| Benefits derived from the annuity-based revenue model
The project being developed has an annuity-based revenue model. Under this model, the NHAI makes bi-annual payment over the concession period to the concessionaire. The company does not bear any traffic risk as it recovers whole of the capital cost through annuity. Further, bi annual operational and maintenance expense and interest cost reimbursement to the extent of bank rate + 1.25 per cent is given to the concessionaire during the concession phase. The company will also receive 10 per cent of the total project cost as mobilisation advances and the same is expected by January 2022. Acuite believes, having strong support from ULCCS for funding and technology will help complete the project without any cost or time over runs.
Strong Counterparty Linked Revenue Profile and timely completion of milestones
During the construction/implementation phase, cash flow is assured in form of 10 milestone achievement linked grants (on achievement of every 5-10 percent of physical progress covering the 40 percent of the project cost) along with mobilization advance. These grants would be against the indexed BPC. During the operational phase, the project shall receive 60 per cent of the actual completion cost (Rs. 1110.20 Cr) adjusted for Price Index Multiple, in the form of biannual annuity instalments from NHAI for 15 years, likely to commence from April 2024. NHAI shall also reimburse Rs.144.28 Cr (O&M bid quote) adjusted to Price Index Multiple on the annuity payment dates.
The company’s construction progress is in line with its projection plan and has raised bills for 4 milestones totaling Rs.336.55Cr out of which the company has received Rs.291.22Cr worth funds.Debt raised from SBI of Rs.563Cr stands unutilized as on March 15, 2023. The company has incurred total cost of Rs.568.61Cr which is funded through Rs.291Cr of funds from NHAI, Rs.221Cr from promoters and others. Acuite believes that the company will complete the milestones as per the projected timeline.
Strong ongoing funding and technical support from the ULCCS
The management team of the Sponsor is ULCCS which was formed in 1925 undertakes civil construction work in Infrastructure development in Kerala and is involved in construction of roads, bridges, buildings and allied infrastructure. The major shareholder of the Society is Government of Kerala which owns 74.67 per cent of the issued shares and the rest are held by the members of the society. Major clients of the Society include National Highways Department for Highway projects, Public Works Department of Govt. of Kerala for State Road Development, Central Ministries such as Ministry of Panchayat Raj for rural roads under Pradhan Mantri Gram Sadak Yojana (PMGSY), several state government ministries such as Local Self Government, Co-operation, Tourism etc., and a host of reputed private enterprises.
Waterfall Mechanism in ESCROW account and Debt service reserve account (DSRA)
UKEPL has escrow mechanism through which cash flows from Authority is to be routed and used for payment as per the defined payment waterfall. Only surplus cash flow after meeting operating expense, debt servicing obligation, and provision for major maintenance expense, can be utilised as per borrower’s discretion during the concession period. Furthermore, ULCCS has given an irrevocable and unconditional corporate guarantee to the borrowings of UKEPL. Also, the borrower/sponsor shall maintain DSRA which is to be created upfront upon COD, of an amount equivalent to the next six months of principal, interest, fees and all other obligations due and payable in respect of facility amount.
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| Execution Risk
Execution risk associated with the project is high as any delays in completion of the project can delay the receipt of NHAI grant and also result in delay in achieving the COD resulting in time and cost over runs. Any such delay will directly impact the credit worthiness of the company. The company has executed back to back execution contract with ULCCS (sponsor) which will execute the project on behalf of the company. Acuite believes, ULCCS with its decades’ experience of experience in executing similar projects will be able to complete the project without time and cost over runs.
Challenging Financial Risk profile of ULCCS
financial position is considerably stretched as observed from leveraged capital structure and weak coverage indicators albeit the comfortable net worth of the Society which stood at Rs 380.81 Cr as on March 31, 2022. The gearing stood high at 8.77 times and Debt to EBITDA stood at 11.12 times as on March 31, 2022. The DSCR was 0.41 times and interest coverage was 1.11 times in FY22. The DSCR is low primarily due to the high portion of short term deposits collected by ULCCS from general public. As a cooperative society, ULCCS distributes the profits to its member labourers in the form of bonuses every year.
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