Strong Parentage/Sponsor; Demonstrated t rack record of WEL in executing road projects
Welspun Enterprises Ltd (WEL) is the Sponsor/Parent Company, who are also the EPC contractors for the SPV - WSNRP. 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 along with achieving PCOD for other 4 HAM and 1 BOT project. WEL has declared divestment of these 6 completed road projects to Actis Highway Infra Limited (Actis) for an aggregate enterprise value of approximately Rs. 6,000 Cr. WEL currently has portfolio of captive 8 road projects, 7assets  under Hybrid Annuity Model (HAM) including WSNRP and one BOT road project. 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 WSNRP, 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 majority 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, high demonstrated capability of buying and turning around projects with weaker balance sheet, or not closed financially or execution is stuck projects, Strong financial risk profile aided by low leveraged capital structure and healthy debt protection metrics. 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 sub- contractors 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.

Robust Sponsor Support
WSNRP is of strategic importance to WEL; the same is demonstrated by the tangible support from WEL. The support has been in form of WSNRP being its 70 percent wholly-owned SPV (30 percent indirectly  held  through  its  subsidiaries  –GIPL  and  Giriraj  Renewables  Pvt  Ltd). The level of WEL’s management involvement is indicated by WSNRP’s common brand name, common management and centralized decision making at WEL’s level. WEL is expected to infuse 13.1 percent  of the project  cost  of Rs.1,905.37 Cr (without indexation – Rs.249. Cr) and 16.3 percent of the bid project cost of Rs.2,322.56 (with indexation – Rs.304.25 Cr). The WEL’s contribution is expected to be infused in form of equity, zero percent compulsory convertible debentures (CCDs) and unsecured loans and advances. Cumulative fund support has been to the tune of Rs.50.67 Cr as on March 31, 2022; in form of equity (Rs.21.7 Cr), unsecured loans (Rs.23.12 Cr) and CCDs (Rs.5.85 Cr). The balance portion of WEL’s contribution is expected to be infused by FY2023 end. WEL has extended support to WSNRP by way of providing bank guarantee from its own sanctioned limits to avail mobilization advance from NHAI, which will eventually be shifted to WSNRPL limits under the sub-limit of Term Loan Facilities sanctioned by project lenders.

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 any shortfall in the termination payment. The corporate guarantee will be available till 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. As stipulated in the financing documents, WEL shall also bring in funds required in case of any escalation in costs beyond estimated completion cost (which includes any cost escalation during completion phase and O&M and MM expenses during operational phase) which may impact debt servicing or completion of the project, for paying interest payments till the receipt of the first annuity and bridge the gap in case of any cash flow mismatch.

Acuité believes that WSNRP will benefit from the operational and financial support from its parent/Sponsor Company over the medium to long term.

Benefits derived under the Hybrid Annuity Model (HAM)
The project executed under HAM model benefits from the upfront availability of right of way (80 percent) before declaring the appointment date, cost of the project being part funded by way of grants (40 percent), receipt of payments in the form of semi-annual annuities from the authority (for the remaining  60  percent  of  the  project  cost).  The project also benefits from expected receipt of mobilization advance to the tune of 10 percent of the bid project cost at bank rates on declaration of appointed date and provision for granting deemed completion of the project in case 100 percent of the work is completed on the ROW which becomes available to it within 150 days of the appointed date. Other benefits include indexation done to the Bid Project Cost and Operation and Maintenance (O&M) cost to inflation and interest payments on residual annuities during the operational period. Inflation indexed BPC protects the developers against price escalation to an extent. Over and above, stringent clauses for levy of damages, encashment of performance security as well as requirement of additional performance security in case of delay in execution due to reasons attributed to the concessionaire also expend some pressure on the developer for ensuring timely execution.

In case of WSNRP, the company received appointment date on October 05, 2020; before 80 percent availability of the ROW on mutual agreement between the NHAI and WSNRP i.e. at 52.7 percent. This was on account of the prolonged delay of the receipt of the judgement on obtaining environmental clearance and Coastal Regulation Zone (CRZ) clearance. With present ROW availability of 97% total envisaged project land, Acuité believes that WSNRP will benefit from favorable clauses in the concession agreement under the HAM and face lower execution challenges vis-à-vis projects under BOT model.

Strong Counterparty linked revenue profile
During the construction/implementation phase, cash flow is assured in form of 5 milestone achievement linked grants (on achievement of every 10-25 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, cash flow is assured in the form of annuity payments from NHAI on bi- annual basis covering 60 percent of the project completion cost along with interest at ‘bank rate plus spread’ on reducing balance and inflation indexed O&M annuity. O&M cost shall be inflation indexed (through a Price Index Multiple (PIM)), which is the weighted average of wholesale price index (WPI) and consumer price index (CPI) in the ratio of 70:30. The annuity nature of the income stream linked to inflation indexed O&M annuity and bank rate linked interest annuity is expected to result in assured cash flow. Moreover, it has low counterparty credit risk, NHAI being its counterparty.

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 2 quarters of debt service obligation (Principal + Interest) out of which 1 quarter DSRA to be created immediately on receipt of 1st annuity and remaining 1 quarter DSRA immediately after 2nd annuity. If in anytime, amount in DSRA is utilized to make payment towards debt obligations, the same is to be immediately replenished by WSNRP from surplus cash flows, to the extent of amount so utilized upon receipt of the NHAI annuity from the date of utilization. WSNRP 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. WSNRP’s receipts from the NHAI to be routed through an escrow/TRA account with a well-defined cash flow. The NHAI is to deposit all annuities, termination payments and so on into the escrow account. Acuité believes that presence of such well-defined waterfall mechanism through Escrow/TRA to ensure prioritizing of withdrawals and prompt debt repayments.

Structured features of the TL repayment vs annuity receipts
WSNRP’s principal repayment obligations are judiciously structured with the annuity payment receipts  from the  NHAI  with a  90-day cushion available  to  the  project  lenders,  i.e.  the principal repayment date is 3 months after the forthcoming annuities are received. Repayment of term loan shall be in 27 structured half-yearly instalments commencing 9 months from COD. The first instalment has been scheduled to be repaid post 9 months of COD, which provides cushion in case of any delay in achieving COD or in receipt of first annuity.
The project loan is to be amortised over 15 years and has a tail period of 3 annuities (the difference between the loan maturity and the concession maturity), which provides reasonable comfort to the lenders. Also, the financing documents stipulate a minimum DSCR of 1.25x post the COD, a breach of which shall lead to the discontinuation of restricted payments, until cured. Besides, to the lender’s comfort, in case, annuity payment is received from NHAI earlier than envisaged repayment schedule, WSNRP shall pay the respective instalment within 3 business days of receipt of such payment. To add, as per the financial documents, the project warrants 100 percent upfront equity to be bought in by promoters to meet the 30 percent of the physical progress and commence the drawn down of term loans.

Interest related risk mitigated through carving out of IDC during construction phase and maintenance of DSRA during operational phase along with shortfall undertaking from WEL
Financial risks take the form of an annual variable interest rate which is linked to the marginal cost of lending rate of the individual lenders (1 Yr MCLR + spread). Any significant fluctuations in interest rates or absence of timely sponsor support is expected to be credit negative. The company will be servicing interest portion during construction period through the IDC. According to the financial documents, WSNRP is to maintain DSRA of 3 months’ interest service in the form of fixed deposits  from project  cash flows  (on receipt  of 1st  and 2nd annuity).  The absence of debt  service reserve account  elevates  the project  risk  profile. However, Acuité draws comfort from the presence of sponsor undertakings for making necessary payments in case of any such shortfall.
 

High Implementation and moderate funding risk given the change in PBC and additional EOT
Given WSNRP received its appointment date on October, 2020, the Company has already started mobilization of resources at initial construction activities at site. WSNRP has incurred Rs.234 Cr as on March 31, 2022 (with indexation). Of which, 70 -75 percent has been incurred as EPC cost and remaining being other cost. This cost has been funded through mix of mobilisation advance of Rs.200 Cr (eligible for total mobilisation advance of max 10 percent of the BPC i.e. ~Rs.200 Cr; will be lower depending on the revised BPC). Remaining portion has been funded through promoter’s fund support. With achievement  of this physical project progress of ~10.57 percent as on August 31, 2022 (as per LIE report), the project has achieved the 1st Milestone under the CA and have submitted its claim for 1st milestone payment to NHAI with total work execution of ~ Rs 198.16 Cr (including indexation) in September 2022. Out of this total claim of ~ Rs. 198.16 Cr, company has already received ~ Rs. 59.57 Cr against the monthly RA bills from NHAI and balance amount  ~ Rs 90.46 Cr (post netting off adjustment of mobilization advance and on other accounts) is also expected to be released shortly.

Notably, WSNRP has overcome the challenges of achieving the appointment date after a wait of 2 years in October 2020 with ROW availability as on date being 97 percent covering length of 54.07 Kms of the total 55.76 Kms. WSNRP was awarded tender for one of the package under the tender of covering area between Villuppuram to Nagapattinam. This was a part of the Rs.11,000 Cr package planned by the Transport Ministry for better connectivity of Tamil Nadu-Puducherry with Karaikal port (tenders were floated in 4 packages). After a wait since the signing of the CA on 3rd December 2018; in January 2021, Supreme Court  gave nod to NH45 -A Villuppuram-Nagapattinam Highway project  stating that there is no requirement for obtaining Environmental Clearances for the said project as land acquisition is not more than 40 meters on existing alignments and 60 meters on realignments or by passes. Besides, the said area is not passing through a hilly terrain and is already witnessing a decent traffic.

The project has sought total EOT of 527 days from the appointed date (177+121+139+90 days) on account of delays; of which 177 days are approved by NHAI, 121+139 days of approvals are awaiting final approval and additional 90 days are yet to be approved. Moreover, due to the change in BPC, 5th supplementary agreement is awaited followed by reassessment of debt proposal and preparation of TEV study by consortium of lenders.

WNSRP’s  project  is  exposed  to  moderate  funding  risk  despite  the  debt  being  tied-up with a consortium of lenders. WSNRP could tie-up for debt within 150 days of signing the concession agreement.  Moreover,  the  project  sites  comfort  and  support  from  lenders despite   a   delay  in receiving the appointment date. Nevertheless, the project is yet to witness the significant amount of 100 percent of the promoter’s equity contribution, timely receipt of the grants and disbursement of the term loans. The above risk is mitigated to an extent asserting factors like strong financial risk profile of the sponsor and track record of timely support to its other HAM projects.

Acuité believes that timely promoter support and receipts of grants to achieve the COD as envisaged will remain key monitorable over the medium term.

Moderate O&M Risk; albeit mitigated partially through lower O&M Cost due to rigid pavement and fixed price O&M contract with sponsor
WSNRP will enter into a fixed-price and fixed-time O&M contract subject to indexation with WEL for taking up routine and major maintenance expenses, latest  by 3 months  prior to envisage COD or SCOD (Scheduled Commercial Operations Date), whichever is earlier. WEL, in turn shall enter at back- to-back contracts with its sub-contractors to naturally hedge in case of any price risk. The duration of the O&M contract shall be for the entire concession period. WEL has a reasonable experience in operating and maintaining road projects. Further, WEL has extended undertaking to infuse funds in case of cost overrun in O&M expenses and periodic maintenance expenses. WSNRP to create major maintenance reserve (MMR) to meet exigencies in any given point of time during the operational phase.

Besides, WSNRP relatively has a lower O&M cost to incur throughout its concession period post COD given the rigid (concrete) road/pavement vis-à-vis that of Bitumen. It is observed that the indexed O&M and MMR cost is around 6 percent of the total BPC which is relatively lower than other SPVs of similar nature. O&M requirement for a project depends on a lot of factors such as structure of the road, material used for road (Bitumen or Concrete road), Number  of  bridges/structures  in  the  project.  Rigid  road  (Concrete  road)  have  higher construction cost but its O&M cost is significantly lower than Bitumen Road. Number of structures/ bridges/ Culverts also reduces the O&M cost. As per NHAI and in general, the expected life of Rigid Pavement  is  of 30 years.  WSNRP project,  being a  Rigid Pavement project, is being constructed to last 30 years and it will not need periodic major maintenance for rigid pavement in 15 years of concession period.