Demonstrated track record of WEL (sponsor/parent) in executing road projects
Welspun Enterprises Ltd (WEL) is the Sponsor/Parent Company, who are also the EPC contractors for the SPV - WIFPL. WEL has demonstrated strong execution capability in road projects (both HAM and BOT) as reflected by the completion of Welspun Delhi Meerut Expressway Pvt Ltd much ahead of its scheduled time. the WEL’s road asset portfolio would comprise of two under construction HAM road projects (Sattanathapuram - Nagapattinam and Aunta - Simaria Road projects)). WEL currently holds 51% stake in the SPV and rest is with Actis Highway Infra Limited. Acuité believes that the parent company’s successful track record of project execution capabilities is expected to support execution of this project as well. While enumerating the support extended by WEL to WIFPL, Acuité takes cognizance of WEL's key strengths defined by its resourceful promoters, strong management team for executing highly value added work and in-house project monitoring, strong brand image, demonstrated execution capabilities in EPC segment, healthy order book providing medium- term revenue visibility, asset-light model by sub-contracting 90 percent of its EPC work, diversified revenue with execution of multiple projects in hand; exhibits lower customer concentration risk, consistent addition in operating income and profitability with strong underlying assets,  demonstrated capability of buying and turning around projects with weaker balance sheet, or not closed financially or projects with delayed execution.  The aforesaid strengths are countervailed to an extent by susceptibility of operating performance to timely receipt of orders and execution of projects in hand, high dependence on subcontractors and Working capital intensive nature of operations.

Acuité believes that the parent company’s successful track record of project execution capabilities is expected to support execution of this project as well.

Strong sponsor support in overall execution of the project
WIFPL is of strategic importance to WEL; the same is demonstrated by the tangible support from WEL. Currently WEL has 51% percent stake in the SPV and rest 49% has been divested to Actis Highway Infra Limited. The level of WEL’s management involvement is indicated by WIFPL’s common brand name, common management and centralized decision making at WEL’s level. WEL’s has already contributed ~34% (Rs.732.16 Cr) of the total project cost of Rs.2,175.31 Cr. WEL’s contribution is in the form of direct equity, optional convertible debentures (OCDs) and unsecured loans. To count on the aforesaid financial support is the unconditional and irrevocable corporate guarantee and shortfall undertaking provided by WEL. The corporate guarantee is provided for the rated debt towards a) for completing the project and overrun in the project due to any circumstances by way of equity/unsecured loans b) shortfall in debt servicing c) any shortfall in the debt service reserve account (DSRA) as stipulated in the financing documents; e) shortfall in termination payment and f) Bridge the gap in case of any cash flow mismatch. The corporate guarantee will be available until the debt serviceability period. While the shortfall undertaking affirms that WEL will meet any deficits or delays in debt servicing, debt service reserve account (DSRA) and termination payment.

Strategic location of the project stretch with favourable traffic volumes expected entailing low demand risk
The toll road stretch is a part of the NH-44 corridor that starts from Mukarba Chowk in Delhi state (15.500 Km) and ends at Panipat in Haryana State (86.00 Km). NH 44 is aligned in North - South direction and traverse through entire country, connecting some of the most important cities of Haryana, Punjab, Chandigarh, Himachal Pradesh, Jammu and Kashmir, Ladakh amongst others in North India and with parts of Delhi, Uttar Pradesh, Rajasthan, Madhya Pradesh amongst others and Kanyakumari, Coimbatore, Bangalore and Hyderabad in South India. Major Industrial estates fall along the project road such as Kundli, Rai, Sonipat, Murthal, Barhi, Samalkha and Panipat. This is an existing 6-lane road where traffic is already plying, and the NHAI has been collecting the toll through Bhagan Toll plaza is in Sonipat district of Haryana. This is the only toll plaza on the project road which is located at km 53.600 near Bhagan village in Sonipat District. The average annual daily traffic (AADT) for the aforementioned stretch is around 1 lakh passenger car units (PCUs) as of FY2021 which constitutes roughly cars/LMV and remaining being others. After achieving PCOD of the project for 53.763 km out of the total 70.500 km on 31 March, 2022; the company has been collecting tolls from April 06, 2022 and has collected total tolls of Rs.284.58 Cr. till 28 February 2023 with average daily collection of ~87 lakh. Upon achieving COD (commercial operations date) for both Haryana and Delhi section, WIFPL expects to collect higher toll.

Acuité believes that WIFPL will benefit from strategic location and moderate traffic volumes upon achieving the COD.

Low execution and funding risk
The implementation risk is low as WIFPL has already completed ~96% of the project as on 28 February, 2022 and the balance ~4% of the physical progress is yet to complete. The company has been facing several hindrances such as encroachment demolitions, HT Line shifting and specially a force majeure event of famer’s agitation which led to delay in completing the project. The implementation risk remain low as it has already completed majority of the work and has also achieved PCOD on 31 March, 2022. The funding risk is also low as the debt was sanctioned in the year 2016 to previous concessionaire (EIPL) and was then transferred to WIFPL through harmonious substitution. As on 06 March, 2023, ~97 percent of the loan has been drawn down i.e. Rs.12,16.80 Cr. The loan disbursement is linked to the physical progress of the project. On the promoter’s equity contribution front, 100 percent of the equity requirement has come in which stood at Rs.732.16 Cr. This in form of direct equity (Rs.24.19 Cr), Unsecured subordinate loan (Rs.140.39 Cr), Share premium (Rs.178.91 Cr) and additional unsecured loan from promoters (Rs.388.67 Cr) as on 06 March, 2023. Additionally, Sponsor/Parent (WEL) has strong financial risk profile aided by low leveraged capital structure and healthy debt protection metrics.

Acuité believes that WIFPL that timely approval of EOT by the NHAI for the balance work and 100 percent COD will be key rating sensitivity factor over the medium term.

Explicit waterfall mechanism through TRA/Escrow account with creation of DSRA & Major maintenance reserve (MMR)
As per the consortium sanction terms, Debt service Reserve account (DSRA) equivalent to 1 quarters of debt service obligation (Principal + Interest) until PCOD is achieved and 2 quarters post COD. If in anytime, amount in DSRA is utilized to make payment towards debt obligations, the same is to be immediately replenished by WIFPL from surplus cash flows. WIFPL shall maintain Trust and retention account (TRA)/ESCROW account for cash flow management. The TRA shall be defined by presence of waterfall mechanism for prioritizing withdrawals during the construction and operational period. Apart from the first charges on movable and intangible assets, escrow, DSRA, MMR, corporate guarantee, term loans are also secured by way of pledging of 51 percent of the borrower’s share held by the sponsor and creation of security by way of Indenture of mortgage (IOM) for perfection of security. Additionally, there is further support for the lenders by way of presence of Cash sweep option; wherein, 50 percent of excess cash flows (PAT +Depreciation-Loan repayment-cash earmarked towards MMR/DSRA) shall be utilised towards prepayment of loan in the inverse order of maturity.

Acuité believes that presence of such well-defined waterfall mechanism through Escrow/TRA to ensure prioritizing of withdrawals and prompt debt repayments.

­Susceptibility of toll revenue to volatility in traffic volume
The project remains exposed to risks inherent in BOT (toll) road projects, including risks arising from variation in traffic volumes over the project stretch and its dependence on the economic activity in the surrounding regions, movement in WPI (for a toll rate hike), political acceptability of toll rate hike, development/improvement of alternate routes and the likelihood of toll leakages. Any reduction in either of these will have an adverse impact on toll collections. The cash flows of a toll-based project are dependent on traffic volumes which in turn are largely influenced by the level of economic activity in and around the area of operation. However, a clause in the concession agreement exists for modifying the concession period for the variation in actual traffic volume from targeted traffic volume, which mitigates the variation in revenue risk from traffic volume variations to some extent. In the event of a project’s cash flows being insufficient to meet its debt servicing commitments/maintenance commitments, the support would be required to be extended from WEL.

Operation & Maintenance risk
Periodic maintenance for the WIFPL will be due by FY2028 as the last periodic maintenance was due in FY2021. WIFPL’s ability to execute planned major maintenance (MM) expenditures within stipulated timelines and budgeted cost will remain critical over the medium to long term.