KN Highways Development Pvt. Ltd.

Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs. 235.82 Crs. of KN Highways Development Pvt. Ltd.

Particulars

Facilities**	Amount(Rs.Crs.)	Tenure	Rating#
Fund Based	235.82	Long Term	BWR BBB /Stable Assignment
Grand Total	235.82	(Rupees Two Hundred Thirty Five Crores and Eighty Two lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
Note: of the rated amount, Rs 50 Crs has been down-sold from L&T Finance Ltd to Aditya Birla Finance Ltd.

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RATING ACTION / OUTLOOK

Brickwork Ratings (BWR) assigns the ratings of the bank loan facilities of Rs. 235.82 Crs of KN Highways Development Private Limited (the SPV or the KNDHPL), considering factors such as the project being based on the Hybrid Annuity Model (HAM) with low revenue risk due to built-in indexed annuities in the HAM, track record of EPC contractor DRN Infrastructures Private Limited (DRN, parent company or sponsor company), capital infusion in the form of unsecured loans (USLs) and the completion of the second milestone and receipt of the grant from the concession authority Karnataka State Highways Improvement Project (KSHIP) and the corporate guarantee provided by DRN  for the rated facilities. However, the ratings are also constrained by project execution risks, ensuring completion within the estimated  costs and any unforeseen likelihood of a delay in future annuity receipts from KSHIP. 

The outlook for the SPV is kept at Stable, considering the progress of the project and future annuity receipts from KSHIP.  
 

KEY RATING DRIVERS

Credit Strengths:

• Project being executed under HAM :

  The rating draws comfort from the hybrid modified annuity model nature of the project, wherein 63% of the project cost (amounting to Rs. 671.30 Crs) is funded by the KSHIP authority during the construction period in the form of construction support. Additionally, in the case of HAMs, there are no traffic revenue risks as post-construction annuities are fixed in the concession agreement. BWR also takes comfort from the fact that the counterparty, in this case, is KSHIP. Benefits also include indexation done to the bid project cost (BPC) and operation and maintenance (O&M) cost to the extent of inflation and interest payments on residual annuity payments during the operational period. However, the timely receipt of annuity during the operational period will remain a key rating monitorable. 

• Established sponsor company and financial performance of parent company :

  DRN Infrastructure Group has an established track record of execution of EPC contracts in the road sector, especially in Karnataka and Maharashtra. The company and its promoters have over three decades of experience in successfully implementing EPC projects with state government bodies and the NHAI. As of 31 October 2021, the sponsor company had an unexecuted order book position of Rs. 2208.60 Crs, of which 52% of the projects were its own group company projects, which shows revenue visibility in the medium term. Towards the SPV, as of 31 October 2021, the sponsor company has infused the capital in the form of share capital and interest-free borrowings to an extent of Rs.111.37 Crs.  During FY21, the company’s operating income improved by 52.10% despite the Covid-19 pandemic, i.e., from Rs. 490.35 Crs in FY20 to Rs. 745.84 Crs. The parent company has reported satisfactory operating and net profit margins of 13.51% and 3.95%, respectively. The debt service coverage indicators were reported at favorable levels during FY21. The parent company reported an improvement in the tangible net-worth from Rs. 134.35 Crs as of FY20 to Rs. 164.04 Crs as of FY21. The average realization days were reported at 47 days in FY21. During H1FY22, the parent company reported revenues  of Rs. 430.00 Crs.

• Moderate debt structure and liquidity :

  The SPV's debt comprises a term loan from the banks, of Rs.235.82 Crs. A Debt Service Reserve Amount(DSRA) amounting to two quarters of debt obligations is to be created post achieving the scheduled commercial operations date (SCOD). 

• Financial closure and receipt of grants from KSHIP upon completion of the first and second milestones :

  The SPV achieved financial closure on 01 July 2020 and received the appointed date from the KSHIP on 01 July 2020. The estimated SCOD of the project is 30 September 2022.  As per the concession agreement made with KSHIP, the SPV is entitled to receive grants from KSHIP during the construction period in a phased manner upon the completion of certain milestones. Accordingly, the company has completed the first and second milestones and received the grant from KSHIP to an extent of Rs. 268.50 Crs as of 31 October 2021. 

• Corporate guarantee of parent/sponsors :

  Parent company DRN has provided an unconditional and irrevocable corporate guarantee to the SPV, wherein if there is any shortfall in the funds available to the SPV, the parent/sponsor company shall arrange the funds to meet debt obligations. This has been considered as additional implicit support for the rated facilities.

Credit Risks:

• Project execution risks :

  As of 31 October 2021, the SPV had completed the physical progress of 42% of the project and has achieved the first and second milestones of the project. The SCOD of the project is expected to be by 30 September 2022. Due to the second wave of the Covid-19 pandemic, independent engineers (IE) have recommended the extension of the project by another 80 days, which is under consideration by KSHIP.  The project carries execution risk till the achievement of the SCOD. Additionally, the timely receipt of the grants from KSHIP during the construction period towards the SPV remains key monitorable.

• Timely infusion of the promoters contribution towards the SPV :

  Of the promoter's contribution of Rs. 199.27 Crs, Rs. 111.37  Crs has been infused up to 31 October 2021. The company has stated that the balance equity will be brought into the company as and when required. The parent company's timely infusion of the capital towards the SPV as per the timelines agreed upon is a key rating monitorable. 

ANALYTICAL APPROACH - Standalone

To arrive at its ratings, BWR has relied on the standalone financials of the company and the implicit support of the corporate guarantee provided by the parent company has been factored.  Additionally, BWR has considered projected financials from FY23 to FY29 based on the annuities expected to be received by the SPV as a part of the Concession Agreement with KHISP, provisions of the Concession Agreement with KHISP, publicly available information, and information/clarifications provided by the Company’s management. BWR has applied its rating methodology as detailed in the Rating Criteria (hyperlinks provided at the end of this rationale) 

RATING SENSITIVITIES

The rating is sensitive to the timely execution of the project within the estimated cost, timely receipt of government grants during the implementation period, and receipt of annuity payments as per the scheduled concession agreement with KSHIP. 

• Upward: The ratings can move upward if the project is completed as per the expected time frame without cost overruns, along with the timely receipts of the government grants during the construction period, commencement of regular annuity payments post the achievement of the SCOD and an upward revision in the credit rating of the guarantor (DRN). 
• Downward: The ratings can move downward if there is a delay in the execution of the works, leading to cost and time overruns and a delay in the receipts of the government grants and equity contribution during the construction period, along with a downward revision in the credit rating of the guarantor (DRN).
   

LIQUIDITY INDICATORS - Adequate

To date, the debt has not been drawn down by the company. BWR expects that the debt will be disbursed to the SPV in a phased manner from Q4FY22  or Q1FY23 onwards.  The repayment obligations of the SPV would commence from FY24. The conditions stipulated for the loan include the routing of the annuities through an escrow account and the availability of an upfront DSRA before the repayment commences. In addition, the parent company has executed the corporate guarantee for the timely repayment of the debt obligations of the rated entity. 

ABOUT THE ENTITY

KN Highways Development Private Limited (KNHDL), a Special Purpose Vehicle (SPV), is promoted by DRN Infrastructure Pvt. Ltd. (DRN) and by Pan India Infraprojects Private Limited (PIIPL). The project awarded is for the construction of a two-lane/four-lane Highway in Kollegal to Hannur, Chintamani to AP Border, Bangalore (Nice Road-Magadi) with a total length of 114.3 Km (299.7 lane Km) under the Hybrid Annuity Model (HAM). KSHIP is a concession authority for the said project. 

Project Cost: The Bid Project Cost (BPC) is Rs 1,062 Crs and the estimated cost is Rs 1,106.30 Crs, which is proposed to be funded by promoter’s equity of Rs 199.27 Crs, Asian Development Bank (ADB) funded Karnataka State Highways Improvement Project (KSHIP) grant of Rs 671.25 Crs and senior debt of Rs 235.82 Crs. KSHIP is an initiative of the Public Works Department (PWD) of the Government of Karnataka (GoK) for the improvement of the road network of the state with World Bank assistance.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	181.62	Not Available
EBITDA	Rs.Crs.	5.43	-1.75
PAT	Rs.Crs.	3.22	-1.76
Tangible Net Worth	Rs.Crs.	3.19	-0.03
Total Debt/Tangible Net Worth	Times	22.50	-64.02
Current Ratio	Times	1.02	0.98

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction normally include standard covenants stipulated for bank loan facilities. The rated facilities stipulate for routing the cash flows through a designated escrow account, the utilisation of these cash flows through a designated waterfall mechanism and a DSRA  for the peak 6 months of interest and principal obligations. In addition, the parent company has provided the corporate guarantee for timely repayment of the obligations

NON-COOPERATION WITH PREVIOUS CREDIT RATING AGENCY

Nil

ANY OTHER INFORMATION

Nil

RATING HISTORY FOR LAST THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating  (2021)			2020		2019		2018
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	235.82	BWR BBB/Stable (Assignment)	NA	NA	NA	NA	NA	NA
Grand Total		235.82	(Rupees Two Hundred Thirty Five Crores and Eighty Two lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Hyperlink/Reference to applicable Criteria

• General Criteria
• Approach to Financial Ratios
• Infrastructure Sector
• Road-HAM Projects

Analytical Contacts
Sowmya Yatham Manager - Ratings Board : +91 80 4040 9940 sowmya.y@brickworkratings.com	Vipula Sharma Director - Ratings Board : +91 80 4040 9940 vipula.s@brickworkratings.com
1-860-425-2742 | media@brickworkratings.com

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Aditya Birla Finance Limited	Term Loan	50.00	_	50.00
2	L&T Finance Limited	Term Loan	185.82	_	185.82
Total			235.82	0.00	235.82
TOTAL (Rupees Two Hundred Thirty Five Crores and Eighty Two lakhs Only)