Rationale

 The assigned rating for Agra Waste Water Management Private Limited (AWWMPL) factors in the healthy financial position and proven track record of its sponsor, Vishvaraj Environment Private Limited (VEPL) in executing and operating drinking water and waste water treatment projects. AWWMPL has entered into a fixed-price engineering, procurement and construction (EPC) contract with VEPL for executing the project, which largely mitigates the cost overrun risk. The total project cost of Rs. 487.8 crore, is being funded through debt of Rs. 209.0 crore, equity contribution of Rs 89.6 crore and balance from grant from NMCG. The equity for this project has been fully infused; debt draw down has started and 8 (of 24) construction grant payments have been received from NMCG with ~45% physical progress as on May 30, 2024. Timely receipt of grants remain crucial for timely completion of project and hence remains a key monitorable. The rating factors in the strong counterparty for the project - National Mission for Clean Ganga (NMCG) with presence of an escrow account, along with budgetary support by the Government of India (GoI) and a payment guarantee backstop by International Bank for Reconstruction and Development (World Bank). The rating draws comfort from the inherent strengths of the hybrid annuity model (HAM) projects with funding support in the form of a grant during the construction period and a stable revenue stream post commercial operations date (COD), which mitigates the revenue risk. Once operational, the project is expected to maintain healthy debt coverage indicators during the debt tenure to withstand any adverse movement in bank rates and inflation to a major extent. Further, the credit profile benefits from the presence of escrow and cash flow waterfall mechanism, funded debt service reserve account (DSRA) equivalent to six months of debt servicing obligations and restricted payment clause with a minimum DSCR of 1.2 times. The rating is constrained by the inherent implementation risks, with land handover for decentralised sewage treatment plants (DSTPs)1 pending due to administrative delays, which exposes the company to risks of delays and cost overruns. While the onus for providing clear work front lies with the project authority, any delays in handover leading to cost overruns, material delays or deduction in grant payments could be a credit negative. The debt repayment will commence from July 2025. However, in case of delays in project completion (COD scheduled in April 2025) and consequent impact on annuity receipts, the SPV may have to rely on financial support from the sponsor to tide over the interim cash flow mismatches. AWWMPL’s cash flows and returns remain exposed to interest rate risk, considering the floating nature of interest rates for the project loan linked with UBI MCLR and EURIBOR, whereas the annuity income is linked to SBI’s one-year MCLR (floating) plus 300 bps. Moreover, the credit profile is exposed to foreign exchange risk, given the Euro-denominated portion of the term loan remains unhedged at this juncture. AWWMPL’s operations and maintenance (O&M) receipts are linked to inflation (70% CPI and 30% WPI) under the concession agreement. Therefore, its cash flows may get impacted in case of higher-than-expected actual O&M (including periodic maintenance) expenses. Further, any usage of power above the guaranteed energy consumption as quoted in the bid may result in higher expenses2 than the O&M payment to be received from authority, thus affecting the project cash flows and return indicators. ICRA understands that an agreement would be entered with VEPL for O&M services, wherein (inflationadjusted) O&M charges shall be payable along with similar commercial terms for key performance parameters, penalties, etc, for the entire O&M period, which mitigates the risk of higher-than-budgeted O&M expenditure. The credit profile is also exposed to the risk of deductions from annuity in case of non-adherence to the key performance indicators (KPIs) under the Concession Agreement. The Stable outlook on the rating reflects ICRA’s expectation that the project will continue to receive grants from NMCG without any major delays or deductions and will achieve the project completion in the timely manner within stipulated cost.