Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA- (CE)/Stable’ rating on the long-term bank facilities of Dineshchandra Tollways Pvt Ltd (DTPL). CRISIL Ratings has also withdrawn its rating on the long-term loan facility worth Rs.17.47 crore and the proposed long-term bank facilities of Rs 34 crore based on request from the client and independent confirmation from the lenders. This is in line with the withdrawal policy of CRISIL Ratings.

 

A continuing and irrevocable corporate guarantee has been extended for bank facilities of DTPL by its parent, Dineshchandra R Agrawal Infracon Pvt Ltd (DRAIPL). DTPL will benefit from the strength of this corporate guarantee, and an additional undertaking stating that the guarantee is unconditional. The guarantee and the undertaking together cover the principal, interest, and other monies payable on the guaranteed bank facilities.

 

The rating continues to reflect healthy business and financial risk profiles of DRAIPL. These strengths are partially offset by exposure to cyclicality inherent in the construction industry and vulnerability to delay in receipt of annuities from the Government of Rajasthan for the DTPL project. Any downgrade in the credit risk profile of DRAIPL and non-adherence to the payment mechanism are key rating sensitivity factors.

Analytical Approach

For arriving at the rating on DTPL, CRISIL Ratings has applied its criteria on rating instruments backed by guarantees. The CE suffix indicates credit enhancement by way of extension of a continuing and irrevocable corporate guarantee and an additional undertaking covering unconditional support to DTPL over the entire tenure of the loan. The guarantee along with the payment mechanism covers the payment structure that is designed to ensure full and time-bound payment to the lenders.

 

For arriving at the rating, CRISIL Ratings has considered the standalone financials of DRAIPL, and has fully consolidated its special purpose vehicle (SPV), DTPL, as the company has provided an unconditional and irrevocable guarantee against the project debt undertaken in the SPV. Further, CRISIL Ratings has moderately consolidated other SPVs to the extent of support required over the medium term. Interest-bearing mobilisation advances 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:

Corporate guarantee and additional undertaking provided by DRAIPL

DTPL should benefit from the continuing and irrevocable corporate guarantee and additional undertaking stating that the guarantee is unconditional. Furthermore, the payment mechanism provided by DRAIPL covers the principal, interest, and other monies payable on the guaranteed bank facilities of the company.

 

According to the payment mechanism covered in the undertaking, the guarantor, DRAIPL, shall monitor if the borrower has made all necessary payments on the due dates, and if the borrower, DTPL, is unable to pay, the guarantor shall ensure that the necessary payments are made not later than 10 business days from the due date, irrespective of the lender's bank invoking the guarantee. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the loan.

 

Healthy business risk profile of DRAIPL

The promoters have more than four decades of experience in the construction business. The company has diversified across verticals, so that it is not dependent on any one segment. The diversified portfolio includes 56% from the road segment, 22% from railways, 4-7% each from the over bridge, airport and water supply segments. Further, the order book is geographically diversified across more than 20 states with key states such as Gujarat, Maharashtra and Delhi contributing not more than 35% of the orderbook. Thereby, overall diversity has strengthened the business risk profile.

 

Revenue in fiscal 2023 grew 48% to Rs 5,693 crore from Rs 3,845 crore in fiscal 2022. Order book as on June 30, 2023, was ~Rs 16,555 crore (L1 bids were of Rs. 3,474 crore), which provides healthy visibility and translates to order book to revenue ratio of 3.1 times. Operating margin remained steady at 8.7% during fiscal 2023 (8.9% in fiscal 2022).

 

Healthy financial risk profile of DRAIPL

Scaling up of business and low leverage have resulted in a comfortable financial risk profile. DRAIPL’s networth improved to Rs 1,340 crore as on March 31, 2023, backed by steady accretion to reserve, with net cash accrual of Rs 270-380 crore in the past two fiscals. A large part of equity requirement in underlying hybrid annuity model (HAM) projects and capital expenditure (capex) requirement have been funded through internal cash accrual, thereby keeping the reliance on debt minimal. This improved the total outside liabilities to tangible networth (TOL/TNW) ratio to 1.33 times as on March 31, 2023, from 1.51 times a year ago; the ratio is expected at 1.10-1.30 times over the medium term. Steady cash accrual and moderate debt led to adequate debt protection metrics, net cash accrual to total debt ratio was4.96 times and interest coverage ratio was 20.00 times, respectively, for fiscal 2023.

 

Further, the company is expected to invest around Rs 860 crore over the next three fiscals towards equity commitment of HAM projects and joint ventures. Additionally, to support the in-house execution of new work orders, increasing scale of operations and reduce dependence on sub-contracting, capex of Rs 135-140 crore per annum is expected over the medium term. The expected cash accrual of above Rs 400-450 crore per fiscal will be sufficient to fund equity commitments as well capex without much reliance on debt, which will keep the TOL/TNW ratio below 1.3 times over medium term. 

 

Prudent working capital cycle of DRAIPL

Gross current assets have been 90-110 days for the three fiscals ended March 31, 2023, owing to a healthy realisation cycle. Given that a large proportion of DRAIPL’s orders are either from strong counterparties such as National Highways Authority of India (NHAI) and Ministry of Road Transport and Highways of India (MoRTH), realisation is timely and debtors were 17 days as on March 31, 2023. Working capital management is also supported by efficient utilisation of resources and low inventory (around 25 days as on March 31, 2023). The company focuses on easy mobilisation of its resources, thereby improving the turnaround time and reducing the idleness of machinery and equipment. Ability to sustain the working capital cycle while improving the scale will remain a key monitorable.

 

Weaknesses:

Weak financial risk profile and delay in receipt of annuities in DTPL

The financial risk profile of the asset is weak as reflected in the lower debt service coverage ratio (DSCR;<1 time) factoring provisioning of major maintenance & repair expenses (expected to be incurred in fiscal 2028). This is further impacted by delay in payments by the counterparty (Government of Rajasthan), further impacting the debt servicing ability of the company. However, this is offset by the presence of debt service reserve account (DSRA) of Rs 10.53 crore, which covers interest servicing for six months and one principal instalment and timely support from the parent to meet the cash flow mismatches.

 

Exposure to cyclical demand inherent to the construction industry

The construction industry is inherently cyclical and profitability is volatile amid intense competition in the engineering, procurement and construction segment. Of the order pipeline as on June 30, 2023, the roads and highways segment accounted for over ~56% while remaining orders were from various other segments. With increased focus of the central government on the infrastructure sector, especially roads and highways, DRAIPL is expected to reap benefits over the medium term. However, most of its projects are tender based and face intense competition, which may hence require it to bid aggressively to get contracts. Competition has intensified further due to the relaxation in bidding norms by MoRTH and NHAI last fiscal. Given the already moderate operating margin of 8-9%, intense competition could adversely impact it. Also, with the cyclicality inherent in the construction industry, the ability to maintain profitability through operating efficiency becomes critical.

Liquidity: Strong

Liquidity of DTPL is strong, aided by robust financial support and corporate guarantee from DRAIPL. DRAIPL’s liquidity is also strong, supported by healthy annual cash accrual, unencumbered cash and cash equivalents and low bank limit utilisation. Net cash accrual is projected at Rs 400-450 crore per annum, against repayment of Rs 80-100 crore over the medium term. The fund-based bank utilisation was 0% during the 12 months through July 2023. Average utilisation of the non-fund-based facilities has been moderate at 75% for 12 months through July 2023. Unencumbered cash and cash equivalents were ~Rs 605 crore as on March 31, 2023.

 

For the project, DTPL had a DSRA of Rs 10.53 crore as on March 31, 2023, which is sufficient to meet six months interest and one principal instalment

Outlook: Stable

The rating on DTPL is based on that of the guarantor, DRAIPL. The rating will remain sensitive to any change in CRISIL Ratings’ credit view on DRAIPL.

 

The business risk profile of DRAIPL should remain healthy over the medium term, driven by healthy growth in revenue, in turn led by strong outstanding orders and execution capabilities. The financial risk profile is expected to remain comfortable, with healthy capital structure and debt protection metrics.

Rating Sensitivity Factors

Upward Factors

• Upgrade in the credit risk profile of the parent by 1 or more notches
• Improvement in DSCR of DTPL along with timely receipt of annuities

 

Downward Factors

• Deterioration in the credit risk profile of DRAIPL parent by 1 or more notches
• Non-adherence to the terms of transaction structure/payment mechanism

Adequacy of credit enhancement structure

The rating continues to be based on the strength of a continuing and irrevocable guarantee, shared by the guarantor, extended for the loans by the parent to ensure full and timely payment of all amounts due to the lender on the due dates. Further, the company has shared an undertaking confirming that the guarantee is unconditional. The guarantee secures the principal repayment and interest payment related to the entire debt. The payment structure is also covered in the undertaking to ensure full and timely payment to the lender.

 

According to the payment mechanism in the undertaking, the guarantor, DRAIPL, shall monitor if the borrower has made all necessary payments on the due dates and if the borrower, DTPL, is unable to pay, it shall ensure that the necessary payments are made not later than 10 business days from the due date. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the loan.

Unsupported ratings: CRISIL BBB

CRISIL Ratings has introduced the 'CE' suffix for instruments having explicit credit enhancement feature in compliance with the circular of Securities and Exchange Board of India dated June 13, 2019.

Key drivers for unsupported ratings

• Established track record of timely receipt of annuities
• Vulnerability of cash flow to delay in receipt of annuities
• Modest debt protection metrics
• Support from DRAIPL in case of cash flow mismatches

About the Company

DTPL was set up for two-laning development and maintenance of the Barmer-Sindhari-Jalore section of State Highway-16 (SH-16) and Ahore-Bali-Mundra section of SH-16 (total 178 kilometre) in Rajasthan (under Rajasthan State Highway Investment Programme Package 2), under a design, build, finance, operate, and transfer basis. Nearly 58% of DTPL’s shares are held by DRAIPL, while the balance is equally distributed between Mr Dineshchandra R Agrawal, Mr Jagdishchandra Agrawal and Mr Hardik Agrawal.

 

The bid project cost is Rs 347 crore. The bid project cost and operations and maintenance cost are adjusted for price index variation between the bid date and the milestone date to arrive at the completion cost. The concession agreement between DTPL and the Government of Rajasthan was signed on February 27, 2017. The concession was granted to DTPL for 12 years (including construction period of 730 days) and based on semi-annual annuity payment. The Project Commercial Operation Date (PCOD) was achieved on April 5, 2019. COD was achieved on June 28, 2019.

About the guarantor

DRAIPL was originally established in 1972 as a partnership firm, Dineshchandra R Agrawal, which got reconstituted into a private-limited company in 2003. The company, promoted by Mr Dineshchandra R Agrawal, is based in Ahmedabad, Gujarat. DRAIPL is involved in civil construction activity, and undertakes construction of roads, bridges, buildings, airports, and drainage systems among others. The company has diversified order book, with 56% contribution from road segment, 22% from railways, 7% from over bridge segment, 4-6% from airport and water supply segment each. The company has a portfolio of nine HAM assets, three of which are operational and four are in the initial stage of construction with appointed date received for two projects and pending for the remaining three.

Key Financial Indicators of DTPL*

Financials as on/for the period ended March 31	Unit	2023 (Aud)	2022 (Aud)
Operating income	Rs crore	26	26
Profit after tax (PAT)	Rs crore	(-0.2)	(2.2)
PAT margin	%	(0.7) %	(6.2) %
Adjusted debt/adjusted networth	Times	1.75	2.00
Adjusted Interest coverage	Times	1.07	0.62

*as per analytical adjustments made by CRISIL Ratings

 

Key financial indicators of DRAIPL**

Financials as on/for the period ended March 31	Unit	2023 (Aud)	2022 (Aud)
Operating income	Rs crore	5,693	3845
PAT	Rs crore	334	231
PAT margin	%	5.9	6
Adjusted debt/adjusted networth	Times	0.13	0.17
Adjusted Interest coverage	Times	21.85	20.00

**as per analytical adjustments made by CRISIL Ratings

List of covenants

This is as per the financing document of the project, DTPL

• Maintenance of DSCR greater than 1.1 time for every fiscal commencing from COD
• At any point of time, the ratio of term loan: promoters’ contribution: Government of Rajasthan contribution shall not exceed 2.95:3.34.

Any other information: Not applicable