Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and debt programmes of Kalpataru Power Transmission Limited (KPTL).

 

CRISIL Ratings notes the amalgamation of JMC Projects (India) Ltd (JMC) with KPTL with effect from January 4, 2023 with an appointed date as April 1, 2022. Under the existing analytical approach, the combined business and financial risk profiles of KPTL and its subsidiaries, including JMC, were considered for credit assessment. Hence, the merger is unlikely to have any impact on the credit risk profile of KPTL. However, the merger should provide synergies by improving the bargaining power, reducing interest rates and enhanced operating leverage.

 

Operating income (on a consolidated basis) improved 12% year-on-year in the nine months through December 2022, primarily due to better execution in the non-transmission and distribution (T&D) business. Earnings before interest, depreciation, tax and amortisation (EBIDTA) margin declined to 8.6% in the nine months ended December 31, 2022, against 8.7% for the same period last year due to increase in material expenses, primarily steel and freight cost. Softening of commodity prices and synergy benefits from the amalgamation should help the margin improve over the medium term.

 

The business risk profile of KPTL will continue to be aided by its established market position in the T&D segment, the growing non-T&D business and strong order book. Outstanding orders worth Rs 41,442 crore as on December 31, 2022, at a consolidated level, offer adequate revenue visibility. Gross debt rose during fiscal 2023 to fund the high capital expenditure (capex) and increasing working capital requirement, which led to an increase in gearing. Steady debt levels, coupled with better profitability and cash accrual, should enhance debt protection metrics in fiscal 2024. Also, liquidity remains strong, supported by unencumbered cash and equivalent of around Rs 800 crore and an undrawn bank limit of around Rs 300 crore as on December 31, 2022.

 

The ratings continue to reflect the strong track record of KPTL in the T&D business, diversified revenue and healthy financial risk profile. These strengths are partially offset by the large working capital requirement given the inherent nature of the EPC business, and exposure to subsidiaries & Road SPVs. KPTL plans to divest few non-core assets including road projects, real estate project in Indore and logistics over the medium term. Additionally, the company plans to expedite project closures in order to improve its working capital cycle.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of KPTL and its subsidiaries — Shree Shubham Logistics Ltd (SSL), and Energy Link (India) Ltd (EnergyLink) — collectively referred to as the Kalpataru group. CRISIL Ratings has moderately integrated the business and financial risk profiles of the road special-purpose vehicles (SPVs) as the projects have been funded through debt without recourse to KPTL. However, CRISIL Ratings has factored in the commitment made to the SPVs in the form of equity, cost overruns and guarantees.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the TLT business: The Kalpataru group has a track record of over four decades in the T&D business. KPTL is one of the leading players in the domestic market with reputed customers such as Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and various state transmission utilities. Orders worth Rs 41,442 crore at a consolidated level as on December 31, 2022, provide strong revenue visibility over the medium term. Favourable prospects for the international & domestic T&D, building construction, water and urban infrastructure space should continue to support the business.

 

• Diversified revenue streams: The order book is fairly diversified with the T&D segment contributing 35% of revenue as on December 31, 2022, followed by water projects (24%), buildings and factories (19%), railways and urban infrastructure projects (9% each) and the oil & gas segment (4%). Further, 44% of the unexecuted orders are from the international market. The company also has a vast presence overseas, as it mainly exports to countries in Asia, Africa, Central and Latin America, the Middle East, Commonwealth of Independent States, Australia and Europe. Diversified revenue streams both in terms of segments and markets, reduce the susceptibility to downturns in any one business.

 

• Healthy financial risk profile: Capital structure is marked by a comfortable gearing of 0.61 time and moderate total outside liabilities to tangible networth (TOLTNW) ratio of 2.19 times as on March 31, 2022, as against 0.53 time and 2.07 times, respectively, a year before. Impairment of around Rs 400 crore in road assets led to a lower-than-expected networth. Gross debt for KPTL and JMC rose to around Rs 2,900 crore as on December 31, 2022, from Rs 1,900 crore as on December 31, 2021 on account of higher capex and working capital requirement amidst higher order execution. Gearing and TOLTNW ratios are projected to increase in fiscal 2023, on account of higher debt but should improve in fiscal 2024, aided by better working capital management and cash accrual. Interest coverage ratio was healthy around 4 times in fiscal 20222. Sustained growth in cash accrual and reduction in debt, leading to stronger debt protection metrics, are key monitorables.

 

Weaknesses

• Working capital-intensive operations: The engineering, procurement and construction business involves large working capital requirement and the project execution cycle of 2-3 years leads to higher reliance on short-term debt. Sizeable retention money remains blocked in projects till the end of the performance guarantee period. Receivables (including net unbilled revenue) rose to around 245 days as on December 31, 2022, from 232 days as on March 31, 2022. Higher contract assets will lead to increase in gross current assets in fiscal 2023, (325 days as on March 31, 2022). Sustained improvement in working capital management remains a key monitorable in line with growth in business.

 

• High exposure to group companies: In fiscal 2022, KPTL completed the divestment in its last transmission asset as planned. However, standalone exposure to subsidiaries and SPVs was high at Rs 1,450 crore as on March 31, 2022, excluding assets held for sale (around Rs 1,490 crore as on March 31, 2021). Road projects also required net infusion of Rs 141 crore in fiscal 2022 and another Rs 75-80 crore in fiscal 2023, largely due to skewed debt profile leading to mismatch in cash flow. However, the investments are unlikely to constrain the cash flow and financial risk profile of the group, which will be cushioned healthy performance of KPTL and efficient working capital management. Nonetheless, incremental exposure in these entities would be closely monitored.

Liquidity: Strong

Cash and equivalents were around Rs 800 crore as on December 31, 2022. Bank limit of around Rs 300 crore remained unutilised as of December 2022. The available liquidity and expected annual cash accrual of Rs 900-1,000 crore over fiscals 2023 and 2024 should comfortably cover debt obligation and moderate capex.

 

Environment, social and governance (ESG) profile

The ESG profile of KPTL supports its already strong credit risk profile.

 

The EPC and power transmission sectors have significant impact on the environment because of risks linked to operations such as energy loss during transmission and waste generation. Also, due to the nature of operations, the sector affects the local community and has various occupational health hazards associated with it. In line with this, KPTL is focused on mitigating its environmental and social risks to ensure minimal impact.

 

Key ESG highlights

• KPTL set up two Biomass power plants in the state of Rajasthan with a combined capacity of 15.8 MW (7.8 MW and 8.0 MW) using the Direct Combustion Boiler technology
• KPTL has installed a 350 KW rooftop solar plant at its Gandhinagar factory, which generates 2.9 lakh units, equivalent to about 238 Ton of CO2 reduction in fiscal 2022
• The company has a goal of zero harm. To achieve the same, the company aims to integrate safety in every aspect of construction work procedure. Currently KPTL has LTIFR of 0.30.
• The governance structure is characterised by around 60% of the board comprising independent directors. The management has been effective in creating wealth for its shareholders.

Outlook: Stable

KPTL should continue to benefit from its established market position in the TLT industry and its healthy order book with a diversified revenue profile.

About the Company

Established in 1981 by Mr Mofatraj P Munot, KPTL is a leading player in the domestic T&D sector. The company undertakes turnkey contracts for setting up transmission lines and substations for extra-high-voltage power transmission. Over the years, it has diversified into civil contracts, railways, and oil and gas pipeline construction.

 

JMC, established in 1986, undertakes construction contracts for infrastructure projects (including bridges, flyovers, highways and captive power plants), industrial projects, buildings, residential and water projects. JMC was amalgamated with KPTL with effect from January 4, 2023 with an appointed date as April 1, 2022.

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SSL offers end-to-end logistical solutions in western India in the agricultural sector, spanning warehousing, cold storage and commodity-funding services, collateral management and commodity exports. Amber and EnergyLink are in the real estate business. Amber has executed an information technology park project in Thane, Maharashtra, while EnergyLink is executing a real estate project in Indore through its wholly owned subsidiary, Saicharan Properties Ltd.

 

For the nine months ended December 31, 2022, KPTL reported a profit after tax of Rs 379 crore on an operating income of Rs 9941 crore against Rs 206 crore and Rs 8,842 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
INE220B08092	Non-convertible debentures	9-Dec-22	Linked to Repo Rate	9-Dec-25	99	Simple	CRISIL AA/Stable
NA	Non-convertible debentures*	NA	NA	NA	1	Simple	CRISIL AA/Stable
NA	Commercial paper	NA	NA	7-365 days	250	Simple	CRISIL A1+
NA	Cash credit	NA	NA	NA	1800	NA	CRISIL AA/Stable
NA	Term loan	Jun-20	7.10%	Jun-24	75	NA	CRISIL AA/Stable
NA	Fund-based facilities	NA	NA	NA	120	NA	CRISIL A1+
NA	Proposed Cash Credit Limit	NA	NA	NA	250	NA	CRISIL AA/Stable
NA	Letter of credit & bank guarantee	NA	NA	NA	16046	NA	CRISIL A1+
NA	Proposed Letter of Credit & bank guarantee	NA	NA	NA	1723	NA	CRISIL A1+

*not issued

Name of entities	Extent of consolidation	Rationale for consolidation
JMC Projects (India) Ltd	Full	Strong managerial, operational and financial linkages
Shree Shubham Logistics Ltd	Full	Strong managerial, operational and financial linkages
Amber Real Estate Ltd	Full	Strong managerial, operational and financial linkages
Energylink (India) Ltd	Full	Strong managerial, operational and financial linkages
Kurukshetra Expressway Pvt Ltd	Partial	SPV with non-recourse debt; only equity contribution considered
Vindhyachal Expressway Pvt Ltd	Partial	SPV with non-recourse debt; only equity contribution considered
Wainganga Expressway Pvt Ltd	Partial	SPV with non-recourse debt; only equity contribution considered
Brij Bhoomi Expressway Pvt Ltd	Partial	SPV with non-recourse debt; only equity contribution considered