Press Release

PNC Challakere (Karnataka) Highways Private Limited

July 06, 2022
Rating
Amount
Facilities/Instruments Rating1 Rating Action
(₹ crore)
CARE A; Stable
Long Term Bank Facilities 440.00 Reaffirmed
(Single A; Outlook: Stable )
440.00
Total Bank Facilities
(₹ Four Hundred Forty Crore Only)
Details of instruments/facilities in Annexure-1.

Detailed Rationale & Key Rating Drivers

The reaffirmation of rating assigned to the bank facilities of PNC Challakere (Karnataka) Highways Private Limited (PCKHPL)
continues to factor in the inherent strengths of hybrid annuity model (HAM) based road projects such as (i) lower project funding
risk with 40 percent of bid project cost available as grant from NHAI, inflation-indexed annuity to be received for construction
and favorable clauses introduced in the concession agreement (CA) to mitigate challenges to project execution (ii) lower post-
implementation risk on account of inflation-indexed annuity to be received for operations and maintenance (O&M) of the road
and (iii) receipt of bank rate linked interest annuity.
The rating of PCKHPL also derives strength from established track record of the sponsor i.e. PNC Infratech Ltd (PIL; rated ‘CARE
AA; Stable/ CARE A1+’), with whom fixed price engineering, procurement and construction (EPC) contract has been executed.
Furthermore, the rating takes into account credit quality of the underlying annuity receivables from National Highways Authority
of India (NHAI; rated ‘CARE AAA; Stable’) subsequent to commencement of operations, proposed fixed price O&M contract
(including Routine & Major Maintenance), proposed liquidity support mechanism such as creation of debt service reserve account
(DSRA), working capital reserve (WCR) and major maintenance reserve (MMR) and undertakings extended by the sponsor, PIL
and promoter, PNC Infra Holdings Limited (PIHL) to fund any shortfall during construction and operational period.
The above rating strengths are, however, tempered by the delays in the project due to external reasons; the residual construction
risk associated with the project and susceptibility to changes in O&M cost and interest rate.

Rating sensitivities:
Positive factors:
• Completion of project on or before the scheduled COD and established track record of timely receipt of annuities post
commencement of operations
Negative factors:
• Deterioration in the credit profile of sponsor (PIL) or counter party (i.e. NHAI)
• Delays in project progress, achievement of project milestones and issuance of Extension of Time (EOT) leading to levy
of penalty by NHAI.
• Increase in O&M cost and interest rates and inadequate compensation for inflation and rate increase in the annuity
payments, thereby adversely impacting the DSCR levels

Detailed description of the key rating drivers

Key Rating Strengths
Hybrid annuity structure of the project, with favourable clauses in concession agreement to address execution
challenges: The concession agreement (CA) – in line with the model CA for HAM projects – includes clauses that serve to partially
secure the project and its lenders against construction risks, including delays in land acquisition. Such clauses include stipulating
the achievement of at least 80% right-of-way (RoW) as a precedent condition for declaring appointed date for the project.
Besides, there is a provision for granting deemed completion of the project in case 100% of the work is completed on the RoW
which becomes available to it within 180 days of the appointed date. In addition, 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 act as significant disincentives against slippages in execution.

Low funding risk and permitted price escalation: The HAM model entails lower sponsor contribution during construction
period considering 40% construction support from NHAI and availability of 10% mobilization advances on bid project cost (BPC)
at bank rate (currently 5.15% per annum). BPC and 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. Inflation
indexed BPC protects the developers against price escalation to an extent. The company has availed entire amount of mobilization
advance. The mobilization advance is to be recovered from the five construction grants to be received by the company.

Cash flow visibility due to annuity nature of the revenue stream linked to inflation indexed O&M annuity and bank
rate linked interest annuity: During operational phase, cash flow is assured in the form of annuity payments from NHAI on
semi-annual basis covering 60% of the project completion cost along with interest at ‘bank rate plus 3%’ on reducing balance
and inflation indexed O&M annuity.

1
Complete definition of the ratings assigned are available at www.careedge.in and other CARE Ratings Ltd.’s publications
1 CARE Ratings Limited
 Press Release

Low counterparty credit risk: Incorporated by the Government of India (GoI) under an Act of the Parliament as a statutory
body, NHAI functions as the nodal agency for development, maintenance and management of the national highways in the
country. The outlook on NHAI reflects the outlook on the sovereign, whose direct and indirect support continues to be the key
rating driver.

Demonstrated track record of PIL in executing road projects: PIL has over two decades of experience of executing road
projects and has executed major infrastructure projects in 15 states across India. Also, PCKHPL has entered into a fixed price EPC
contract with PIL. The promoters of PIL have long experience in the construction & infrastructure sector and are ably supported
by a team of qualified engineers with expertise in road and highway construction.

Sponsor’s undertaking for meeting exigencies and Proposed DSRA & Working Capital Reserve (WCR): PIL as sponsor
has extended undertaking to the lenders to fund any shortfall due to delay or non-receipt of funding from NHAI and cost overruns
(if any) during the construction period, any delay/deficit in annuity payment due to default in meeting construction obligations,
to create and/or maintain the required DSRA and in case of termination of CA. Also, the promoter- PIHL has extended undertaking
to the lenders to provide additional funds for meeting the routine O&M expenses and major maintenance expenses over and
above as envisaged in base case business plan, which provide comfort from credit perspective.
Further as per the terms of sanction, an upfront WCR to the extent of six months of interest obligations shall be created out of
project cost at the time of COD and shall be maintained throughout the operational period. Also, DSRA covering three months of
interest obligations shall be created by the sponsor upon COD from its own sources. Furthermore, DSRA for ensuing one principal
installment and additional three months interest shall be created in a phased manner from the receipt of first two annuities. The
sponsor has an option of creating the same in the form of bank guarantee (BG).

Key Rating Weaknesses

Inherent project execution risk; albeit partly offset by demonstrated capability of PIL: Notwithstanding the availability
of about 89% of ROW and demonstrated track record of PIL as an EPC contractor in executing large sized road projects, PCKHPL
is exposed to inherent construction risk attached with road projects. As per the Lender Independent Engineer’s (LIE) Report, the
company has completed works amounting to ₹334.77 Crore (physical progress of 30.20% and financial progress of 35.80%) till
March 2022. The company has received construction grants amounting to about ₹ 228 Crore till June 8, 2022, from NHAI.
The project was running behind the schedule due to impact of Covid-19 and extended monsoon in the state of Karnataka. As
informed by the company management, the company has applied for extension of time (EoT) for 240 days owing to these external
factors However, NHAI approval on the same is still awaited. Though presence of fixed price EPC contract mitigates the risk to
an extent, completion of the project within the scheduled timelines would remain a key rating monitorable.

O&M risk associated with the project; albeit with partial mitigation through proposed signing of fixed price O&M
contract with the sponsor and sponsor undertaking: While the inflation-indexed O&M annuity partly mitigates O&M risk,
the disparate movement in inflation index (70% WPI; 30% CPI) and the O&M cost heads poses a risk. Besides, the company
could face the risk of a sharp increase in the O&M cost in the event wear and tear on the road is more than envisaged during
bidding. PCKHPL is expected to enter into fixed price and fixed time O&M contract (including routine and major maintenance)
with the sponsor mitigating O&M risk to an extent. Also, as per the sponsor undertaking furnished by PIHL; the sponsor will infuse
additional funds in case O&M expenses (routine as well as major maintenance) are higher than base case levels which lends
additional comfort.

Inherent interest rate risk: PCKHPL is exposed to inherent interest rate risk considering floating rate of interest with spread
reset clause every year post COD. Reimbursement of the interest cost in the form of interest annuity payable by NHAI biannually
at bank rate plus three per cent mitigates the risk only to an extent, since there could be a lag between movement in bank rates
and in lenders’ benchmark rates.

Liquidity Analysis: Adequate

The project is under construction stage, wherein the appointed date (AD) has been declared on January 25, 2021. As per the
terms of sanction letter, an upfront working capital reserve (WCR) to the extent of six months of interest obligations shall be
created out of project cost at the time of COD and shall be maintained throughout the operational period. Also, DSRA covering
three months of interest obligations shall be created by the sponsor upon COD from its own sources. Further, DSRA for ensuing
one principal installment and additional three months interest shall be created in a phased manner from the receipt of first two
annuities.
As on June 08, 2022, promoter has infused equity of ₹60.15 crore out of the equity contribution of ₹120.30 crore; Debt of ₹100.00
crore has been disbursed out of the sanctioned limit of ₹440.00 crore; and construction grant from NHAI has been received to
the extent of ~₹228 crore (including inflation component).

Analytical approach: Standalone while factoring sponsor’s undertaking and track record of EPC contractor.
Applicable Criteria
Policy on default recognition
Factoring Linkages Parent Sub JV Group
Financial Ratios – Non financial Sector
Liquidity Analysis of Non-financial sector entities
Rating Outlook and Credit Watch
Hybrid Annuity Model based road projects
2 CARE Ratings Limited
 Press Release

About the Company

PNC Challakere (Karnataka) Highways Private Limited (PCKHPL), a special purpose vehicle (SPV) promoted by PNC Infra Holdings
Ltd (wholly owned subsidiary of PNC Infratech Ltd - PIL, rated ‘CARE AA; Stable’, ‘CARE A1+’) has entered into 15 year concession
agreement (CA; excluding construction period of 730 days from appointed date) with National Highways Authority of India (NHAI,
rated ‘CARE AAA; Stable) for four laning of Challakere-Hariyur section of NH150A (from Km 358.500 to Km 414.205) in the state
of Karnataka under Bharatmala Pariyojna under Hybrid Annuity Mode (HAM). The total cost of the project is estimated at ₹1023.10
crore; being funded through debt of ₹440.00 crore, construction grant from NHAI of ₹462.80 crore and balance through promoter’s
contribution of ₹120.30 crore.

Brief Financials: Not applicable as PCKHPL is a project stage company

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History for last three years: Please refer Annexure-2

Covenants of rated instrument / facility: Detailed explanation of covenants of the rated instruments/facilities is given in
Annexure-3

Annexure-1: Details of instruments/facilities

Size of the
Name of the Date of Coupon Maturity Rating Assigned along with
ISIN Issue
Instrument Issuance Rate Date Rating Outlook
(₹ crore)

Fund-based - LT- August-

- - 440.00 CARE A; Stable
Term Loan 2036

Annexure-2: Rating history for the last three years

Current Ratings Rating History
Date(s) Date(s)
Name of the
Sr. and and Date(s) and Date(s) and
Instrument/Bank Amount
No. Rating(s) Rating(s) Rating(s) Rating(s)
Facilities Type Outstanding Rating
assigned assigned assigned in assigned in
(₹ crore)
in 2022- in 2021- 2020-2021 2019-2020
2023 2022
1)CARE A;
Stable
(25-Mar-21) 1)Provisional
CARE 1)CARE A;
Fund-based - LT- CARE A;
1 LT 440.00 A; - Stable
Term Loan 2)Provisional Stable
Stable (06-Jul-21)
CARE A; (18-Jun-19)
Stable
(06-Jul-20)
*Long term/Short term.

Annexure-3: Detailed explanation of the covenants of the rated instruments/facilities

Name of the Instrument Detailed Explanation
A. Financial covenants
I. Debt Equity ratio (DER) DER Shall not exceed 3.66:1
II. Debt Service Coverage Ratio (DSCR) DSCR at any point of time, not fall below 1.1x during the
operational phase
B. Non-financial covenants
I. Audited Annual Financial Statement The borrower shall furnish Audited Annual Financial Statement
as soon as available and with-in 180 days after the end of
Financial Year
II. Unaudited Half Yearly Statements The borrower shall furnish unaudited Half yearly Financial
Statement as soon as available and with-in 90 days after the
end of half year

3 CARE Ratings Limited

 Press Release

Annexure-4: Complexity level of various instruments rated for this company

Sr. No. Name of Instrument Complexity Level

1 Fund-based - LT-Term Loan Simple

Annexure-5: Bank lender details for this company

To view the lender wise details of bank facilities please click here

Note on complexity levels of the rated instruments: CARE Ratings has classified instruments rated by it on the basis of
complexity. Investors/market intermediaries/regulators or others are welcome to write to care@careedge.in for any clarifications.

Contact us
Media Contact
Name – Mr. Mradul Mishra
Contact no. – +91 - 22 - 6754 3596
Email ID – mradul.mishra@careedge.in

Analyst Contact
Name – Mr. Harish Chellani
Contact no. - +91 - 22 - 6837 4472
Email ID –harish.chellani@careedge.in

Relationship Contact
Name – Ms. Swati Agrawal
Contact no. : +91-11-45333237
Email ID – swati.agrawal@careedge.in

About CARE Ratings Limited:

Established in 1993, CARE Ratings Ltd. is one of the leading credit rating agencies in India. Registered under the Securities and
Exchange Board of India (SEBI), it has also been acknowledged as an External Credit Assessment Institution (ECAI) by the
Reserve Bank of India (RBI). With an equitable position in the Indian capital market, CARE Ratings Limited provides a wide array
of credit rating services that help corporates to raise capital and enable investors to make informed decisions backed by knowledge
and assessment provided by the company.
With an established track record of rating companies over almost three decades, we follow a robust and transparent rating process
that leverages our domain and analytical expertise backed by the methodologies congruent with the international best practices.
CARE Ratings Limited has had a pivotal role to play in developing bank debt and capital market instruments including CPs,
corporate bonds and debentures, and structured credit.

Disclaimer
The ratings issued by CARE Ratings Limited are opinions on the likelihood of timely payment of the obligations under the rated
instrument and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or
hold any security. These ratings do not convey suitability or price for the investor. The agency does not constitute an audit on
the rated entity. CARE Ratings Limited has based its ratings/outlooks based on information obtained from reliable and credible
sources. CARE Ratings Limited does not, however, guarantee the accuracy, adequacy or completeness of any information and is
not responsible for any errors or omissions and the results obtained from the use of such information. Most entities whose bank
facilities/instruments are rated by CARE Ratings Limited have paid a credit rating fee, based on the amount and type of bank
facilities/instruments. CARE Ratings Limited or its subsidiaries/associates may also be involved with other commercial transactions
with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE Ratings Limited is, inter-alia,
based on the capital deployed by the partners/proprietor and the current financial strength of the firm. The rating/outlook may
undergo a change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the
financial performance and other relevant factors. CARE Ratings Limited is not responsible for any errors and states that it has no
financial liability whatsoever to the users of CARE Ratings Limited’s rating.

Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve
acceleration of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings
may see volatility and sharp downgrades.

**For detailed Rationale Report and subscription information, please contact us at www.careedge.in

4 CARE Ratings Limited