KSHPL is an SPV incorporated to implement a 77.2km lane expansion project (two-to-four laning) between Kashipur and Sitarganj in Uttarakhand on NH-74, under a 21-year concession from National Highways Authority of India (NHAI, ‘IND AAA’/Stable). The estimated project cost of INR7,574.1m is being funded by a term loan of INR4,220m, sponsor’s contribution of INR1124.1m and the balance amount of INR2,230m as a grant by NHAI.
KEY RATING DRIVERS
The downgrade reflects the slippages in physical progress leading to a shift in the scheduled commercial operations date (COD) by at least nine months, the relatively weak credit profile of the sponsor Galfar Engineering & Contracting (India) Pvt Ltd (Galfar India) (‘IND BBB-’/Stable) which could impact the possible timely support to KSHPL, both in terms of completion of the project as well as the potential debt service shortfall due to lower-than-expected traffic numbers. These concerns are also reiterated by the recent default of two SPVs of Galfar India. The management expects the provisional completion to be achieved by 1 January 2017 and final COD by 1 June 2017.
Completion Risk Remains: The rating downgrade factors-in the delay in the physical progress of the project, with around 76.24% of construction work completed by end-August 2016 (targeted progress: 100%) and the fact that 100% of the land has been handed over and all the relevant permissions are in place. The project is being delayed for reasons beyond the control of promoters. The project is being developed by Galfar Engineering & Contracting SAOG (Galfar SAOG, holds a 4.49% stake in the project) on a build, operate and transfer (BOT) basis. Its subsidiary Galfar Engineering & Contracting (India) Pvt Ltd (Galfar India), is the engineering, procurement and construction (EPC) contractor and also holds 95.41% of KSHPL. The sponsors have also undertaken to fund cost overruns. A fixed-price EPC contract with Galfar India and a provision for commencing toll operations once 75% of the project is completed are credit positives. The management expects the provisional completion to be achieved by 1 January 2017.
Sponsor’s Track Record: Even though Galfar India has relatively limited experience in the BOT space, the rating factors in the technical expertise of the contractor’s management and its four decades of experience in the infrastructure construction space.
Liquidity Concerns of the Group: The rating downgrade factors-in stretched credit matrices and poor liquidity of the two SPVs. Galfar India has a total of five BOT projects in its portfolio (including KSHPL) with no pending equity commitment in any of the projects..
Moderate Revenue Risk: According to the traffic study, 64% of the traffic is likely to be passenger vehicles. Ind-Ra expects multi-axle vehicles to provide some fillip to the revenue due to the project’s proximity to the industrial area developed by the State Industrial Development Corporation of Uttarakhand Limited at Rudrapur and Integrated Industrial Estate at Pantnagar, Sitarganj and Lalkuan. Stone crushing industries in Haldwani and passenger traffic comprising tourists and local people from highly populated adjacent areas have also been considered in the traffic estimates. Price risk is partially mitigated, since toll rates are subject to annual escalation, based on inflation indices (40% of wholesale price index), in addition to a fixed escalation of 3%. Although the study indicates two alternate routes, a traffic leakage is unlikely due to their poor conditions and higher estimated travel time.
Debt Structure: The project debt is structured to amortise in 11.5 years after a 12-month moratorium period in 138 structured unequal monthly instalments. The security features include a three-month debt service reserve. However, its creation from operational cash flow could be a challenge, if traffic does not materialise according to projections. The debt’s variable interest rate (currently - 11.70% with effect from 8 June 2016, reduced from 12.25% earlier), with a reset every year post the commercial operations date could increase cash flow volatility.
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