Detailed Rationale

CRISIL Ratings reaffirms its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank loan facilities and commercial paper programme of Ashoka Buildcon Ltd (ABL)

 

The ratings reflect healthy business  profile of ABL supported by strong order book, diversified revenue mix and strong execution capabilities, also supported by comfortable financial risk profile ABL reported revenue of Rs. 4,319 crore for 9M fiscal 2023 and reported growth of 42% year on year and to grow by 30% in fiscal 2023, driven by healthy execution in the engineering, procurement and construction (EPC) segment. Revenue is expected to grow at 8-10% in fiscal 2024 driven by strengthened order book of Rs 16,140 crore as on December 31, 2022. Operating margin is likely moderate to 9-9.5% in fiscal 2023 owing to higher inflation and delay in right of way (ROW) and projects with lower margins obtained during covid being executed and are expected to be 9.5-11% in the medium term.

 

The financial risk profile remains healthy, with sufficient cash accrual and moderate debt levels. Networth should improve to Rs 3,300-3,400 crore, while gearing is expected at around 0.50-0.55 time by March 31, 2024. Net cash accrual to adjusted debt (NCAAD) and adjusted interest coverage are estimated at 0.20-0.25 time and 4.5-5 times, respectively, in fiscal 2024.

 

The ratings continue to reflect established track record in executing EPC contracts and 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, ACL and Unison Enviro Pvt Ltd (UEPL). These strengths are partially offset by large working capital requirement 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 the moderate consolidation approach of CRISIL Ratings, 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 cash flow mismatches in ACL and UEPL. CRISIL Ratings has also consolidated the debt of ACL guaranteed (unconditional and irrevocable) by ABL and debt in UEPL, which is also guaranteed (unconditional and irrevocable) by ABL, while assessing the credit risk profile of ABL.

 

Furthermore, interest-bearing mobilisation advances estimated at Rs. 580 crores 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:

• Established track record of executing EPC contracts and BOT road projects: 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 23 such projects (of which five BOT assets are being sold to KKR affiliate). 18 of these assets are operational and four are under construction. Over 11,800 lane kilometres (km) has been constructed so far and nine completed projects have been successfully handed over.

 

Of the portfolio of 25 projects, 13 (six BOT toll and seven HAM) are housed under ACL. Out of the total 11 HAM projects with the group, seven are in the operational stage (including 5 projects which have received provisional completion certificate) and four are under construction. Few under-construction HAM projects had ROW issues, but these are expected to be completed on time given the strong track record of the EPC contractor and six months of extension due to the Covid-19 pandemic. Nonetheless, progress of HAM projects will remain a key monitorable.

 

The orderbook of ABL has evolved over time. The company has shifted its focus from bidding for BOT and HAM projects to EPC projects. ABL aims to become an all-sector EPC player over the medium term. The company has ventured into the following: roads, power transmission and distribution (10 years), rail (five years), buildings (one year) and has entered into sewage, smart infra and solar projects recently. As on December 31, 2022, total order book of ABL stood at Rs 16,140 crores, translating to order book to revenue ratio of ~2.7-3 times, providing revenue visibility over the medium term. ABL has recently received projects in power transmission & distribution which will help company to report healthy increase in scale of operations.

 

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.

 

• Robust order book providing strong revenue visibility: The company has an order book of Rs ~16,140 crore as on December 31, 2023, with the order book to sales ratio estimated at ~2.7-3 times, which will help the company achieve strong revenue numbers in the coming fiscals as the orders are to be executed over the next three year. Around 57% of orders (as on December 31, 2022) are from the road segment, while 19%, 8% and 16% are from power T&D and others, railways segments and buildings, respectively. Of the road orders, HAM and EPC account for 12% and 45%, respectively.

 

The company post third quarter of fiscal 2023 has won orders worth Rs 3,763 crore in power sector, which includes orders from MSEDCL for 4 circles and includes power projects from Uttar Pradesh Chattisgarh and Bihar and has also won railway projects of Rs. 285 crore and road projects of Rs. 2,161 crore. The strong order book will help in healthy revenue growth in the medium term as the current orderbook is to be executed over 30 months. 

 

• Comfortable financial risk profile: Tangible networth is estimated at a strong at approx. Rs 3,000 crore and adjusted gearing at around 0.6 time as on March 31, 2023. Networth should improve to Rs 3,300-3,500 crore, while gearing is expected at around 0.50-0.55 time by March 31, 2024. ABL follows a conservative financial policy and hence the capital structure remained healthy over the years. Adjusted debt increased to an estimated Rs 1,700-1,800 crore as on March 31, 2023, from Rs 931 crore a year ago due to rise in increase in interest bearing mobilization advance because of increase in orderbook and higher utilization of working capital limits. Total outside liabilities to adjusted networth (TOL/ANW) ratio is projected at 1.0-1.10 time and NCAAD and adjusted Interest coverage are estimated at 0.2-0.25 time and 4.5-5 times, respectively, in fiscal 2024.

 

About 50% of ABL’s networth is locked in investments made in the underlying BOT and HAM portfolio. Further, the company is expected to invest around Rs 600 crore over fiscals 2024 to 2026, towards equity commitment of ongoing HAM projects along with financial support for meeting cash flow mismatches at the underlying SPVs. Internal accrual will fund incremental working capital requirement and support the future growth of ABL.

 

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, used to pay off unsecured loans from ABL. Post sale of BOT assets in Q2 FY2024, ABL will be a 100% shareholder of ACL and will fund all equity commitments.

 

CRISIL Ratings has fully consolidated debt in subsidiaries guaranteed by ABL/ACL in its assessment. Transaction for sale of 5 BOT assets to an affiliate of Kohlberg Kravis Roberts & Co L.P. has been delayed and is expected to get completed by Q2 FY2024. This transaction will also provide for the exit of Macquarie SBI Infrastructure Investments Pte Ltd and SBI Macquarie Infrastructure Trust (SBI Macquarie), which together own 34% shareholding in Ashoka Concessions Ltd (ACL; ‘CRISIL AA-(CE)/Stable’). The impairments (to the tune of Rs ~1000 crore) due to this sale have been accounted in the profit and loss statement of ABL and ACL in the last two years; CRISIL Ratings expects no further impairment due to this transaction.  Such debt associated with five subsidiaries in concern is expected to come down post conclusion of the transaction. Additionally, any support to the five BOT assets in fiscal 2023 and beyond will be reimbursed by KKR affiliate to ABL based on a back-to-back agreement.  ABL also has Rs ~1200-1500 crore claims from NHAI on the subject five BOT assets, which will not be transferred to KKR. Any cash inflow with realization of these claims will remain a key monitorable.

 

Further, ACL is in advanced stages of discussion for monetising Jaora-Nayagaon toll asset and has signed an SPA with National Investment and Infrastructure Fund Ltd for sale of GVR Ashoka Chennai Outer Ring Road for Rs 686 crore in fiscal 2024 which will help offset the losses on the sale of 5 BOT toll assets.  An SPA has also been signed for sale of Jaora Nayagaon Toll Road project with NIIF and Unsio Enviro for CDG business with Mahanagar Gas Ltd. All these transactions are expected to conclude in FY2024 which will support the financial and business risk profile

 

Weaknesses:

• Large working capital requirement: The working capital cycle may remain stretched, 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 operationalized, 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.

 

However, the working capital cycle has been comfortable over the years, with gross current assets (GCA) estimated at around 220 days in the medium term from FY2024 to FY2026.

 

• Susceptibility to intense competition and cyclicality in the construction industry: Around 57% of ABL’s outstanding orders as on December 31, 2022, 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.

 

Additionally, even though operating margin moderated at around 8.65% during the first nine months of fiscal 2023, it moderated to some extent compared to the same period of the previous fiscal owing to higher inflation and delay in ROW, leading to suboptimal utilization of fixed costs.  The margin is projected at ~9.5-11% over the medium term.

Liquidity: Strong

Liquidity may continue to be supported by healthy cash accrual, unutilized bank lines, and moderate cash and equivalents. Cash accrual is projected at more than Rs 500-600 crore per annum, sufficient to cover the maturing debt of ~Rs 100 crore per annum from fiscals 2024 to 2026. Fund-based bank limit utilization remained at 53% during the 12 months through March 2023. The company uses non-fund-based facilities for meeting working capital requirement. Utilization of these facilities averaged 64% for the 12 months through March 2023. Furthermore, an established relationship with suppliers results in long credit period and hence, lower dependence on own funds. Unencumbered cash and equivalents stood at Rs 270 crore as on December 31, 2022.

Outlook: Stable

CRISIL believes ABL's business risk profile will remain healthy over the medium term, driven by moderate growth in revenue, in turn led by strong outstanding orders and execution capabilities. The financial risk profile is expected to remain comfortable, marked by healthy capital structure and debt protection metrics.

Rating Sensitivity factors

Upward Factors:

• Substantial increase in scale of operations and improvement in operating margin leading to increase in net cash accruals of over Rs. 500-550 crore

 

• Sustained improvement in financial risk profile supported by steady working capital management and improvement in debt metrics

 

Downward Factors:

• Moderation in operating performance or stretch in working capital cycle leading to sustained weakening in TOL/ANW ratio to 1.5 times or more

 

• Delays in project implementation or deterioration in performance of operational projects, leading to higher-than-expected support requirement or delay in monetization of assets leading to higher debt or deterioration in debt metrics

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 tolls 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 11,800 lane km till date. This is also reflected in its outstanding BOT/HAM portfolio of 25 projects (including ACL assets) as on fiscal 2022. 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, where six BOT projects were transferred to the former. SBI Macquarie also infused Rs 800 crore (39% stake at the time of entry), and ACL acted as an exclusive BOT project developer for both ABL and SBI Macquarie. Out of 11 HAM projects awarded to ABL, seven were housed under ACL. Currently, ACL has entered into a deal with KKR, for sale of the entire share capital held in five toll projects held under ACL for an aggregate consideration of Rs 1,337 crore which will provide an exit to SBI Macquarie (34% shareholding in ACL) at Rs 1,200 crore.

 

For the nine months ending December 31, 2022, ABL posted revenue of Rs 4,319 crore and PAT of Rs 237 crore, as against Rs 3,032 crore and Rs (497) crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
NA	Non-Fund Based Limit	NA	NA	NA	5280	NA	CRISIL A1+
NA	Non-Fund Based Limit*	NA	NA	NA	110	NA	CRISIL AA-/Stable
NA	Fund-Based Facilities	NA	NA	NA	390	NA	CRISIL AA-/Stable
NA	Rupee Term Loan	NA	NA	Oct-23	51	NA	CRISIL AA-/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	475	NA	CRISIL A1+
NA	Commercial Paper	NA	NA	7-365 days	200	Simple	CRISIL A1+

* Fully interchangeable with fund-based facilities

NA: Not applicable