Khagaria Purnea Highway Project Limited March 31, 2018 Ratings Facilities Long-term Bank Facilities (Senior debt) Long-term Bank Facilities (Sub-ordinate debt) Amount 462.35 (reduced from Rs.516.95 crore) Total 492.35 (Rs. Four Hundred Ninety Two Crore and Thirty Five Lakh only) Details of instruments/facilities in Annexure-1 Rating 1 CARE A-; (Single A Minus; Outlook: ) 30.00 CARE BBB+; (Triple B Plus; Outlook: ) Rating Action Revised from CARE A; (Single A; Outlook: ) Revised from CARE A-; (Single A Minus; Outlook: ) Detailed Rationale and key rating drivers The revision in the ratings assigned to the bank facilities of Khagaria Purnea Highway Project Limited (KPHPL) takes in account deduction of small amounts in the annuities due to maintenance issue and higher than expected expenses in FY17 and FY18 leading to shortfall in appropriation of major maintenance reserve account. The ratings continue to derive comfort from the annuity-based nature of the project and established track record of receipt of annuity payments from National Highways Authority of India (NHAI, rated CARE AAA; ). The rating is, however, constrained by weak credit profile of the sponsor and O&M contractor, viz. Punj Lloyd Limited (PLL, rated CARE D) relatively high leverage levels, moderate debt coverage indicators and exposure to interest rate, O&M risks and foreign currency fluctuation risks. Going forward, satisfactory maintenance of the project road within the envisaged costs, timely receipt of annuity payments from NHAI without any deductions and efficient management of foreign exchange risk shall be the key rating sensitivities. Detailed description of the key rating drivers Key Rating Strengths Annuity-based nature of project: The company has received seven annuity payments since COD from National Highways Authority of India (NHAI, rated CARE AAA; ) as per schedule except for the delay in sixth annuity payment for about 20 days. The company has claimed interest from NHAI for delay in annuity payment but the same is yet to be received. There also have been minor deductions in sixth and seventh annuity received pertaining to road maintenance issue. Further, Rs.2.00 crore has been deferred from sixth annuity on account of delay in completion of work due to nonavailability of land and it is expected to be received soon as per the recommendation letter from NHAI. While annuity based nature of project from NHAI provides comfort, timely receipt of future annuity payments without any deductions will be crucial. MMRA and foreign currency fluctuation reserve (FCFR): The company has created FCFR of Rs.13.21 crore as against envisaged reserve of Rs.17.73 crore as on March 31, 2018. Further, the company is estimated to have funds of about Rs.24 crore as on March 31, 2018, which it proposes to utilize towards major maintenance works planned for FY19 and FY20. As per the base case plan the company was required to have MMRA of Rs.28.24 crore by end of FY18. The company has also additionally received refund order for Rs.3.83 crore from income tax department. 1 Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications. 1 CARE Ratings Limited
Undertaking from the sponsors: PLL and PLIL have provided an undertaking to the lenders that any overrun in the project cost shall be arranged by them. They have also provided an undertaking to fund any shortfall in the second major maintenance expense of the project during the tenure of the CA in case the internal accruals of the project are not sufficient. However, due to the weak credit profile of the sponsors, the cash flows of the project would have to be sufficiently available for meeting the major maintenance expenditures in the project. Key Rating Weaknesses Exposure to O&M risk: KPHPL has issued a Letter of Award (LOA) to PLL to undertake O&M activity of the project at a predefined cost. During FY17 and FY18, the company incurred additional expense towards maintenance and repair works, which led to shortfall in adequate reserve appropriations. Further, due to lack of a fixed priced major maintenance contract with a reputed player, the company is exposed to the risk of any higher than envisaged major maintenance cost, which is scheduled in FY19 and FY20. Moderate financial risk profile; however relatively high project debt-equity ratio and exposure to foreign currency fluctuation risk: The project is funded through debt of Rs.616 crore and promoter contribution of Rs.119 crore translating into a relatively high project debt-equity ratio of 5.2x. The company is required to maintain a cash trap account containing an amount equivalent to interest payments (both senior and subordinate debt) and O&M expenses for the ensuing six months. Also, the company has partially hedged the ECB exposure by entering into a call spread option trading strategy. Experienced promoters; however deterioration in financial risk profile of PLL: KPHPL is wholly owned by PLIL (which is a 100% subsidiary of PLL). PLL, promoted by Mr. Atul Punj in 1988, is a leading engineering & construction company in India. The total operating income of PLL for FY17 increased to Rs.4059.75 crore from Rs.3527.71 crore in FY16. However, the company continues to report net loss in FY17 of Rs.850.58 crore as compared to net loss of Rs.1513.71 crore in FY16. Analytical approach: Standalone Applicable Criteria Criteria on assigning Outlook to Credit Ratings CARE s Policy on Default Recognition Financial ratios Non-Financial Sector About the Company KPHPL is a Special Purpose Vehicle floated by PLIL, which is a wholly owned subsidiary of PLL to undertake two-laning with paved shoulders of Khagaria-Purnea section of NH-31 from KM 270 to KM 410 in the state of Bihar under National Highways Development Programme (NHDP) Phase III of NHAI on Design, Build, Finance, Operate and Transfer (Annuity) basis. As per the concession agreement (CA) signed between NHAI & KPHPL in April 2011, the concession period is for 17 years (including a construction period of 30 months) from the appointed date, which has been fixed as October 5, 2011. The project had achieved COD on February 03, 2014 and has been received five annuity payments and a bonus annuity. The total project cost is Rs.735 crore, funded through senior debt of Rs.586 crore, sub-ordinate debt of Rs.30 crore and promoters contribution of Rs.119 crore. Brief Financials FY16 (A) FY17 (A) Total operating income 79.03 75.46 PBILDT 60.84 64.55 PAT -7.42-1.40 Overall gearing (times) 588.44-2032.79 Interest coverage (times) 0.89 0.98 A: Audited; 2 CARE Ratings Limited
Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable Rating History (Last three years): Please refer Annexure-2 Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications. Analyst Contact Name: Mr. Gautam Bafna Tel: 011-4533 3256 Mobile: +91-98914 93443 Email: gautam.bafna@careratings.com **For detailed Rationale Report and subscription information, please contact us at www.careratings.com About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. Disclaimer CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. 3 CARE Ratings Limited
Annexure-1: Details of Instruments/Facilities Name of the Instrument Fund-based - LT-Term Loan (Senior Debt) Fund-based - LT-Term Loan (Subordinate) Date of Issuance Coupon Rate Maturity Date Size of the Issue Rating assigned along with Rating Outlook - - Apr -26 462.35 CARE A-; - - Apr- 26 30.00 CARE BBB+; Annexure-2: Rating History of last three years Sr. No. Name of the Instrument/Bank Facilities 1. Fund-based - LT-Term Loan (Senior) Type Current Ratings Amount Outstanding Rating LT 462.35 CARE A-; 2017-2018 1)CARE A; (20-Apr-17) Rating history 2016-2017 1)CARE A (05-Apr-16) 2015-2016 2014-2015 - 1)CARE A (14-Nov-14) 2. Fund-based - LT-Term Loan (Subordinate) LT 30.00 CARE BBB+; 1)CARE A-; (20-Apr-17) 1)CARE A- (05-Apr-16) - 1)CARE A- (14-Nov-14) 4 CARE Ratings Limited
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