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Of new roads and old pain

Flow of the presentation • Impact of key policy initiatives

• Competitive scenario • Credit performance of NHAI’s BOT portfolio

• Impact of reforms on NHAI’s under construction and operational BOT portfolio • Credit assessment of hybrid annuity projects

2

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• Awarding and execution for National Highways

Reforms to give impetus to investments

100% exit in BOT projects

• ~20 road assets have been/are in process of being sold

Premium rescheduling

• Done for about 20 NHAI projects

Introduction of HAM model

• 27 projects aggregating 1500 kms awarded

Pay 75% of arbitration claim

• New policy, results yet to come • Ability of players to produce BG a concern

Introduction of InVIT

• 3 players receive SEBI nod for InVIT

Amendments to BOT MCA

• Only 3 projects awarded so far

NHAI one-time fund infusion

• 3 stalled projects selected • Lenders reluctant to give up first charge

Harmonious Substitution

• Only 1 project benefitted so far

Note: 3

Shaded Portion indicates extent of impact

Under construction projects

Future projects to be bid out

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Completed projects

Worries linked to land acquisition reduce

3D

3G

Publication of notification to acquire land in Gazette

Determination of compensation

All objections to be heard

3H

3E

Land possession is received

Compensation is paid

Significant percentage of land in place at tendering 92%

95% 88% 83%

Average 3(D) completed Tenders in 2015 (18 tenders) Source: CRISIL Research

4

Average 3(G) completed Tenders in 2016 (22 tenders)

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Government declares intention to acquire land

3C

3(E)

3A

3(H)

Land acquisition process flow

Time overruns come down sharply Median time overrun declines sharply

Pace of execution picks up 76

41%

39%

66

52 43

18%

32

32 26

15

13

13

7

9%

15

2% 3% 3%

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

2012-13

2013-14 Year of awarding

2014-15

12

17

33

7

3

9

Median delay in months No of projects completed in the year Note: Data only for NHAI projects EPC and BOT; data for 2016-17 is up to July 2016

8 months post awarding Note:

12 months

18 months

Numbers in circles refers to number of projects awarded in that particular year

Source: CRISIL Research



3 projects out of 17 awarded in 2013-14 already completed



3 projects out of 33 awarded in 2014-15 in advanced stages of completion



15 projects completed in first 4 months of 2016-17; 7 projects are BOT-Toll ‾

5

30 months

5 projects have no time overruns; 4 projects awarded prior to 2009 indicating progress in stalled projects

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24%

46

Hybrid Annuity Model (HAM) Aims to reduce risk for developers and lenders

Looks at

Construction risk

•

Maintenance risk

• Developer responsible to maintain the road • O&M payments made by authority

Traffic risk

• Semi annual payments ensure steady cash flows

Inflation risk

• Bid project cost adjusted for inflation during construction period • Semi annual O&M payments linked to inflation

Interest rate risk

• Interest rate on remaining payments made by developer linked to bank rate

Right of way(ROW)

• ROW in 90 days of Appointed date. • Payment for damages by authority higher at Rs 1 per 10 square mts • NPV of Project cost and first year maintenance

Bid Parameter Project funding

6

Developer bears risk; gets annuity payments after COD

• 60% of project cost to be arranged by developer • Significantly reduces promoter equity, debt requirement

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Reduces Risk

HAM now the most preferred mode of awarding

1500 kms

expected to be awarded in H2 FY17

1 project achieved FC

Lenders concerns on

Land acquisition LandEquity acquisition Promoter Contribution

Banks slightly wary due to low equity Equity Contribution of promoter contribution significantly low at 80: 20 debt equity

Termination Payments

Banks slightly wary due to low equity Termination contributionpayments may be lesser than outstanding debt both during under construction or on COD

Promoter equity contribution Competitive intensity

7

For projects awarded significantly above benchmark cost, promoter contribution No of players increasing and awarding can become negligible close to benchmark cost

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aggregating a length of

Another 2000 kms

FINANCIAL CLOSURE

27 projects awarded

AWARDING in H2FY18

AWARDING

Interest in HAM increased over the last few months

Awarding momentum continues in FY17 Government focus to improve awarding in coming years

6,095

6,300

5898 3957

955 2,270

1083 1,055

2011-12

2012-13

1770

3,018

4,200

2013-14

2014-15

2015-16

2016-17P

2017-18P

MoRTH

Note: P:Projected

NHAI terminated projects are not included above; MoRTH numbers include State PWDs and NHIDCL

8

5,676

1,200

NHAI

Source: CRISIL Research

5,160

About 2200 kms awarded in H12017, 50% on HAM

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Km

Hybrid Annuity to dominate awarding in next 2 years NHAI awarding changed significantly over the last few years

8%

8%

8% 24%

92%

20% 47%

93%

100%

92%

15%

76%

2012-13

2013-14 Cash

2014-15 BOT-Toll

2015-16

BOT-Annuity

2016-17P

HAM

Note: P:Projected Above data is based of length of projects; there is no significant difference in proportion based on value of projects Source: CRISIL Research

MoRTH awards projects mostly on EPC basis 9

18%

72% 38%

2011-12

50%

32%

2017-18P

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7%

Execution mirrors reform efforts After declining for 2 years, reform push reflects in NH execution 26 km/day Km

5317 4752

16 km/day

4242

13.5 km/day 3251 2806 2207

2481

2396 1628

2011-12

2012-13

3040

2767

2013-14

Note: P:Projected ,MoRTH numbers include State PWDs and NHIDCL

2196 1576

2014-15 NHAI

2015-16

2016-17P

2017-18P

MoRTH

Source: CRISIL Research

•NHAI execution to reach up to 11 km/day in 2017-18 from 6 km/day in 2015-16 ‾ 674 kms executed in first four months of 2016-17;second half to grow at a faster rate supported by faster execution of EPC projects •Expect MoRTH execution to sustain due to higher cess allocation; projects are of lower value

‾Execution in north eastern states remains slow; impacted by land acquisition and forest clearances

10

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3866

Private investments to begin rising only gradually

Private participation aided by • Asset sale • Equity infusion • Entry of new players Rs 1100 bn

42%

Rs 470 bn

Rs 480 bn 40%

70%

58%

60% 30% 2012-13 to 2013-14E Note: E: Estimated; P:Projected Source: CRISIL Research

11

2014-15 to 2015-16E Public Private

2016-17 to 2017-18P

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HAM to improve private participation

EPC

BOT

HAM

Remains high at ~15-16

Remains low at ~4-5

Jan 2016: 2-3 Jul 2016: 9-10

Median gap

Remains insignificant between L1 and L2

H1 FY2016 : 1% of PC*, mostly on grant H1 FY2017 : 1.4% of PC, mostly on premium

Jan 2016: 18% of L1 Jul 2016: 9% of L1

Competition level

HIGH

LOW

MODERATE

No. of bidders

Note: PC indicates NHAI project benchmark cost Source: Industry, CRISIL Research

12

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Competition in BOT low, EPC highly competitive

Competition in HAM increased significantly Considerable rise in interest witnessed in a few months 10

30% 9

9

27%

8

25%

7

20%

6

18% 16%

5

15%

4

2

11% 9%

3

3 2

3%

1

5%

3% 2%

0 Jan-Feb 2016

Mar-Apr 2016

Median no.of bidders Median of (L1 excl O&M/NHAI Benchmark cost-1) Note: Data is representative of only NHAI projects All numbers of L1, L2 and benchmark cost are on NPV basis Source: NHAI, CRISIL Research

13

10%

May-Jun 2016

0% Jul-Aug 2016

Median gap b/w L2 and L1 as a proportion of L1 (Bid price)

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8

Now we will look at:

• Credit Assessment of hybrid projects

14

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• Credit Performance and Impact reforms on NHAI’s BOT portfolio

•

Implementation of policy reforms by NHAI provides positive thrust for NHAI BOT portfolio

•

Under construction NHAI BOT: Faster approvals and termination lead to moderate improvement

•

•

•

15

−

10% reduction (500 km) in high risk under construction portfolio over last one year

−

Change in scope could tackle ROW issues and help 3,200 km high risk projects

−

Debt refinancing/ restructuring and sponsor change could help 1,400 km of PCOD projects that face viability risks

Operational NHAI BOT: Debt coverage ratio >1 for 65% of portfolio, up from 55% last year −

Exit of weak sponsors & refinancing improves credit profile of 600 km of projects

−

Healthy traffic growth in line with economic activity helped combat impact of low WPI inflation

−

NHAI premium deferment has also aided some projects

Ability of developers to raise funds through InVits could ease funding shortfall in the sector −

Stake sale from operational projects and capital market IPO to help raise funds for equity requirements in under construction projects

−

However, weak sponsors would continue to struggle in meeting its funding requirement

Hybrid awards pick up, however increasing bidding aggression being seen −

Aggressive bidding in recent projects could lead to debt servicing issues

−

25% of hybrid annuity projects could face cash flow mismatches and higher equity contribution could help

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Key messages

The journey so far NHAI’s BOT portfolio includes 234 projects covering ~21,600 km 45 projects covering ~5000 km terminated/foreclosed

Under construction 85 projects ~8,800 km Construction risk

Operational 104 projects ~7,800 km Debt servicing ability

Sponsor strength

Viability risk

Last year CRISIL had analysed on similar framework What’s the change over the last one year?

16

Sponsor strength

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189 projects covering ~16,600 km

Journey over the last year March 2015

• •

•

Healthy project progress

Length 5,100 km

•

Achievement of PCOD

Debt* Rs 45,910 crore

•

Termination

Under-construction projects at high risk

• •

Length 4, 600 km Debt Rs 41,350 crore

U/C projects – execution risk

Operational projects at risk

• •

•

Length 3,200 km

•

Length 1,400 km

•

Debt Rs 29,000 cr

•

Debt Rs 12,350 cr

Operational projects at risk

• 100% exit in operational projects

Length 3,300 km

• Healthy traffic growth

O/S^ Rs 24,195 crore

• Refinancing at lower cost

* Debt refers to sanctioned debt ^Outstanding debt PCOD – Provisional commercial operational date; COD – Commercial Operational Date 17

U/C projects at viability risk

• •

Length 2,700 km O/S Rs 19,650 crore

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Under-construction projects at high risk

March 2016

Journey over the last year March 2016 March 2015

• •

Length 5,100 km

• • •

Healthy project progress Achievement of PCOD Termination

• •

Length 4, 600 km

Debt Rs 41,350 crore

Debt* Rs 45,910 crore U/C projects – execution risk

Operational projects at risk

• •

18

Length 3,300 km O/S^ Rs 24,195 crore

U/C projects at viability risk

•

Length 3,200 km

•

Length 1,400 km

•

Debt Rs 29,000 cr

•

Debt Rs 12,350 cr

Reforms & government policies showing results • 100% exit in operational projects • Partial premium deferment • Refinancing at lower cost

Operational projects at risk

• •

Length 2,700 km O/S Rs 19,650 crore

* Debt refers to sanctioned debt ^Outstanding debt PCOD – Provisional commercial operational date; COD – Commercial Operational Date

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Under-construction projects at high risk

Under-construction projects at high risk

Journey over the last year March 2016 March 2015

• •

Length 5,100 km

• • •

Healthy project progress Achievement of PCOD Termination

• •

Length 4, 600 km

Debt Rs 41,350 crore

Debt* Rs 45,910 crore U/C projects – execution risk

Operational projects at risk

• •

19

Length 3300 km O/S Rs 24,195 crore

U/C projects at viability risk

•

Length 3,200 km

•

Length 1,400 km

•

Debt Rs 29,000 cr

•

Debt Rs 12,350 cr

Reforms & government policies showing results • 100% exit in operational projects • Partial premium deferment • Refinancing at lower cost

* Debt refers to sanctioned debt ^Outstanding debt PCOD – Provisional commercial operational date; COD – Commercial Operational Date

Operational projects at risk

• •

Length 2,700 km O/S Rs 19,650 crore

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Under-construction projects at high risk

Under-construction projects at high risk

Risk framework for under-construction BOT projects

>18 months

6-18 months

< 6 months

May achieve PCOD but with time and cost overruns

Low construction risk *

Close to achieving provisional COD

More than 70%

High construction risk Substantial time and cost overrun (19 projects of 1,632 km have more than 30 months overrun)

Moderate construction risk

Progressing as per schedule with limited time & cost overrun expected

30% - 70%

Time overrun over 6 months and low progress. Still facing right of way issues

Low progress, but may achieve COD with limited time overrun Less than 30%

Project Progress * Despite delays in construction, 32 projects of 3403 km have been categorized under low risk as they have achieved PCOD Source: NHAI, company reports & CRISIL estimates

20

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Estimated time overrun

A

Sponsor risk assessment framework, fiscal 2016 3.00

B

Weak sponsors D3, 1,245

D12, 356

D6, 300

2.50 D8, 109

2.00

1.50

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Gearing (times)

D10, 210 D5, 33

D4, 2323

D7, 450

1.00

D1, 472 D11, 416

0.50

D2, 240

D13, 1,200

D9, 468

-

Strong sponsors (0.50)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

Percentage of operational projects Source: NHAI, company reports & CRISIL estimates

Sponsors considered weak Sponsors considered strong Size of bubble indicates total support requirement (equity for new projects and support for operational projects) over next 2 years in Rs crore Sponsor risk analysis has factored in stake sale during the year

21

InvITs to help strong sponsors overcome funding gap, but struggle continues for weak sponsors 15000 1075

1038

10000

Rs. crore

Surplus with strong sponsors 5000 2140

5820

6120

4729 2889

0 Equity & support req for UC & operational Projects

Surplus in operational

Stake sale in operational projects

Additional fund from IPO/INVIT -6318

-5000

Deficit with weak sponsors -10000

Strong sponsors

Weak sponsors

Source: NHAI, company reports & CRISIL estimates

• •

22

Sponsors have concluded deals of about Rs.1000 crore through asset sale over the last one year Surplus funds of ~ Rs.1700 crore from its operational projects generated

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8432

3,200 km at high execution risk A+B 2089 km^ Sanctioned debt – Rs 19,556 crore

High Risk

• •

• •

2942 km Sanctioned debt – Rs.27,460 crore

3,222 km Sanctioned debt – Rs 29,013 crore

Moderate Risk

• • Weak

Sponsor

568 km Sanctioned debt – Rs.7,206 crore

Strong

Low risk

High Risk

1

2

3

^ Includes 15 projects of 1400 km with sanctioned debt Rs. 12,350 crore that face viability risk

• •

~500 km reduction in high execution-risk projects over the past one year Only saviour for high-risk projects is NHAI loans, exit of weak sponsors in under-construction projects, and change in scope of work by NHAI to combat land acquisition issues

23

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Construction Risk

• •

Low Risk

High

Low

Low Risk

Healthy project progress reduces high risk portfolio by ~500 km

High Risk

Low risk

24

Movement of projects to moderate risk due to delay in project execution

As of Mar ‘16

Healthy project progress

401 km, 3

Low risk

Completion of project

166 km, 1

Completed

Improvement in financial health of sponsor

296 km, 2

Moderate risk

Termination of projects

109 km, 2

Terminated

993 km, 8

482 km, 3

Delay in project execution due to land acquisition and weak financial sponsor

482 km, 3

High risk

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As of Mar ‘15

60% traffic growth required for 1400 km of PCOD projects to become viable Cost per km: Rs. 19 cr 32000

30000

5000

20000

in Rs.

•

Time & cost overruns led to cash flow mismatch

•

20 of 36 unviable

17000 30000

10000 0 -10000 -20000 Revenue/day/km

• − − −

Operating expense/day/km

debt service obl./day/km

15 projects with ~1400 km belong to weak sponsors – at risk

premium Shortfall/day/km payout/day/km

70% 60%

Revenue growth of ~60% required to meet shortfall as against expected growth of 12% in FY17

50%

Way out :

40%

63%

30%

Refinancing/ debt restructuring Premium deferment Acquisition by strong sponsor

20%

10%

6%

6%

0% 2013

25

are

(20,000)

-30000

•

projects

2014

11%

13%

12%

2015

2016

2017

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40000

Increase in traffic growth saves the day in times of negative WPI inflation Healthy traffic growth expected to sustain and support toll revenue in near term 12%

11.2%

10.0% 6.2%

5.6%

5.2%

2.0%

9.5%

7.5%

6.0%

4.2% 1.0%

FY13

3.0%

2.6%

3.6%

1.3%

0.0% -2.0%

9.5%

12.9%

8.0%

FY14

-0.1% FY16

FY15 %Growth revenues

%Toll rate hike

FY17E

FY18E

%Traffic growth

10.0%

8.0%

7.5%

6.6%

6.0% 4.0%

7.2%

7.6%

7.6% 7.7%

5.5%

5.6%

4%

4.8%

4%

2.0% 0.0% -2.0%

FY13

FY14

FY15

FY16 -2.4%

%WPI Inflation

%GDP Growth

-4.0%

Source: Company reports & CRISIL estimates

26

FY17E

FY18E

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12.0%

4.0%

12%

13.0%

14.0%

DSCR < 1

DSCR > 1 DSCR Level

Source: NHAI, Company reports & CRISIL estimates

27

Strong

Moderate Risk (Sponsor support is key) 1,450 km Debt outstanding Rs 9,850 crore

Adequate debt servicing capability 5,080 km Debt outstanding Rs 27,300 crore

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High risk 1,250 km Debt outstanding Rs 9,800 crore

Sponsors

Weak

Improvement in operational portfolio: 65% at low risk

Reforms and pick-up in traffic reduce risk for 600 km Movement of projects to lower risk bucket with improved debt servicing capability March 2016

March 2015 132 km, 2

Pick-up in traffic volumes

Moderate risk

Viable

53 km, 1

868 km (project length) High risk

281 km, 4

Stake Sale & subsequent refinancing

Rs 5,930 crore

(debt outstanding) Moderate risk

323 km, 4

Refinancing debt at lower cost

Moderate risk

79 km, 1

Premium deferment by NHAI

12 projects

One recently operational BOT-toll project of 244 km and Rs 1,854 crore outstanding debt added to moderate risk bucket and another BOTannuity project of 53 km & Rs 500 crore outstanding debt added to low risk

28

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High risk

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Hybrid annuity BOT model

29

25% of awarded projects so far may face issues in debt servicing Bid characteristics of some projects 140.0

2.5

Viable

Unviable

100.0

1.5

80.0 60.0

1

40.0

Viable 0.5

20.0 0.0

0 Project 1

Project 2

Bidder project cost

• •

30

Project 3

Project 4

NHAI project cost

Project 5

Project 6

Normative O&M

Project 7

Project 8

Bidder O&M

Aggressive bids with lower BPC or lower O&M costs as compared to the normative values may face issues in debt servicing Aggressively bid projects will need higher equity infusion requirement

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2

Normative O&M

Project cost to base 100

120.0

31

Risks during construction phase

Risks during operational phase

Higher than anticipated project cost resulting in cost overruns

High maintenance costs as compared to bid amount

Inability to bring in required equity for overrun

Funding mix to impact debt servicing

Delays in approvals and hence construction

Movement in interest rate and inflation

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Summarising risks in hybrid annuity model

Conclusion

• •

• • • •

32

NH awarding and execution to pick up with measures taken to correct delays and improve investor confidence. Public spending leads the way with bulk of awards in EPC and hybrid modes.

Competitive intensity continues to remain high in EPC; increasing in hybrid annuity Change in scope and sponsors to help improve credit profile of under-construction BOT projects

Restructuring/refinancing to help improve credit profile of PCOD projects Traffic growth, premium deferment and refinancing to continue improve viability of operational portfolio Weak developers still face funding risks of Rs 6,300 crore. Consolidation in the sector to continue with sale of operational assets Bidding aggression and funding mix needs close monitoring for hybrid awards

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•

Ms. Nivedita Srivastava Chief General Manager – Finance National Highway Authority of India (NHAI)

Mr. Shiva Rajaraman Chief Executive L&T Infra Debt Fund Ltd

Dr. Harikishan Reddy Chief Executive Officer Cube Highways

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