Detailed rationale

CRISIL Ratings has revised the outlook on its rating on the long-term bank facility of Welspun Aunta Simaria Projects Pvt. Ltd (WASPPL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A-’. CRISIL Ratings has also withdrawn its ‘CRISIL A2+’ rating on short-term facilities of Rs 50 crore following a request from the company and receipt of relevant documents from bankers. This is in line with CRISIL Ratings policy on withdrawal of bank loan ratings.

 

The revision in outlook follows significant lag in project progress vis-à-vis scheduled timeline. The delay is due to multiple reasons including – a) heavy rains in the region, b) construction hiatus due to the pandemic, c) ruination of work done due to flooding, cyclone and excessive rise in the water level of the Ganges, d) technical issues with respect to the project design and change of scope (COS) and e) law and order issues. Physical and financial progress as on January 31, 2022 was 30.6% and 47.0% respectively, against planned progress of 99.8% as per original project schedule (unadjusted for extension of timeline [EOT] of 180 days).

 

EOT of 180 days was received in August 2021 and related to delays due to the pandemic. In addition to this, the company has applied for further EOT of 436 days relating to other issues (mentioned above), and of this 380 days has been approved by independent engineer (IE) and project director (PD), National Highways of Authority of India (NHAI, rated ‘CRISIL AAA/Stable’) and regional office (RO), NHAI. Final approval from head office (HO), NHAI is pending. Final approval from NHAI is expected in April 2022, and its timely receipt is a key rating sensitivity factor. The company has also applied for change in scope (COS), wherein a railway under-bridge (RUB) is to be constructed instead of a reinforced earth (RE) wall. The final approval for COS is also pending with NHAI. The project is under the PRAGATI (Pro-Active Governance and Timely Implementation) platform of the Government of India, which should expedite resolution of issues.

 

Cost escalation is expected on account of the significant delay as well as recent surge in input prices. The company is in the process of preparing a revised cost estimate and the same will be submitted to NHAI for approval once EOT and COS are in place. In the interim, the escalations are expected to be funded by the sponsor and erection, procurement and construction (EPC) contractor, Welspun Enterprises Ltd (WEL); WEL, has sufficient financial flexibility to meet any cash flow mismatches in both construction and operational phases. Funding risk is moderate with debt tie-up done and entire equity commitment brought in – debt drawdown has been kept low in line with management philosophy of utilising equity first. The company achieved the second payment milestone on February 14, 2022, upon 30% physical progress and payment towards it has been received in full.

 

The rating continues to factor in the inherent benefits of the hybrid annuity model (HAM), such as provisions for change in scope or delinking of unavailable land. The ratings also reflect moderate funding risk, and operational and financial support from the sponsor, WEL. These strengths are partially offset by exposure to implementation risk, given the complexity of the project, nascent phase of construction and significant delays.

Analytical approach

CRISIL Ratings has notched up WASPPL's standalone ratings based on the expectation of strong support from its parent, WEL, on an ongoing basis and in the event of distress.

Key rating drivers & detailed description

Strengths

• Inherit benefits of HAM: Benefits from HAM will be available to the project; these include provisional commercial operation date (PCOD) to be issued on completion of construction on the land made available up to 255 days from the appointed date (AD), thereby allowing full annuities to be paid as if all works of the project have been completed; annuities are generally paid in proportion to the work completed by PCOD. The concessionaire will be required to complete construction on the remaining land, whenever it is made available post PCOD.

 

The HAM concession agreement (CA) also allows for change in scope on land not available within 255 days of the AD, thereby reducing completion cost and corresponding annuity and operation and maintenance (O&M) payments and facilitating timely completion of the project. Other benefits include indexation done to the bid project cost (BPC) and O&M cost to the extent of inflation and interest payments on residual annuity payments in the operational period.

 

• Moderate funding risk: The project cost of Rs 1,161 crore is being funded by NHAI grant, debt and equity in the ratio of 40:48:12, respectively. Funding risk is low because the company has already tied up with banks for loans. Only around Rs 123 crore had been drawn down as on December 31, 2021 from total sanctioned debt of Rs 648 crore. The project had achieved 47.0% financial progress till January 2022, majority of which has been funded through sponsor’s funds and NHAI grants. The sponsor has brought in their entire equity commitment (Rs 162 crore) as of December 2021 and Rs 275 crore has been received from NHAI (corresponding to two payment milestones) till February 2022. Furthermore, WEL has provided an undertaking for financial support for any cost overrun and for cash flow mismatches during the construction and operational phases.

 

• Expected operational and financial support from the sponsor: Strong operational, managerial and financial support is expected from the sponsor, WEL. Apart from any cost overrun, WEL will support any increase in O&M expense during the construction phase. It will also meet any shortfall in debt servicing and increase in O&M expenses beyond the NHAI payout during the operational phase.

 

Weakness

• Exposure to implementation risk: The project is at a nascent stage with only 30.6% of physical progress being achieved as of January 2022. Furthermore, the project is witnessing delays because of multitude of issues including land acquisition, excessive rains and floods leading to ruination of work, cyclones and rise in water level of the Ganges, technical issues with respect to the project design, law and order problems and pandemic related disruptions. While the company has applied for EOT and the approval is expected to come in April 2022, timely progress of construction thereafter will be a key rating sensitivity factor.

 

WASPPL is also exposed to implementation risk given the complexity of the project, which involves construction of 1.865-kilometer (km), 6-lane bridge over the Ganges and 6.6-km of approach roads. This risk is partly mitigated by the fixed-price, fixed-time contract with and strong project execution capability of the EPC contractor and sponsor, WEL. Given the complexity involved in bridge construction, WEL has sub-contracted the work to S P Singla Constructions Pvt. Ltd (rated ‘CRISIL A/Stable/CRISIL A1’), which has built 350 bridges across India.

Liquidity: Adequate

The project is currently under construction and the first repayment is scheduled nine months post achieving COD. Funding risk is moderate because the company has already tied up with banks for loans, and the sponsors have brought in their entire equity commitment. WASPPL has also received the second construction grant from the NHAI upon completing 30% physical completion of the stretch. Furthermore, WEL has provided an undertaking for financial support in case of cost overrun and cash flow mismatches during the construction, as well as operational phases.

 

Liquidity is expected to be healthy post completion (scheduled for August 06, 2022, however, it may get extended following receipt of EOT) as the project will receive semi-annual annuities (along with interest) and O&M payout from NHAI. Debt service coverage ratio (DSCR) is expected to be above 1.0 time throughout the tenure of the debt. Furthermore, the company is required to maintain a debt service reserve account (DSRA) equivalent to six months of principal and interest obligation upon receipt of first annuity. WEL will also provide for any increase in O&M expenses beyond the NHAI payout during the operational phase.

Outlook: Negative

CRISIL Ratings believes that the receipt of approvals for EOT and COS, in a timely, will be critical for successful project implementation as well as to manage cost escalation arising out of the delay in execution. Nevertheless, WASPPL will continue to benefit from the project execution capability of and fixed-price, fixed-time contract with WEL.

Rating sensitivity factors

Upward factors

• Receipt of EOT by end of April 2022 and completion of project within the revised schedule
• Timely receipt of milestone payments and first annuity
• Lower-than-expected debt draw down

 

Downward factors

• Delay in receipt of extension of timeline beyond April 2022
• Higher-than-expected cost overruns leading to draw down of significant incremental debt
• Deterioration in credit risk profile of the sponsor, WEL

About the company

WASPPL was incorporated on October 10, 2017, as a special purpose vehicle (SPV) to undertake 6-laning of the Aunta-Simaria (Ganga Bridge with approach roads) section of National Highway (NH)-31 from 197.90 km to 206.05 km in Bihar on design, build, operate and transfer (DBOT) basis (hybrid annuity). The project was awarded to WASPPL by NHAI and CA was signed in November 2017. The project received AD in August 2018.

 

The project bid cost is Rs 1,161 crore. The project bid cost and O&M bid cost are adjusted for price index variation between the bid date and the milestone date to arrive at the completion cost. The project will be funded by NHAI to the extent of 40% of completion cost during the construction phase, while the balance 60% will be paid out as annuity during the operational phase.

 

The concession was granted to WASPPL for 18.5 years (including construction period of 3.5 years) and based on semi-annual annuity payment. The company has received EOT of 180 days and has applied for further extension by 436 days (of this extension for 380 days is pending approval from HO, NHAI).

 

WASPPL has received significant right-of-way (ROW) and major approvals, which are critical during the construction phase of the project. Around 91.4% of the required ROW (with 3H completion) has been obtained. Other minor approvals such as those required for utility shifting will be obtained as the construction progresses. 

Key financial indicators

For fiscal	Units	2021	2020
Revenue*	Rs crore	80	133
Profit after tax (PAT)	Rs crore	6	0
PAT margin	%	7.9	0.3
Adjusted debt/Adjusted net worth	Times	2.17	1.12
Interest coverage^	Times	1.96	0.89

*Revenue includes the construction cost incurred in the project as per IND-AS accounting requirements

^Interest cover is less than one as the project is under construction

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Term loan^	NA	NA	31-Dec-36	457.28	NA	CRISIL A-/Negative
NA	Term loan^^	NA	NA	31-Dec-36	100.00	NA	CRISIL A-/Negative
NA	Term loan*	NA	NA	31-Dec-36	74.44	NA	CRISIL A-/Negative
NA	Term loan**	NA	NA	31-Dec-36	16.28	NA	CRISIL A-/Negative
NA	Bank guarantee	NA	NA	NA	58.05	NA	Withdrawn

^Includes sublimit of Rs 250 crore for line of credit and Rs 95.27 crore as mobilisation bank guarantee

^^Includes sublimit of Rs 20.83 crore as mobilisation bank guarantee

*Includes sublimit of overdraft facility of Rs 74.44 crore

**Includes sublimit of overdraft facility of Rs 16.28 crore