Indian Road Sector — Perspective, Challenges and Way Forward May 26, 2020Contents Update on Road Sector — Pace of Awards and Execution, Awarding pattern Gol initiatives during FY20 CARE’s presence in Road sector Rating dispersion of CARE rated portfolio. Analysis of Operational toll road projects = Toll growth — Past trend and FY21 Outlook = Liquidity buffer in COVID — 19 scenario = Relief modalities under force majeure - Are they real? = COVID—19 impact on investment grade portfolio Q Analysis of Hybrid Annuity model (HAM) projects = HAM-More cracks than repairs... . Emerging risk in operational phase - HAM projects * Analysis of cash flow resilience of HAM portfolio in declining bank rate ooooocd C1 Way forward & Key Takeaways. dee Ratings Professional Risk OpinionRoad Sector — Better execution pace; but awards still low Pace of Award NHAI award misses | ies target in FY20 with | 10900 award of 3200 km of the pm projects against targeted i smo) gk . award of around 4500 | = cotOrBteiSroe- + : a = oe — - —_ ‘Source: MORTH and NHAI website memset menio MORTH = NHAL Pace of Execution /HAI’s pace of execution remained at its peak with construction of 979 km during FY20. | s fs We | However, the same is expected to 3 me E a r ‘decline in FY21 due to subdued oof “awards in FY19 and FY20 coupled L a ol 7 + with COVID 19 impact. fr ) SE MORTH = NALA NHL dae Ratings Professional Risk Opinion 9PPP losing flavor-shifting focus to EPC in awarding 3 0% ae Ratings Awarding pattern - NHAI and MORTH 1% 4% 1% 1% 16 5% ey PEs cag cr bad soe 75% rd 2015-16 2016-17 2017.18 2018-19 2019-20 (Upto Jan 2020) = EPC MHAM = BOT (Toll / Annuity) Souree: MORTH and NHAI website mal Risk Opinion 10Gol initiatives in FY20- crawling in the right direction Proposed settlement of arbitration claim through Conciliation Committees - ¥ ~~ y Awarding projects only after 80% availability of right of way (RoW)- <> A Extension of interest bearing working capital advance in lieu of grant on achievement of every 10% physical progress in HAM - ¥ FASTag curbed toll leakages VV ST Flexibility in TOT concession period to 15-30 years instead of fixed 30 years period - V 7 Ae Ratings sional Risk Opin rmCARE’s presence in Road sector Total road projects rated across CRAs 375 Rate ask Aes Orme Cy Te) fen i) Total road projects rated by CARE 186 74,575 - Toll projects 86 46% 36,925 50% - HAM projects 43 23% 22,545 30% - Annuity / Toll + Annuity projects 57 31% 15,105 20% dee Ratings Professional Risk Opinion 2Rating dispersion of CARE rated portfolio id 30% \ | | i ; Bane 3 sw , ne | 10% . os — a | o, | aa = : des Ratings Professional Risk Opinion BOperatior Professional Risk Opinion nal Toll a © jectsToll growth: Hitting new lows -trend to continue in FY21 Toll growth (%) Change in axle load norms Economic slowdown Reduction in overloading income YP Negative outlook for FY21. Expectation of decline in toll by around 21%Liquidity buffer to provide cash flow cushion % Majority of the 86 companies have availed moratorium on term loan granted by Reserve Bank of India. Debt Service Reserve Account (DSRA): 9% number of companies - Operational toll road projects _Ddebeservice Reserve Account (DSR 1 oo | i= fe TT 2 | J saucer | 2s t | nemecrandstoe_ lll 5 ———xa a a t } es Ratings Professional Risk Opinion 16Force Majeure - /s the Relief real? Patmos concession period REE) a) CONC LTTY UTE els Leelee EYL CY Tele a zeleay WEYL} Monetary Compensation? By uri (e) CGeR atings K OpiCOVID — 19 Impact on 40 investment grade toll portfolio Tate) Cedars Rated Debt (Rs. crore) Change in Outlook Cte ee 18% 3,357 z % of Projects Rating category downgraded Rated Debt (Rs. crore) AAA 0 0 AA 0 0 A 30% 893 BBB 70% 2,464 dee Ratings nal Risk OpinionHAM - More cracks than repairs.. Strong sponsors with good execution capability are able to execute projects on time 13 HAM projects with debt of around Rs.6000 crore has already achieved PCOD or applied Timely release of construction annuity along with inflation by NHAI _ | Moderation in credit profile of sponsor- Prominent reason for delay in execution ___ Lower availability of continuous ROW- Prominent factor leading to execution woes Delay in de-scoping or de-linking of unavailable ROW | Commencement of debt repayments prior to COD due to delay in EOT 28 Ratings Professional Risk OpinionEmerging risk in operational phase - HAM projects Bank rate vs. 1-year SBI MCLR 10.00% 1g a5, 555% 8.50% 8.45% 8.25% —g.95% Tan SF s.00% | &75% 650% 625% 600% case 465% 4.25% FFF PPP PP SP PELL eS PSS PPS SS SLES ELS OP SE Soo oo ss Fe oF 9 9 0% oF OF OF eRankRate —m-S81 LY MCR Over a period of time, bank rate declined by 250 bps while the lending rate declined by only 100 bps. CONSEQUENCES of widening gap - Moderation in debt coverage indicators especially for the aggressively bid projects. - Dampener on stake sale prospects of completed projects Professional Rsk OpinionHow resilient are the cash flows? Sees ere) oi eed kad ert est Eien eakers Ciera Bid project cost (Rs. crore) 1,000 1,000 1,000 1,000 Completion cost post inflation (Rs. crore) 1,080 1,080 1,080 1,080 ‘mm ta eae 6.75% 4.25% 6.75% 4.25% eed emeaecd ed 134 ——> 121 125 SS 113) eee 128 ——> 118 119 ——> 110 {uced by 75 bps as against reduction in bank rate by 250 bps “1, Higher cash flow resilience in Scenario-1 2. Moderate cash flow resilience in Scenario-2 3. Low cash flow resilience in scenario 2 + Aggressive bidding in O&M annuity Source: CARE Ratings Ane Ratings Professional Risk Opinion 2Key Takeaways... °\ Slackening pace of project award by NHAI as well as state authority along with expected ( |) decline in pace of execution during FY21 | ‘= { Freight dominated to bounce back faster | Higher cash flow resilience observed for mature toll roads with liquidity buffer and low leverage even during Covid-19 pandemic Dismal investor sentiment for stake sale, InviT and TOT Ll ( Sponsor with good execution capability are beneficiary under HAM 7 28 Ratings sional Risk OpinionRoads Sector: Striving to be Back-On-Track | On-time approval for de-scoping and EOT prerequisite for the success of HAM Prompt disposals of arbitration claims / FM compensations- Crucial for boosting developer /investor sentiments in BOT 1 Timely completion of the HAM projects and sensible bidding important for developers I Commissioned HAM Projects with completed cost of project < BPC are preferred targets for refinancing for lender L ( Improvement in the credit appetite for the lender- crucial to bring BOT Back On Track < Ae Ratings Professional Risk Opinion 4