Detailed Rationale

Crisil Ratings has downgraded its ratings on the bank facilities of Engineering Projects India Limited (EPIL) to ‘Crisil BB+/Stable/Crisil A4+’ from ‘Crisil BBB-/Stable/Crisil A3’.

 

The downgrade reflects the weakening in the company’s business and financial risk profiles driven by operating (earnings before interest depreciation amortisation tax) losses, resulting in weak debt protection metrics. 

 

Operating performance moderated with decline in operating income by 25% in fiscal 2024 to reach Rs 851 crore due to delay in awarding as well as handing over of sites for execution of projects. The company reported operating losses on account of execution of very low-margin projects and delays in projects that caused cost overruns. The company has clocked ~Rs 800 crore of operating income during the nine months of fiscal 2025 and is expected to achieve Rs 1,200-1,300 crore for full fiscal with higher execution of orders (order book stood at ~Rs 5,585 crore as on December 2024). However, the operating margin was negative during the nine months through December 2024 and is expected to breakeven in fiscal 2025, backed by execution of higher margin projects and receipt of monthly claims from Tamil Nadu Power Generation Corporation Ltd (TNPGCL) pertaining to a settlement agreement signed on a previously executed project. The margin is expected to remain modest at 1.5-2.5% as the company sub-contracts 100% of its projects despite expected growth in the operating income.

 

The debt protection metrics are expected to remain muted with adjusted interest coverage ratio of 1-1.2 times during fiscal 2025 (negative during previous fiscal), which is likely to be 2.3-3.1 times over the medium term. Working capital intensity remains high, with gross current assets (GCAs) (net of cash) of 393 days as on March 31, 2024 (338 days as of March 2023). This is managed by the ability to stretch payables, which stood at 126 days (84 days). However, the liquidity is adequate with average fund-based bank limit utilisation of 45% during the 12 months through January 2025.

 

The ratings reflect the strong order book providing revenue visibility over the medium term, established position in project management. The ratings also factor in the benefit to the credit profile of EPIL, a Miniratna company, due to ownership by the Government of India through the Ministry of Heavy Industries. These strengths are partially offset by weak operating profitability and debt metrics, susceptibility to intense competition, cyclicality in the construction industry and to risk related to contingent liabilities and working capital-intensive operations.

Analytical Approach

Crisil Ratings has considered the standalone financials to arrive at the final ratings of EPIL.

Key Rating Drivers & Detailed Description

Strengths:

Long track record and established position in project management

EPIL was incorporated in 1970 as a Government of India enterprise under the administrative control of the Department of Heavy Industries and Public Enterprise and has Miniratna status. Since then, EPIL has been one of the government’s prime contracting company. EPIL has left its imprint not only in India but in the overseas market as well where its past operations spread over a decade in the wake of the oil boom in the Middle East. EPIL’s contribution in project execution for various sectors is also substantial. It has contributed to housing and buildings works, dams and irrigation projects, industrial, process plant, material handling, electrical and border management projects, and transportation structures. 

 

Currently, the company secures orders through competitive bidding. Being a government-owned entity gives it some competitive advantage to secure projects from other public sector entities. Nevertheless, the competitive intensity of the sector remains high with the presence of other government-owned construction entities such as IRCON International Ltd and NPCC Ltd, as well as large private construction companies. Furthermore, EPIL has been part of the divestment plan of the government over the last five fiscals, and any progress on this front will remain monitorable.

 

Strong order book providing revenue visibility:

The company currently has an order book (mainly domestic) of Rs 5,585 crore as on December 31, 2024, translating into order book to revenue ratio of 6.6 times for fiscal 20204 (Rs 5,290 crore as on March 2023). EPIL will increase its focus on international projects over the medium term. The company has already reported Rs 800 crore of topline during the nine months of fiscal 2025 and is expected to achieve Rs 1,200-1,300 crore for the full fiscal, backed by its strong order book.

 

Weaknesses:

Modest operating profitability and muted debt metrics

The financial risk profile has deteriorated in the past four fiscals on account of execution of very low margin projects and delays in projects that caused cost overruns, leading to operating losses. Delays in projects have been due to faulty materials supplied by the suppliers, delays in handing over work fronts for the project, and modification and reworks by the client. Some of the major projects that have seen losses are Vavuniya Water Supply Scheme at Sri Lanka, Tamil Nadu slum clearance project, IISC project in Bengaluru, dairy and power plant in Bihar, HAL project in Nashik, and Coal India and NTPC projects. These delays have caused margin to weaken in the past few fiscals. Subsequently, the debt protection metrics have also been muted, as reflected in negative or low adjusted interest coverage ratio over the past four fiscals. Operating profitability is expected to remain weak over the medium term, resulting in subdued debt protection metrics. Adjusted interest coverage ratio is expected to remain at 1-1.2 times in fiscal 2025 (negative 5.6 times in fiscal 2024) and around 2.0 times over the medium term. Operating performance and resultant debt protection metrics will remain monitorable.

 

Susceptibility to intense competition, cyclicality in the construction industry and exposure to risk related to contingent liabilities:

The company is susceptible to competition in the EPC (engineering, procurement, and construction) sector with the presence of other government-owned construction entities such as NBCC and NPCC Ltd, as well as large private construction companies. The sector is also subject to cyclicality as it is dependent on economic growth. Due to the nature of business, EPIL has sizeable off-balance sheet liabilities, primarily claims pending from client as well as bank guarantees given to clients. Weakening in the credit profiles of sub-contractors can also cause delays in projects, and consequently increase the risk of penalties or invocation of bank guarantees. EPIL partly de-risks itself by taking similar guarantees from its sub-contractors. The company also has sizeable claims under arbitration. Due to these, it is exposed to liquidity risk.

 

Working capital-intensive operations

The GCAs (net of cash) were 393 days as on March 31, 2024 (338 days as on March 2023). This is managed by stretching payables, which stood at 126 days (84 days). However, comfort is drawn from the back-to-back arrangements with the sub-contractors, including bank guarantees. Working capital will remain monitorable over the medium term.

Liquidity: Adequate

Average bank limit utilisation stood at 45% (fund-based limit of Rs 140 crore as of January 2025) during the 12 months through January 2025. While cash and equivalent stood at ~Rs 597 crore as on March 31, 2024, these are the advances from clients for project execution; free cash is negligible. Annual net cash accrual of Rs 10-20 crore over the next three fiscals and unutilised bank limit should be adequate to meet the incremental working capital requirement over the medium term amid no major capital expenditure plan and nil term debt obligation.

Outlook: Stable

The company’s business risk profile will be driven by the long track record of execution and established position in the project management, while financial risk profile is expected to remain modest over the medium term.

Rating Sensitivity Factors

Upward factors

• Substantial increase in revenue and improvement in Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin to more than 2-3% on a sustained basis
• Improvement in debt protection metrics with adjusted interest coverage ratio remaining above 2.5-3.0 times on a sustained basis
• Ease in the working capital cycle resulting in improvement liquidity
• Improvement in stance of government towards support

 

Downward factors

• Ebitda margin remaining negative (less than 0) on a sustained basis
• Significant increase in debt weakening the financial risk profile
• Further stretch in the working capital cycle leading to weakening of liquidity
• Significant reduction in the shareholding of the government in EPIL or further deterioration in the strategic importance of the entity for the government.

About the Company

EPIL was incorporated in 1970 as a Government of India enterprise under the administrative control of the department of heavy industries. Since then, EPIL has been the country’s leading prime contracting company and has left its imprint not only in India but in the overseas market as well where its past operations spread over a decade in the wake of the oil boom in the Middle East.

Key Financial Indicators (standalone)*

As on March 31	Unit	2024	2023
Operating income	Rs crore	851	1,139
Profit after tax (PAT)	Rs crore	-61	3
PAT margin	%	-7.2	0.2
Adjusted debt/networth	Times	0.1	0.2
Adjusted interest coverage	Times	-5.6	0.6

*as per analytical adjustments made by Crisil Ratings

Any other information: Not Applicable