| Ashoka Buildcon Limited | ||||||
| Ratings placed on 'Watch Developing' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has placed its ratings on the bank facilities and commercial paper programme of Ashoka Buildcon Limited (ABL) on ‘Rating Watch with Developing Implications’.
The rating action follows an announcement by ABL on December 25, 2021 that Ashoka Concessions Limited (ACL; ‘CRISIL AA-(CE)/Watch Developing’), a material subsidiary of ABL, has entered into share subscription and share purchase agreements (SPAs) with Galaxy Investments II Pte. Ltd., an affiliate of Kohlberg Kravis Roberts & Co. L.P. (KKR), for sale of the entire share capital held in five subsidiaries of ACL i.e., Ashoka Highways (Bhandara) Limited (‘CRISIL BBB+/Stable’), Ashoka Highways (Durg) Limited (‘CRISIL BBB/Stable’), Ashoka Belgaum Dharwad Tollway Limited, Ashoka Sambalpur Baragarh Tollway Limited [‘CRISIL A-(CE)/Stable’], and Ashoka Dhankuni Kharagpur Tollway Limited, for an aggregate consideration of Rs.1337 crore.
The proceeds from the sale would be utilised to provide an exit to Macquarie SBI Infrastructure Investments Pte Limited and SBI Macquarie Infrastructure Trust (SBI Macquarie), which together own 34% shareholding in ACL. Around Rs 1200 crore of the total consideration of Rs 1337 crore, would be utilised towards providing full exit to SBI Macquarie from ACL. The aggregate consideration will also include repayment of any shareholder loans held in these five subsidiaries. The deal is expected to be concluded by September 30, 2022 subject to National Highways Authority of India (‘CRISIL AAA/Stable’) approval, lender consent and satisfaction of certain conditions precedent. CRISIL Ratings has fully consolidated debt in subsidiaries guaranteed by ABL/ACL in its assessment. Such debt associated with five subsidiaries in concern is expected to come down post conclusion of the transaction. Further, the group is also in advanced stages of discussion for monetising its two other assets and is likely to sign the SPAs with potential investors before the end of fiscal 2022.
CRISIL Ratings is in discussion with ABL to seek further details of the transaction including impact of this transaction on the company’s business and financial risk profiles and shall resolve the watch once it has clarity on these aspects.
The ratings continue to reflect the company’s established track record in executing engineering, procurement, construction (EPC) contracts and build-operate-transfer (BOT) road projects and robust order book providing healthy revenue visibility. The ratings also factor in adequate financial risk profile amidst expectation of funding support and investment in subsidiaries, Ashoka Concessions Ltd (ACL; rated CRISIL AA-(CE)/Watch Developing) and Unison Enviro Pvt Ltd (UEPL). These strengths are partially offset by working capital-intensive operations and susceptibility to intense competition and cyclicality in the construction industry. |
Analytical Approach CRISIL Ratings has moderately consolidated ABL with its special purpose vehicles (SPVs), ACL, and UEPL. The debt in ABL's SPVs is non-recourse to ABL, and in line with CRISIL Ratings’ moderate consolidation approach, the investment requirement, expected cost overrun in under-implementation projects, as well as cash flow mismatches in operational projects of ABL, have been factored into the financials of ABL. ABL is expected to extend equity and support towards cashflow mismatches in ACL and UEPL. CRISIL Ratings has also consolidated the debt of ACL guaranteed (unconditional and irrevocable) by ABL and expected debt in UEPL which is proposed to be guaranteed (unconditional and irrevocable) by ABL, while assessing the credit risk profile of ABL.
Furthermore, interest-bearing mobilisation advances (Rs 278 crore as on September 30, 2021) have been treated as debt.
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:
Experience of over two decades in the EPC business and established relationships with state government departments, NHAI, and the Ministry of Road Transport and Highways should continue to support the business.
The company was one of the early entrants in BOT road projects in India, and won its first project in 1997. Along with ACL, it currently has 25 such projects, of which 18 are operational, 5 under construction, 2 are yet to receive appointed date (financial closure is achieved in both the projects). Over 10,000 lane kilometre (km) has been constructed so far and nine completed projects have been successfully handed over.
Of the portfolio of 25 projects, 13 (6 BOT toll and 7 hybrid annuity model [HAM]) are housed under ACL. Out of the total ten HAM projects with the group, three have achieved provisional commercial operations date (PCOD), five projects are under construction and the balance two are yet to receive the appointed date. Few under-construction HAM projects have right of way (ROW) issues but these are expected to get completed on time given the strong track record of EPC contractor and six months of extension of time due to COVID-19. Nonetheless, progress of HAM projects will remain a key monitorable.
ABL’s strong project execution capabilities are reflected in successful completion of projects within the scheduled time and budgeted cost. The strong in-house EPC division undertakes all project implementation for the BOT/HAM road projects. The group also manufactures readymade concrete and high-grade bitumen, which supports operating efficiency, reflected in a moderate operating margin of 12-15% in the past five fiscals through 2021.
The company had orders of Rs 11,883 crore as on September 30, 2021. The company received orders of Rs 1,869 crore during the second quarter of fiscal 2022. Order book to revenue ratio of the company is 3.1 times, providing healthy revenue visibility over the medium term. Around 61% of orders (as on September 30, 2021) are from the road segment, while 16% and 23% are from power transmission and distribution (T&D), and railways and commercial gas distribution (CGD) segments, respectively. Of the road orders, HAM and EPC account for 39% and 61%, respectively.
Operating income registered a de-growth of around 4% and was at around Rs 3,800 crore in fiscal 2021. This was due to lower execution in Q1 2021 on account of COVID-induced lockdown. Flattish revenue and higher fixed cost resulted in 200 basis points (bps) decline in operating margin which was at 13.6% in fiscal 2021. Revenue for H1 2022 registered growth of 33% (y-o-y) due to low base in the previous fiscal.
Adjusted debt stood at around Rs 740 crore as on March 31, 2021. Healthy net worth and low debt has kept the capital structure comfortable. Adjusted gearing improved to 0.25 time as on March 31, 2021 from 0.30 time as on March 31, 2020. Adjusted total outside liabilities to adjusted net worth (TOL/ANW) also remains comfortable at 0.8 times as on March 31, 2021 (1.02 times as on March 31, 2020).
Healthy profitability and moderate debt levels have helped maintain comfortable debt protection metrics: the adjusted interest and finance coverage and net cash accrual to adjusted debt ratios were around 8.94 times and 0.7 time, respectively, in fiscal 2021. Debt protection metrics are expected to be sustained going forward.
About 80% of ABL’s net worth is locked in investments made in the underlying BOT and HAM portfolio. Further, the company is expected to invest around Rs 500 crore over fiscals 2022 and 2023, towards equity commitment of ongoing HAM projects and investments in CGD business along with financial support for meeting cash flow mismatches at the underlying SPVs. Major maintenance works in two projects were completed in fiscal 2021 and is being taken up for four BOT projects in fiscals 2022 and 2023, which would entail support requirements. This support is over and above the surplus generated from Jaora Nayagaon Toll Road Co. Pvt. Ltd and Viva Highways Ltd, which would be used towards supporting ABL’s SPVs.
ABL has been infusing the entire equity commitment towards HAM projects under ACL, including the share of SBI Macquarie. ACL has raised Rs 250 crore till now which has been used to pay off unsecured loans from ABL. ABL will be infusing entire balance equity commitment in the ongoing HAM projects till a new investor is identified.
Weaknesses:
Working capital requirement of ABL is inherently large, given the high dependence on state and central government authorities for receipt of payments. Further, in the power T&D segment, working capital requirement is higher because 20% of the payment is received once the project is operationalised, which usually takes two years and 10% of the contract value is held as retention money until the expiry of the warranty period that usually takes five years.
Working capital cycle has been improving over the years, with gross current assets (GCA, net off cash) at around 200 days as on March 31, 2021 (266 days as on March 31, 2017), aided by lower inventory on account of collection of working capital advance for NHAI road projects which has improved the billing cycle in fiscal 2021 and lower execution in power T&D segment.
Around 61% of ABL’s outstanding orders as on September 30, 2021 comprised projects from roads and highways, and the remaining from the power T&D, railways and CGD segments. Although the company executes projects across various modes (BOT/EPC/HAM) in the roads segment, revenue is susceptible to changes in government regulations and economic conditions. Limited diversity in revenue will keep it susceptible to intense competition and cyclicality inherent in the construction industry. |
Liquidity: Strong Liquidity is strong, supported by healthy cash accrual, unutilised bank lines, and moderate cash and equivalents. Expected cash accrual of over Rs 400 crore per annum over the medium term, should suffice to cover the maturing debt of Rs 90-120 crore each in fiscals 2022 and 2023. Fund-based bank limit utilisation remained low at 13% during the 12 months through June 2021. The company primarily uses non-fund-based facilities for meeting working capital requirement. Utilisation of these facilities averaged 67% for the 12 months through June 2021. Furthermore, an established relationship with suppliers results in a long credit period and hence, lower dependence on own funds. Unencumbered cash and equivalents stood at Rs 26 crore as on September 30, 2021. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company ABL, incorporated in 1993, engineered and constructed residential, commercial, industrial, and institutional buildings until 1997. The company won its first BOT project in 1997. Currently, operations comprise BOT and EPC road projects, EPC power T&D projects, collection of toll on roads and bridges owned and constructed by third parties, and manufacturing of ready-mix concrete. The company also ventured into the commercial gas distribution business in 2016 by winning its first order to build and operate a gas distribution network in Ratnagiri district, Maharashtra. Additionally, the company entered into executing smart city construction projects in 2016.
ABL is listed on both the Bombay Stock Exchange and National Stock Exchange. It has significant experience in executing road projects across India and has constructed more than 10,000 lane km till date. This is also reflected in its outstanding BOT/HAM portfolio of 25 projects (including ACL assets). In the EPC division, ABL constructs roads and bridges for its own BOT projects as well as for third parties. It also executes EPC projects in the power distribution space for various state governments.
ACL was set up in November 2011 as a subsidiary of ABL, which transferred seven BOT projects to the former. SBI Macquarie infused Rs 800 crore through a stake dilution of 34% in ACL, which acts as an exclusive BOT project developer for both ABL and SBI Macquarie. Out of ten HAM projects awarded to ABL, seven have been housed under ACL. |
Key Financial Indicators - CRISIL Ratings adjusted
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
* Fully interchangeable with fund-based facilities |
Annexure – List of entities consolidated
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Criteria Details
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