India Ratings & Research (Ind-Ra) has affirmed National Highways Authority of India's (NHAI) long-term issuer rating at 'AAA' with a stable outlook. Ind-Ra has also assigned NHAI's proposed Rs 40 billion long-term bonds (FY15), part of the Rs 120 billion long-term debt programme, a long-term rating of 'AAA'.
The ratings factor in NHAI's significant financial, operational and managerial linkages with the government of India (GoI), besides its statutory status. GoI provides substantial support to NHAI through fuel cess and grants. To raise finances at competitive rates, GoI has permitted NHAI to issue bonds under Section 54EC of the Income Tax Act, which allows investors to secure tax exemption on capital gains earned on the sale of other assets. NHAI is one of the only two institutions allowed by GoI to issue such bonds. Ind-Ra believes that low rate financing and continuous revenue flow from GoI through fuel cess and grants would help NHAI to honour its debt service commitments.
NHAI's54EC bonds are open for subscription throughout the year. For the 11 months ended February 2014, NHAI mobilised Rs 23.80 billion of the FY14 Rs 40 billion bonds. Servicing of its FY12 issued bonds shall begin from April 2014. At any given time, its long-term borrowing through the 54EC bonds will not exceed Rs 120 billion. Fuel cess remains the major source of the authority’s finances. Though the cess declined 3.0% yoy in FY13 to Rs 60.03 billion, it is likely to increase 14.23% yoy to Rs 68.57 billion in FY14 according to the revised estimates.
The authority is running behind schedule in both the award and completion of projects. Achievement in terms of projects completed (completion as apercentage of targets) marginally declined to 88.9% in FY13 from 89.9% in FY12. In FY14 (till February), NHAI could achieve only 36.6% of the yearly target. Achievement in terms of contracts awarded took a hit in FY13 and dropped to 13.9% from 79.8% in FY12. Though it improved marginally by end-February 2014 to 16.2%, it is unlikely to reach its FY12 benchmark.
The award process slackened in FY13 due to various regulatory hurdles like obtaining forest clearance before applying for environmental clearance, difficulties in financial closure due to limitations of concessionaires on the availability of equity and the general slowdown of the economy. During FY14, although NHAI focused on obtaining engineering, procurement and construction contracts, it could not garner much response. The private participation slowed down and till end January 2014, only one 100km build-operate-transfer (toll) project based on public private partnership (PPP) was awarded.
Ind-Ra believes that recently announced policy measures such as formulation of roads regulator, reschedulement of premium, delinking of forest and environmental clearances and relaxation of exit clause for developers are positive for the road sector. However, it will take some time before the actual impact of these measures will be realised on ground.
