June 26, 2020

Nelamangala Devihalli Expressway Private Limited: Provisional [ICRA]AA-(Stable) assigned

Summary of rating action

Instrument* Current Rated Amount Rating Action
(Rs. crore)
Fund Based – Term Loan 275.00 Provisional [ICRA]AA-(Stable); Assigned
Total 275.00
*Instrument details are provided in Annexure-1

Rationale
ICRA has assigned Provisional [ICRA]AA- (pronounced as Provisional ICRA double A minus) rating to the Rs. 275.00 crore
proposed term loan facilities of Nelamangala Devihalli Expressway Private Limited (NDEPL). The outlook on the rating is
Stable. The rating assigned is provisional as of now (as denoted by the prefix ‘Provisional’ before the rating symbol) and is
subject to the fulfilment and review of all pending actions/documentation pertaining to the facility rated by ICRA. The
final rating may differ from the provisional rating in case the completed actions/documentation are not in line with ICRA’s
expectations.

The rating takes into account the importance of the project stretch for which NDEPL is proposing to acquire the toll
concession rights under the substitution scheme from the NHAI. The project stretch provides connectivity between
Bengaluru and Mangaluru, and also to important places such as pilgrim sites like Shiradi, Dharmasthala, Kukke
Subramanya, Bellur Udupi and tourist destinations such as Coorg (Madikeri), Udupi, etc. The project has a long track
record of toll collection (under the existing SPV/concessionaire) and has recorded healthy traffic growth over the years.
The rating also takes into account the proposed transaction (acquisition deal) structure that ensures availability of
sufficient funds for the completion of the pending major maintenance (MM) exercise and provision for payment of the
applicable penalty to the authority for delay in completion of maintenance. Further, the rating takes into account the
projected healthy debt service coverage metrics and the structural features of the proposed debt, including competitive
borrowing cost, long debt tenure, presence of three-months of debt service reserve (DSR) to be created upfront and the
undertaking from sponsor for supplementing any shortfall in the scheduled MM. The rating also favourably takes into
account the reputed sponsor and its experience in operation of road assets in India.

The rating is, however, constrained by the risk associated with a build operate transfer (BOT) toll road project, including
traffic growth, wholesale price index (WPI)-linked toll rates, development/improvement of alternate routes and risk of
toll leakages. ICRA notes that the project stretch witnessed volatility in traffic growth in the recent past, though it was
primarily due to bottlenecks in the connecting stretches that impacted long haul traffic; the issue has now been resolved.
Further, the Covid-19 related disruption (including nationwide lockdown) has impacted the traffic on all toll road
projects, but the same has been gradually returning to normal levels. While there is limited track record since
resumption of toll collection, the volume of traffic recovery and their sustenance will be a key rating sensitivity once
NDEPL acquires this project. ICRA notes that NDEPL, after acquiring the project concession, will have to undertake the
long-overdue first MM in the project, timely and within budgeted cost completion of which will be crucial. In this
context, ICRA notes that the funding-related concerns are partly mitigated by the provision of upfront MM cost in the
transaction, and sponsor shortfall undertaking for all the MM.

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The Stable outlook on the rating reflects ICRA’s opinion that NDEPL will benefit from the presence of professional
management and reputed sponsor with experience in operation of road assets in India and will be able to maintain
healthy operating and financial profile. As the proposed debt has not been sanctioned, NDEPL has indicated some key
terms for the proposed borrowing programme that have been taken into consideration for assigning the provisional
rating, which includes a total borrowing of up to Rs. 275.00 crore with repayment schedule of 11 years starting from
FY2021, interest rate of 8.25% p.a., upfront creation of a three months of DSRA and undertaking from sponsor for
supplementing any shortfall in funding the scheduled MM. Post finalisation of the transaction and debt sanction, ICRA
will assess the final terms of the sanction and the consequent impact on NDEPL’s credit profile, if any.

Key rating drivers and their description

Credit strengths
Operational nature of the project to be acquired with established eight-year track record of toll collections – The
project stretch to be acquired is operational with about eight years of track record of toll collection (under the existing
SPV/concessionaire) and healthy traffic growth, at a CAGR of 6.5% in passenger car unit (PCU) terms, over the last eight
years. The traffic growth has been supported by robust growth in passenger vehicles, which account for over 60% of the
total traffic (AADT), given the proximity to tourist sites and pilgrimage sites.

Importance of project stretch with low alternate route risk – The project stretch lies on the NH-48 (as per restructuring
of National Highways, it is renamed as NH-75) that runs through Karnataka, Tamil Nadu and Andhra Pradesh, connecting
key cities like Bantwal, Hassan, Bengaluru and Vellore. The project provides connectivity to a number of pilgrim sites in
Karnataka like Shiradi, Dharmasthala, Kukke Subramanya, Bellur Udupi and other tourist destinations in the southern
region such as Mangaluru, Coorg (Madikeri), Udupi and some national parks and waterfalls. The project stretch has
presence of two major LPG bottling units of HPCL and BPCL, which also generate a part of commercial traffic.

The project also has low alternate route risk as the Bengaluru to Mangalore road via Nelamangala-Devihalli is the
shortest route between the two destinations; the alternate routes are either longer by up to 150 km, or do not have
proper four laning, or have restriction on movement of commercial traffic.

Healthy debt coverage metrics and structural features of borrowing programme – With the proposed transaction
structure and proposed debt terms, the debt service coverage ratios are expected to remain healthy with cumulative
debt service coverage ratio (DSCR) of over 1.8 times and loan life coverage ratio (LLCR) of over 1.7 times. The rating also
takes into account into account structural features of the proposed borrowing programme, including presence of a debt
service reserve (DSR) equivalent to three months of debt servicing requirement, which is to be created upfront and the
undertaking from sponsor for supplementing any shortfall in the funding of the scheduled MM as per the concession
agreement.

Reputed sponsor with experience in operation of road assets in India – The rating favourably takes into account the
profile of the sponsor, Cube Highways, that is a group of funds based in Singapore created as an infrastructure
management company/fund with a special focus on road and highway projects in India. Cube Highways has I-Squared
Capital, International Finance Corporation, Abu Dhabi Investment Authority and Japanese Highway International as
shareholders. Cube Highways focuses on a 100% buyout or acquisition of the majority stakes in identified operational
highway projects. The Cube Highways Group currently owns five road projects covering 2,100 lane-km of highways in
India and has multiple projects in pipeline.

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Credit challenges
Operations and maintenance risk – NDEPL, like any toll road project, is exposed to the risk of higher-than-budgeted
operations and maintenance (O&M) and MM cost, which could have a bearing on its debt servicing capability. The first
MM exercise on the project stretch is already overdue and would be required to be completed in a short span of time
after NDEPL acquires the concession rights. The cost for the remaining work for the first MM is estimated by the
management at Rs. 49.4 crore. On account of the delay in undertaking the maintenance work, the concessionaire is
required to pay penalty to the authority (NHAI) of over Rs. 60 crore, as estimated by the management. While the deal
structure ensures funding for the pending MM activity and the penalty on MM exercise to be paid to the authority,
timely and within budget completion of the same will be crucial. In this regard, ICRA has taken comfort from the sponsor
undertaking for supplementing any shortfall in funding of the scheduled MM. Nevertheless, the completion of regular
and periodic maintenance cost within budgeted levels will remain a key determinant of debt coverage metrics and
therefore, will remain a key rating sensitivity going forward.

Risks associated with a BOT (toll) road project, including risk of lower traffic growth and inflation-linked toll rates –
The project remains exposed to risks inherent in BOT (toll) road projects, including risks arising from political
acceptability of toll rate hike over the concession period and development/improvement of alternate routes and
likelihood of toll leakages. Furthermore, lower-than-anticipated growth in traffic or toll rates could result in lower debt
service coverage ratio. The annual toll rate revision on the project stretch is based on the average WPI during the
previous financial year and hence, is exposed to the risk of lower toll rate in the scenario of prolonged low WPI. ICRA
notes that while there is a long track record of toll collection on the project stretch, the traffic had witnessed some
volatility in the recent past. The traffic in FY2019 was adversely impacted by closure of road stretches in connecting
stretch near Shiradi Ghat on account of landslides that damaged the roads. Recently, the Covid-19-related lockdown
resulted in suspension of toll collection for the project during the nationwide lockdown period. The toll collection has
resumed on the stretch from April 20, 2020, and the traffic has been steadily ramping up. Going forward, the volume of
traffic return compared with the pre-Covid-19 level and the sustenance of traffic post acquisition by NDEPL will be a key
rating sensitivity.

Liquidity position: Adequate

ICRA expects NDEPL to generate adequate cash flows from toll collection after meeting the O&M expenditure and
provisioning of MM to meet its external debt servicing requirement. This apart, the upfront creation of three months
DSRA supports its liquidity.

Rating sensitivities
Positive triggers – The rating maybe upgraded if there is sustainable improvement in traffic and toll collections, while
keeping the O&M cost within the budgeted levels, leading to significant improvement in debt coverage indicators.

Negative triggers – The rating maybe downgraded if the growth in toll collections is lower than envisaged or if the
operations and maintenance expenditure is higher than the budgeted levels, resulting in pressure on the debt coverage
metrics. The rating could also come under pressure if there are delays in completion of the scheduled MM. Downgrade
pressure on rating maybe also emerge if the loan life coverage ratio falls below 1.6 times.

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Analytical approach
Analytical Approach Comments
Corporate Credit Rating Methodology
Applicable Rating Methodologies Rating Methodology for BOT (Toll) Roads
ICRA’s Policy on Assigning Provisional Ratings
Parent/Group Support Not applicable
Consolidation/Standalone Not applicable

About the company

Nelamangala Devihalli Expressway Private Limited (NDEPL) is promoted by Cube Highways & Infrastructure I-D Pte.
Limited (Cube Highways I-D). Cube Highways I-D is owned by I-Squared Capital (75.10%), and the Abu Dhabi Investment
Authority (ADIA, 24.90%). Cube Highways I-D is part of the Cube Highways Group, which comprises multiple holding
companies and has sizeable investment in the Indian road assets. NDEPL is in advanced stage of acquiring the concession
right of Lanco Devihalli Highways Limited (LDHL) to operate and maintain the Nelamangala-Devihalli Section of NH-48
from km 28.200 to km 110.250 in Karnataka. The project road is a four-lane section of National Highway 48 (new NH75)
that starts near Nelmangala (near Bengaluru) and ends near Devihalli and is about 81.8 km long. It mainly passes through
three districts, i.e., Bengaluru Rural, Tumkur and Mandya.

Key financial indicators (audited)

FY2018 FY2019
Operating Income (Rs. crore) NA NA
PAT (Rs. crore) NA NA
OPBDIT/OI (%) NA NA
RoCE (%) NA NA

Total Outside Liabilities/Tangible Net Worth (times) NA NA

Total Debt/OPBDIT (times) NA NA
Interest Coverage (times) NA NA
DSCR NA NA
* NDEPL does not have any significant operations at present and the concession rights are yet to be acquired.

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

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Rating history for past three years
Current Rating (FY2021) Rating History for the Past 3 Years
Instrument Amount Rating FY2020 FY2019 FY2018
Type Amount Rated
Outstanding 26-Jun-20 - - -
Term Loan* Provisional
1 Long Term 275.00 0.00 - - -
(Proposed) [ICRA]AA-(Stable)
* Loan has not been sanctioned yet; Amount in Rs. crore

Complexity level of the rated instrument

ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The
classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details
ISIN Instrument Date of Issuance Coupon Maturity Amount Rated Current Rating and
Name / Sanction Rate Date (Rs. crore) Outlook
NA Term Loan NA NA NA 275.00 Provisional
(Proposed) [ICRA]AA-(Stable)
* Loan has not been sanctioned yet, Source: NDEPL

Annexure-2: List of entities considered for consolidated analysis – Not applicable

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Analyst Contacts
Shubham Jain Abhishek Gupta
+91 124 4545 306 +91 124 4545 863
shubhamj@icraindia.com abhishek.gupta@icraindia.com

Nitin Kumar
+91 124 4545 845
nitin.kumar2@icraindia.com

Relationship Contact
Jayanta Chatterjee
+91 80 4332 6401
jayantac@icraindia.com

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
communications@icraindia.com

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

info@icraindia.com

About ICRA Limited:

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Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited
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For more information, visit www.icra.in

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