Detailed Rationale

CRISIL Ratings’ rating on the bank facilities of Gawar Construction Limited (GCL) continue to reflect improvement in business risk profile, supported by strong operating performance and stable working capital cycle while maintaining healthy financial risk profile. .These strengths are partially offset by limited revenue diversity and exposure to intense competition .

 

CRISIL Ratings had on August 16, 2022, revised its rating outlook on the long-term bank facilities of GCL to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL AA-’.

Analytical Approach

CRISIL Ratings has moderately combined the business and financial risk profiles of GCL and its special-purpose vehicles (SPVs) for HAM projects. The debt in the SPVs is non-recourse to the parent. In-line with the moderate consolidation approach of CRISIL Ratings, the equity requirement, expected cost overrun and support requirement in underlying HAM projects have been factored into the financials of the company.

 

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 position in the construction industry

Presence of over two decades in executing road projects mainly  in Central & North India and a Class-1 contractor status with several state governments have helped the company to establish a strong market position. The company has developed the technical capability to be the sole bidder for large EPC contracts from the National Highways Authority of India (NHAI; rated ‘CRISIL AAA/Stable’) and state road development agencies. Healthy relationships with leading players in the infrastructure segment also enables joint bidding for projects. GCL has significantly ramped up its order book to Rs 16,000 crore in the last four fiscals owing to higher participation in HAM projects. Hence, revenue registered a compound annual growth rate of around 21% in the five fiscals through 2022; operating income was Rs 6,500 crore in fiscal 2022 (year-on-year growth of 9.4%).

 

The company has a track record of executing projects before scheduled timeline and getting early completion bonuses from relevant authorities. GCL has a portfolio of 15 HAM projects of which 4 have achieved commercial operation date (COD) or provisional COD. All these projects have become operational at least 7 months ahead of schedule. Other HAM projects are also running well ahead of completion timeline. Two HAM projects are under L1 stage, wherein Letter of Appointment  is yet to be received. The strong project execution capability is reflected in successful completion of projects within scheduled time and budgeted cost.

 

Healthy order book providing medium-term revenue visibility

Orders of Rs 16,000 crore in hand translates into order–to-revenue (fiscal 2022) ratio of 2.5 times. About half of the orders are HAM projects and order book is  geographically diversified across 11 states. The company won 8 HAM projects in fiscal 2022 worth Rs 7,400 crore.

 

Around 90% of the orders are from central government agencies (80% from the NHAI), thereby reducing counterparty risk. Revenue contribution from under construction HAM projects (four laning of Rajauli-Bakhtiyarpur section of NH-31, four laning of Kiratpur to Nerchowk section of NH-21 and rehabilitation and upgrading of existing 2 lane to 4 lane from Bhangbar (Near Ranital) to Kangra Bypass Section of NH-88) and EPC projects (construction of 8-lane Vadodara Kim Expressway, two laning with paved shoulder of Gadag to Honnali and development of 6-lane access control greenfield highway of Delhi-Saharanpur-Dehradun economic corridor) will drive healthy revenue growth this fiscal.

 

High operating efficiency

GCL benefits from increasing scale of operations, sound execution capabilities and early completion of projects, which have supported operating efficiency.  Operating margin has remained at over 15% since fiscal 2020 and improved from 11-12% historically on account of execution of HAM projects. Margin is likely to remain at around 15% despite raw material inflation. Furthermore, efficient working capital management supported by strong sourcing tie-ups and healthy collection efficiency have led to comfortable return on capital employed (37-42% in the last three fiscals and expected at over 22% over the medium term). The GCAs were 93 days as on March 31, 2022, and are expected to sustain over the medium term.

 

Robust financial risk profile

Tangible networth is estimated at Rs 2,900 crore and adjusted gearing at around 0.04 time, as on March 31, 2022. Networth should improve to Rs 4,500-5,000 crore while gearing is expected at 0.09-0.10 time, as on March 31, 2024, due to strong execution of order book and minimal reliance on external debt. Moderate revenue growth and improvement in profitability led to sizeable cash accrual of over Rs 780 crore in fiscal 2022. Net cash accrual to adjusted debt (NCAAD) and adjusted interest coverage ratios are estimated at 6.46 times and 76.34 times, respectively, in fiscal 2022.

 

The TOLTNW ratio is also expected to remain below 0.30 time over the medium term (0.20 time as on March 31, 2022). With the equity requirement envisaged, we  expect Interest coverage ratio in the range of 25-28 times over the medium term.

 

GCL has annual equity funding requirement of around Rs  500 to 700  crores in fiscals 2023 and 2024 and moderate capital expenditure of around Rs 100 crore annually. Annual accrual of around Rs 800 - 900 crore, over the medium term, should cover these requirements with minimal reliance on external debt.

 

While a large part of the investments is towards HAM projects that carry lower risk due to their fixed annuity inflows, deleveraging through monetisation of these assets would be essential in order to sustain current growth trajectory. The company plans to monetise its asset vis-à-vis InvIT (infrastructure investment trust) once a sizeable number of HAM projects are operational.

 

Significant increase in debt on account of large, debt-funded capex plans, high cost overruns in existing HAM projects or substantial exposure to new ones necessitating sizeable equity investment will remain key rating sensitivity factors.

 

Weaknesses

Limited diversity in revenue profile

Operations continue to be focused on road projects, which contribute the bulk of the revenue, unlike EPC players with presence in multiple segments such as commercial, residential, and industrial construction and infrastructure (railways, irrigation, dams, and power). Operating performance is likely to remain exposed to cyclicality and risk of delayed payment. Furthermore, the orders are largely concentrated in North India, leading to geographical concentration in revenue. Nevertheless, increasing geographical diversity and plans to expand into other segments such as railways would mitigate concentration risk over the medium term.

 

Exposure to intense competition in the construction industry

With increased focus of the central government on the infrastructure sector, especially roads and highways, GCL is expected to reap benefits over the medium term. However, most of its projects are tender-based and face intense competition, thus requiring to bid aggressively to get contracts, which restricts operating margin. Also, given the cyclicality inherent in the construction industry, the ability to maintain profitability through operating efficiency becomes critical.

Liquidity: Strong

Liquidity is supported by healthy cash accrual, unutilised bank limit, and adequate cash and cash equivalents. Accrual, expected to remain over Rs 800-900 crore per annum, should be sufficient to meet yearly debt obligation of Rs 50-70 crore. Utilisation of fund-based limit was just 10% for the 12 months through May 2022, while non-fund-based limit was utilised at 58% on average. Unencumbered cash balance was healthy at around Rs 150 crore as on May 25, 2022.

Outlook: Positive

GCL will continue to benefit from its established position in the construction industry, and robust financial risk profile over the medium term.

Rating Sensitivity Factors

Upward Factors

• Sustenance of scale of operations and operating profitability at 14-16% leading to net cash accrual of Rs 750-800 crore
• Maintaining strong financial risk profile and healthy cash surplus

 

Downward Factors

• Decline in revenue and fall in operating margin below 12%
• Significant stretch in working capital cycle
• Large capex or investments in existing or new HAM projects necessitating sizeable equity investment, thereby weakening financial risk profile

About the Company

Established as a partnership (Gawar Construction Company) in 1997 and reconstituted as a limited company on March 31, 2008, GCL constructs roads and buildings for government authorities and is a registered Class-1 contractor. The company has 15 HAM projects. EPC works of the under-construction HAM projects is undertaken by GCL.

Any other information: Not applicable