also stipulates that if the operating profit, to be tested quarterly, is less than Rs 10 crore, the entire surplus will be retained in the cash trap account.

 

Weakness:

• Susceptibility to fluctuations in traffic volume or change in tolling policy: Toll is the 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 susceptibility to economic downturns could adversely impact the cash flow. Furthermore, any change in government policy such as demonetisation in November 2016 and more recently the nationwide lockdown, can impact the cash flow and debt protection metrics. Toll revenue was negatively affected due to traffic diversion at Keesara, Telangana, in fiscal 2016. A ban on sand mining and halt in construction work in AP during fiscal 2020 affected traffic and toll collection. Toll collection was then suspended from March 26, 2020, until April 19, 2020, on account of the nationwide lockdown to contain the Covid-19 pandemic, and traffic mobility remained affected due to restrictions up till August 2020. Hence, volatility in traffic volume and any change in tolling policy will be closely monitored.

Liquidity: Superior

The DSCR for fiscal 2023 was 11.86 times and is expected to remain comfortable over the remaining tenure of the debt. Operating income was Rs 328 crore in fiscal 2023 and is expected to remain sufficiently healthy to meet the debt obligation of Rs 16-20 crore per fiscal over the next three fiscals through 2026. Furthermore, DSRA equivalent to the next six months of debt obligation will be maintained throughout the tenure of the debt. As of March 2022, the company had cash and cash equivalent of Rs 316 crore

Outlook: Stable

CRISIL Ratings believes STPL will maintain strong debt protection metrics over the medium term, driven by low debt, strong liquidity and expectation of moderate traffic growth over the medium term.

Rating Sensitivity factors

Downward factors

• Toll revenue declines by more than 5% year-on-year on a sustained basis
• Any incremental debt is drawn resulting in deterioration of the financial risk profile
• Non-adherence to any other structural features of the transaction

About the Company

Incorporated in 2001, STPL is a special-purpose vehicle of CIDB Inventures SDN BHD (CIDBI) for the implementation of a road project in AP on a build-operate-transfer (BOT) basis, pursuant to the concession agreement dated March 27, 2001. The agreement was entered into on a government-to-government basis between the governments of Malaysia and India, through CIDBI and NHAI, respectively. Investment companies of prominent Malaysian construction firms, IJM Corporation Berhad (IJM), WCT Engineering (WCT), Bumi Hiway Ventures (BHV) and MTD Capital (MTD) also subscribed to the share capital of STPL along with CIDBI.

 

In October 2013, IJM’s investment company acquired shares held by the investment companies of WCT, BHV and MTD. Subsequently, CIDBI and these other companies were holding 30% and 70% of STPL’s shareholding, respectively.

 

In October 2015, MAIF acquired 70% of the equity stake held by the investment companies in STPL, while the remaining 30% was acquired during fiscal 2019.

 

The project entailed designing, engineering, financing, constructing, developing, improving, rehabilitating and strengthening the existing two-lane road and widening to four lanes of (a) NH-16 from kilometre (km) 52.8 to km 163.6 on the Tada-Nellore section in AP and (b) NH-65 from km 217 to km 265 on the Nandigama-Ibrahimpatnam-Vijayawada section in AP; and (c) operation, maintenance and collection of fees on these sections of NH-16 and NH-65 on a BOT basis.

Key Financial Indicators

Particulars	Unit	2023^	2022
Revenue	Rs crore	328.00	264.00
Profit after tax (PAT)	Rs crore	209	134
PAT margin	%	63.4	50.7
Adjusted gearing	Times	0.11	0.18
Interest coverage	Times	15.71	14.43

^Financials for fiscal 2023 are provisional

Any other information: Not applicable