Icra assigns negative outlook to RInfra?s 2 road projects

Credit ratings agency ICRA has given a negative outlook to long-term fund-based limits of two road projects of Reliance Infrastructure (RInfra). A negative outlook indicates the rating carries the risk of a downgrade.

The two projects are Trichy-Dindigul and Trichy-Karur, both located in southern India. Trichy-Dindigul has its outlook mired by traffic falling below what Reliance Infrastructure had estimated while Trichy-Karur has suffered a sharp 12.4% cost overrun due to delays and changes in alignment of the project.

In response to queries from FE, an RInfra spokersperson said, ?There is positive growth in traffic on our roads, but the overall macro economic condition of the country is weak. Road projects have long gestation periods and take time to start generating returns on equity. Both projects are successfully completed despite several challenges.?

On the company’s R600-crore Trichy-Dindigul project, ICRA has revised the outlook to ‘negative’ from ‘stable’, reflecting that cash flows will be increasingly sensitive to the growth rate of traffic on the project.

“An outlook gives a direction of the rating and a negative outlook means there is a risk of a downgrade,” explains Shubham Jain, assistant vice-president, ICRA-Ratings.

Trichy-Dindigul has long-term fund- based limits of R322 crore. The 88.27-km project is being implemented under TD Toll Road, the wholly-owned subsidiary of RInfra incorporated in March 2007.

The credit agency has observed that the current ratings of Trichy-Dindigul are constrained due to lower-than-estimated toll collection, which is mainly due to a decline in commercial vehicle traffic during the six months of FY14. This has resulted in weak debt coverage and profitability indicators.According to RInfra’s 2012-2013 annual report, THE company had around R49 crore of annual toll collections on Trichy-Dindigul.

It is also feared that if the traffic declines further, or is lower than the anticipated traffic growth rates, there could be “cash flow mismatches exposing the project to repayment risk”. Going forward, future trend in traffic growth rates will be key to ratings of the project. The project has been rated BBB-.

Instruments with BBB (Triple B) rating are considered to have a moderate degree of safety regarding timely servicing of financial obligations. Such instruments carry moderate credit risk.

The R730-crore Trichy-Karur project, on the other hand, has seen cost overruns and, according to sources, the final cost for the project has been about R823 crore as against the budgeted cost of R732 crore, an increase of 12.4%. The project has been rated BBB-.

ICRA has maintained a negative outlook on the project as delays and changes in alignment of the project have resulted in both cost and time overruns, which increase the repayment/refinance risks for the project. Also, the rating factors in the weak cash flows and repayment risk as the company proposes to commence tolling only on the 63-km stretch, resulting in lower toll revenues than anticipated, says the rating agency. The tolling was supposed to begin in January 2014.

Commenting on the alignment, RInfra said, “The original alignment that NHAI required us to construct was to pass through water bodies. There was local resistance and the matter was settled in court between the local community and NHAI. The additional cost due to the changed alignment and overall escalations will be borne by the NHAI.

Trichy-Karur has long-term fund- based limits of R439 crore. The 79.82-km project is being implemented under TKTRPL, a wholly-owned subsidiary of RInfra incorporated in March 2007.

ICRA further observes that “the negative outlook indicates the ratings can be downgraded if there is any further delay in commencement of tolling operations on the now proposed 63-km stretch and if actual traffic is significantly lower than projected”. However, the rating agency also says it will be revised to ?stable? once the tolling commences and cash flows generated are significant to meet the debt servicing of the company.

RInfra spokersperson said, “There is no increase in debt from what had been originally envisaged. The toll notification has been approved by the ministry now and we will commence tolling on the stretch soon. Our latest traffic study indicates that actual revenues should be in line with our estimates”.