By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has affirmed North Karnataka Expressway Ltd’s (NKEL) non-convertible debentures (NCDs) as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

NCDs£

-

9.50

January 2020

INR4,636*

IND AAA(SO)/Stable

Affirmed

* outstanding: INR787 million on 31 August 2017.

£Details in annexure

KEY RATING DRIVERS

Satisfactory Performance: The affirmation reflects the project's satisfactory performance in FY17, in line with Ind-Ra’s base-case expectations. This includes timely receipt of semi-annual annuities, timely redemption of NCDs, adequate maintenance of reserves for debt service, major maintenance and contingency, and debt service coverage ratios being consistent with base-case levels. 

Low Revenue Risk Profile:
The project’s annuities are secured through an escrow account of fixed, semi-annual annuity streams under a concession agreement from a highly rated counterparty, the National Highways Authority of India (NHAI, 'IND AAA'/Stable). The company has received of 25 half-yearly annuities of INR505.17 million each so far, without any performance-related deductions. 

Robust Structural Features:
The project's structural features include an already established debt service reserve of INR400 million in the form of a fixed deposit. Also, a major maintenance reserve and a contingency reserve are being built up through semi-annual transfers from cash flows. As of August 2017, the major maintenance reserve account had a balance of INR191.13 million while the contingency reserve account had INR260 million. IDBI Trusteeship Services Ltd (the trustee) administers the security mechanism for NCDs, and the trustee-controlled escrow account is maintained with Deutsche Bank. 

Operating Risks Mitigated:
The performance-related risks are mitigated by the presence of a fixed-rate operations and maintenance contract with the main sponsor, IL&FS Transportation Networks Ltd (ITNL, ‘IND A’/Negative), and a development agreement with Punj Lloyd Limited (PLL). ITNL has over a decade-long track record in the construction and maintenance of build-operate-transfer (BOT) concessions, and is one of the largest BOT operators in the highway sector. The second overlay was undertaken by ITNL at a higher rate, since PLL denied doing it at the contracted rate. That being said, NKEL and ITNL have mutually agreed that the differential amount (INR154 million) would be settled only upon the recovery of the same from PLL. Timely transfers to the major maintenance reserve, contingency reserve and escrow accounts continue to provide comfort. 

However, ITNL has indicated its plan to transfer NKEL to IL&FS Transportation Investment Trust (InvIT), which it expects to close within FY18. According to the information provided by NKEL, ITNL has proposed to hold a 26% stake in InvIT. ITNL has confirmed that there are no changes in the commercial aspects or scope of the O&M agreements for NKEL pursuant to its transfer to InvIT. 

Contingent Liability:
NKEL has provided a short-term loan of INR251 million to ITNL prior to the NCD transaction and accumulated interest of INR92 million on 31 March 2017. According to NKEL’s management, this loan is payable on demand. There is a contingent liability of INR110.2 million which is related to income tax demands and is contested by the company.


RATING SENSITIVITIES

Negative: A negative rating action could result from NHAI’s rating downgrade and any significant deterioration in ITNL’s credit quality.


COMPANY PROFILE

NKEL is an SPV, created to implement a lane expansion project under the BOT-annuity model. It is jointly sponsored by ITNL (93.5% direct and indirect equity interest with Infrastructure Leasing and Financial Services Ltd, 'IND AAA'/Stable) and PLL. Effective June 2002, the project has a 17.5-year concession from NHAI to design, construct, develop, finance, operate and maintain a 77km stretch between Belgaum in Karnataka up to the Maharashtra border on National Highway 4. The commercial operation date was achieved in July 2004, six months ahead of the schedule. NKEL refinanced the bank loans and advanced equity distributions through the NCD issuance in 2011. 

FINANCIAL SUMMARY
 

Particulars

FY17

FY16

Revenue from operations (INR million)*

371.29

432.96

Total income (INR million)

491.63

572.65

EBITDA (INR million)

344.28

419.06

EBITDA margin (%)

70.03

73.18

Source: Company

 

 

*Revenue from operations includes operations and maintenance income, finance income and periodic maintenance income. Pending annuity receipts from NHAI have been mentioned as other financial assets as per the Ind-AS.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limit (million)

Rating

22 May 2017

27 September 2016

3 August 2015

NCDs

Long term

INR4,636

IND AAA(SO)/

Stable

IND AAA(SO)/Stable

IND AAA(SO)/Stable

IND AAA(SO)/Stable

ANNEXURE

ISIN Number

Date of Issue

Coupon Rate (%)

Maturity date

Issue Size (million)

Rating/Outlook

Rating Action

INE898G07153

15 December 2010

9

15 January 2018

INR176

IND AAA(SO)/Stable

Affirmed

INE898G07161

15 December 2010

9

16 July 2018

INR166

IND AAA(SO)/Stable

Affirmed

INE898G07179

15 December 2010

9

15 January 2019

INR156

IND AAA(SO)/Stable

Affirmed

INE898G07187

15 December 2010

9

15 July 2019

INR148

IND AAA(SO)/Stable

Affirmed

INE898G07195

15 December 2010

9

15 January 2020

INR141

IND AAA(SO)/Stable

Affirmed


COMPLEXITY LEVEL OF INSTRUMENTS

For details on complexity level of the instruments please visit www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Analyst Names

  • Primary Analyst

    Ratnam Raju Nakka

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001742

    Committee Chairperson

    Dr. Sunil Kumar Sinha

    Principal Economist and Director Public Finance
    +91 11 43567255

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121