By Ratnam Raju Nakka

India Ratings and Research (Ind-Ra) has undertaken the following rating actions on DBL Lucknow Sultanpur Highways Limited’s (DBLLSHL) bank facilities:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Term loan

-

-

October 2033

INR9,250

IND A/Stable

Assigned

Bank guarantee

-

-

-

INR1,008

IND A/Stable

Assigned

KEY RATING DRIVERS

Low Revenue Risk Profile: The ratings reflect pre-agreed semi-annual annuities to be received from National Highways Authority of India (NHAI; 'IND AAA'/Stable). DBLLSHL shall receive 60% of the bid project cost (INR20,160 million), adjusted for a price index multiple, in the form of biannual annuity instalments for 15 years, commencing from the commercial operations date. Along with annuity payments, interest shall be payable to DBLLSHL on the reducing outstanding balance of the annuity amount at a rate equal to the bank rate plus 3%. In addition, NHAI shall reimburse DBLLSHL INR50 million (operations and maintenance (O&M) bid quote), adjusted for the price index multiple, on annuity payment dates. 

Annuity payments, which are subject to a variation in the inflation index, and deductions for non-conformance to lane availability norms and maintenance requirements pose a risk. DBL has a satisfactory operating track record in the highway sector. 

Low Funding Risk:
According to the chartered accountant certificate dated 5 June 2017, the sponsor, Dilip Buildcon Limited (DBL; IND A’/RWP), had injected INR2,846 million (50% of the promoters’ contribution) in the project and no senior debt had been drawn. The remaining equity will be contributed by Chhatwal Group Trust (Shrem Infrastructure Private Limited), which holds a 49% stake in the project. The ratings factor in DBL’s assertion that if Shrem Infrastructure does not infuse equity, DBL will step in on time and infuse the balance equity to ensure timely completion of the construction. 

Subdued Construction Risk:
The project faces a construction risk, considering 10.63% of the engineering procurement and construction work was completed as on 9 September 2017, as per the lenders’ engineer report. However, DBL has extensive experience in highway construction and completed 90% of projects before time. The presence of a fixed-price construction contract partly mitigates the potential cost overrun risk. According to an NHAI letter dated 20 February 2017, the construction of 83.76% of the project stretch has been handed over by NHAI to DBLLSHL. As per the concession agreement, the scope of the project shall be restricted to available right of way provided within 182 days from the appointed date (8 May 2017). 

Debt Structure:
Any significant fluctuations in interest rates or absence of sponsor support would be credit negative. According to the financing documents, an interest reserve equivalent to six months of debt servicing obligations shall be included in the project cost and the interest reserve shall be utilised to repay interest service until the first annuity receipt. Subsequently, a debt service reserve account (DSRA) of INR879.5 million shall be established. The presence of sponsor undertakings for making necessary O&M arrangement during the entire tenor of the facility, along with a minimum debt servicing coverage ratio of 1.25x throughout the debt tenure, adds to the comfort. The sponsor has provided a corporate guarantee for the term loan and bank guarantees availed. 

Subdued O&M Risk:
DBL is likely to be the O&M operator. The management expects DBLLSHL to enter into a fixed-price O&M contract with the sponsor for taking up routine and major maintenance expenses. The duration of the O&M contract shall be for the entire debt service tenor. DBL has reasonable experience in the O&M of road projects. The project’s routine O&M costs are comparable with those of Ind-Ra-rated peers. Thus, Ind-Ra does not expect a major O&M risk. Moreover, there is no major maintenance scheduled during the concession period. 

The ratings factor in DBL’s assertion that the O&M of the project through the tenure of the debt will be undertaken by DBL. This mitigates O&M-related risks. However, the terms of the O&M will become clear once the project is complete.


RATING SENSITIVITIES

Negative: Significant construction delays or absence of timely sponsor support could result in a downgrade. Moreover, any breach with regard to DBL’s commitment from the position discussed above will lead to a downgrade.


COMPANY PROFILE

DBLLSHL is a special-purpose vehicle promoted by DBL. DBL plans to divest its remaining stake in DBLLSHL after the completion of construction work.

DHLLSHL has received a 17.5-year concession from NHAI for the development of the four-laning of the Lucknow-Sultanpur Section of NH 56 (new NH 731). The 127.425km project was awarded under NHDP Phase-IV on Hybrid Annuity Mode to DBL on the basis of the lowest amount of the bid project cost. 



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://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.

ABOUT INDIA RATINGS AND RESEARCH

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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

    Venkataraman Rajaraman

    Senior Director and Head Infrastructure and Project Finance
    +91 44 43401702

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121