­Strong revenue visibility over the tenure of the NCDs
APSBCL was incorporated in 2015 and since 2016 was involved in supporting liquour distribution across the state of Andhra Pradesh which was then a responsibility of the excise department. For this, it used a earn small percentage of sales as commission. However, in October 2019 GoAP made APSBCL the sole distributor (retail and wholesale) of liquor in the state which it undertook through a network of 13 depots and 2934 restaurant, bars and retailers. Further, since November 2021 by amending the AP (Regulation of Trade in Indian Made Foreign Liquor, Foreign Liquor) Act 1993 GoAP entrusted addtional responsibility of implemention of its socio-economic welfare schemes and the proceeds raised through the rated NCDs will also be used towards the same. For this GoAP, introduced the concept of special margin which is calculated as a percentage of total sale proceeds from liquor sale across the state. This special margin will generate stable operating income for APSBCL and will be used to cover its overhead as well as its repayment obligations. As per the terms of the proposed NCDs, GoAP is also expected extend an irrevocable undertaking stating that no changes will be made to the liquor distribution policy and special margin will not be reduced to level where the DSCR will go below 1.5 times through the tenure of the NCDs. Further, the revenue from liquor distribution (wholesale + retailers) across the state has remained stable for the three year period ended FY2022. It stood at Rs. 22,748 Cr. in FY2022 against Rs. 20,189 Cr. in FY2021 and Rs. 20,909 Cr. in FY2020. Since its introduction on 12 November 2021 special margin collection stood at Rs. 2600 Cr. till March 31, 2022.

Acuite expects APSBCL's revenue to record a steady growth over the medium term on account of it being the sole distributor of liquor across the state.

Strength of the st ructured payment mechanism and other key terms of the NCD issue
Sale proceeds from each outlets will be deposited on a daily basis in a suspense account with State Bank of India. Out of this net revenue (which includes Basic price, all margins/ commissions and special margin) will be transferred to the Net Revenue Receipt Account (NRRA) of issuer (APSBCL) based on corresponding challans. Withdrawals out of NRRA will only be allowed after first prioritizing the payments toward bond servicing. 1.67 percent of the total repayment obligations for the particular quarter will be transferred on a daily basis into Bond Servicing Account (BSA) from the first day of the quarter.The transfers during a particular quarter on the above mode will continue till the full build-up of the servicing requirement for that particular quarter is achieved in the APSBCL BSA. In the event of full built up of servicing amount not being achieved in any quarter for whatsoever reason 15 days prior to the relevant servicing date (T-15), the debenture trustee should inform the issuer through written communication to fund the shortfall within the next 12 days. On T-2nd day, if the shortfall still persists, then Debenture Trustee would meet such shortfall by transferring funds from the DSRA account and make the necessary payments to the debenture holders on the due date. An amount equivalent to the servicing obligation (Principal & Interest) of the outstanding bonds for next two quarters would need to be created and maintained by the APSBCL in the Debt Servie Reserve Account (DSRA) till the final redemption of the bonds. The DSRA amount would need to be deposited at least 1 day prior to the date of allotment of the bonds. The debenture trustees would have a default escrow right on the funds available in the NRRA. In the event any impairment of DSRA on account of meeting servicing obligation on any bond servicing date - The Debenture Trustee would immediately trigger the default escrow mechanism on the NRRA and immediately transfer the balance lying there-in to the DSRA Account, any further accrual to the said account would also get transferred on a daily basis until the DSRA amount is fully replenished.

Acuite believes the structured payment mechanism along with other key features of the issue allows adequate liqudity and protection against inadequacy of the funds on the bond servicing date and any significant change in the same would be a key rating sensitivity. 

­Susceptibility to changes in GoAP liquor policies and reduction in alcohol consumption
GoAP has made APSBCL to the sole distributor through changes in the AP (Regulation of Trade in Indian Made Foreign Liquor, Foreign Liquor) Act 1993. APSBCL's operating income is highly susceptible to any changes to the liquor distribution of policy. GoAP is expected to extend an irrevocable Guarantee and Undertaking which will ensure no changes to the liquor distribution policies and the reduction in special margin, if any will be only to the extent the DSCR on the rated debt remains above 1.5 times at all times. This undertaking mitigates the risk of susceptibility to the changes in GoAP policies. However, GoAP has been trying to reduce alcohol consuption in a phased manner since 2019 and has even reduced the number of restaurants, bars and liquor shops to 2900 in May 2022 from around 4000 earlier. Any continued reduction in shops will adversely impact APSBCL's revenues and will remain a key rating monitorable. While there is a potential risk of a prohibition by future governments, the unconditional and irrevocable undertaking by the GoAP under the transaction structure addresses such a political risk.

Linkages to fiscal position of State of AP
The current state of Andhra Pradesh was created in 2014-15 following the bifurcation of the original state into the former and Telengana. The reorganisation led to the conversion of the state into an economy where the share of agriculture was significant. While the pandemic had resulted in a negative 2.6% GSDP growth in FY2021, it is estimated to have witnessed a significant recovery in FY2022(RE). However, the fiscal position of the state has remained under strain with a major shortfall in revenue receipts in FY2022(RE) as compared to the budgeted figures, leading to a revenue deficit of 1.6% of GSDP. The fiscal deficit was, however, lower at 3.2% (RE) of GSDP than the BE of 3.5%, on account of higher than expected Acuité Ratings & Research Limited www.acuite.in  nominal GSDP. For FY23, the government has pegged the fiscal deficit higher at 3.6% (BE). The aggregate borrowings of the state stands at Rs 3.91 Lakh Cr as per FY2022 (RE) as against Rs 3.51 Lakh Cr (FY21 Actuals) Any further adverse changes in the fiscal indicators of GoAP due to factors such as prolonged slowdown in industrial activities or socio-economic challenges faced by AP can have a significant impact on APSBCL and will be a key monitoring factor.