Fitch Ratings has affirmed India-based Mumbai Waste Management Limited's (MWML) National Long-Term rating at 'Fitch A(ind)'. The Outlook is Stable. Fitch has also assigned ratings to MWML's additional instruments. A full rating breakdown is provided at the end of this commentary.

The ratings reflect MWML's current monopoly in industrial hazardous waste management in the state of Maharashtra, which will extend to Andhra Pradesh from FY13 onwards. In both these states, the businesses are backed by long-term concessions from the respective state pollution control boards, thus providing MWML with strong cash flow visibility.

Additionally, the ratings are supported by MWML's comfortable financial position as reflected in its revenue stability and strong EBITDA margins of about 60% over the past three years. Provisional results for FY12 indicate an operating income of Rs. 619m (FY11: Rs. 573m) and an operating EBITDA of Rs. 363m (Rs. 358m). However, unadjusted financial leverage and interest cover deteriorated significantly in FY12 to 2.8x (FY11: 0.22x) and 6.7x (FY11: 62.88x), respectively, as debt levels increased substantially to Rs. 1,015m (Rs. 27m) to fund investments in REEL's project companies.

Fitch notes that MWML proposes to purchase Hyderabad Waste Management Project (HWMP) business unit from its parent Ramky Enviro Engineers Limited (REEL). On conclusion of this deal and the cancellation of a corporate guarantee of Rs. 3,323m provided by MWML towards REEL's bank debt, the guarantee provided by REEL to a part of MWML's debt will cease. Fitch however believes that the ties between MWML and REEL will continue to be strong and that MWML's rating will continue to be influenced by REEL's credit profile.

What could trigger a rating action?

Positive: Future developments that may, individually or collectively, lead to positive rating action include

• MWML's net unadjusted leverage below 1.0x on a sustained basis and
• REEL completing a significant portion of its capex while maintaining its current credit profile

Negative: Future developments that may, individually or collectively, lead to negative rating action include

• MWML's net unadjusted leverage above 3.0x on a sustained basis or
• REEL's consolidated adjusted net leverage above 2.5x on a sustained basis

As per REEL's estimated consolidated financials for FY12, revenue was Rs. 14.45bn (FY11: Rs. 10.29bn) and EBITDA was Rs. 3.9bn (Rs. 2.51bn). The company reported total adjusted debt of Rs. 5.95bn in FY12 (FY11: Rs. 4.06bn) and its net financial leverage was flat at 1.48x. In FY11, HWMP reported revenue of Rs. 387.9m and total debt outstanding of Rs. 11.4m.

Rating actions on MWML:

• National Long-Term rating affirmed at 'Fitch A(ind)'; Outlook Stable
• Rs. 950m term loans: assigned at National Long-Term 'Fitch A(ind)'
• Rs. 100m fund-based working capital limits: assigned at National Long-Term 'Fitch A(ind)' and National Short-Term 'Fitch A1(ind)'
• Rs. 25m fund-based working capital limits: affirmed at National Long-Term 'Fitch A(ind)' and National Short-Term 'Fitch A1(ind)'
• Rs. 25m non-fund-based working capital limits: affirmed at National Long-Term 'Fitch A(ind)' and National Short-Term 'Fitch A1(ind)'