Rating Rationale

Key Rating Drivers & Detailed Description

Strengths

* Established position in the construction industry

Longstanding presence of over two decades in executing road projects in North India and a Class-1 contractor status with several state governments has helped GCL establish a strong market position. Over the years, the company has developed the technical capability to be the sole bidder for large engineering, procurement, and construction (EPC) contracts from 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. The company has been able to significantly ramp up its order book and scale in the last five years. The order book improved to Rs 14,850 crore as on from Rs 2,200 crore in March 2016 and revenue has grown at a compounded annual growth rate of around 35% in the same time period – operating income was Rs 5,968 crore in fiscal 2021. The operations were hit by second wave of pandemic for the months of April and May, however things have resumed and operations have normalised June onwards. Strong order book to revenue ratio of around 2.5 times will help GCL maintain healthy revenue growth in the medium term.

Strong project execution capabilities are reflected from GCL’s track record of executing projects before scheduled timeline and getting early completion bonuses from relevant authorities: it received early completion bonus of Rs 40 crore in fiscal 2020 and Rs 34 crore in fiscal 2021. GCL has a portfolio of 11 HAM projects of which 3 have achieved commercial operation date (COD) or provisional COD. All these projects have become operational well ahead of schedule by atleast 7 months. Other HAM projects are also running well ahead of time. Established market position and strong execution capabilities have helped the company successfully execute more than 10000 lane km of road projects till date.

* Healthy order book provides revenue visibility over the medium term

Orders worth Rs 14,850 crore as on March 31, 2021 (translates to order–to-revenue (FY21) ratio of 2.5 times), which assures medium-term revenue visibility. Of this, more than 75% order is from NHAI. Of the outstanding order book, HAM and EPC orders account for 55% and 45%, respectively.

GCL has two large EPC orders worth Rs 2,800 crore from Uttar Pradesh Expressways Industrial Development Authority (UPEIDA), which are funded by a consortium of banks led by Bank of Baroda at UPEIDA. These projects commenced in January 2020 and are running ahead of schedule with aggregate progress of ~64% as on date. It further has eleven HAM projects, out of which one has achieved COD on July 31, 2020, two have achieved provisional completion in January2021, one is under construction and more than 75% complete, four have achieved financial close and awaiting appointed date and remaining three have been awarded recently and are yet to achieve financial close. With execution of the ongoing HAM projects and large Uttar Pradesh projects in the near-to-medium term, GCL’s scale is expected to sustain. Timely completion of these projects within the budgeted cost remains a rating sensitivity factor.

* Comfortable financial risk profile

While the company has scaled up to Rs 5,968 crore in fiscal 2021 from Rs 1,308 crore in fiscal 2016, its reliance on debt continues to be low at around Rs 125 crore as on March 31, 2021. Growth has been largely funded through internal accrual. Continued healthy accretion to reserves has resulted in strong networth of Rs 2200 crore. Supported by strong networth and low debt, gearing (0.06 time as on March 31, 2021) has remained stable at less than 0.2 time over the past five years. TOL/TNW ratio was also remained healthy at below 1.4 times over this period. Moderate growth in revenue along with improvement in profitability led to sizeable cash accrual of over Rs 700 crore in fiscal 2021.

Operating margin gradually improved from 7.7% in fiscal 2016 to 15.7% in fiscal 2021. This improvement was due to economies of scale on account of higher scale of operations, execution of higher margin projects, and regular receipt of bonuses. The contribution of higher margin HAM projects to revenue have increased steadily to over 45% in fiscal 2021 from nil in fiscal 2016. GCL’s employee cost had risen significantly in fiscal 2019 to Rs 152 crore from Rs 42 crore in the previous fiscal owing to large pay-out to key managerial/promoters. Such payout has remained stable in fiscal 2020 and fiscal 2021. Management has indicated that the pay-out will be capped at current levels in the near term. Any large pay-out to the key managerial personnel/promoters’ thereby impacting GCL’s profitability will remain a key rating sensitive factor.

GCL has large investments in its project SPVs with about 23% of its networth invested in existing HAM SPVs which will increase given that the company has bagged seven new HAM projects in fiscal 2021 & 2022. The company has equity funding requirement of around Rs 960 crore for its new HAM projects of which around Rs 345 crore is to be infused in fiscal 2022. While these investments are towards HAM projects which carry lower risk due to their fixed annuity inflows, deleveraging through sale of these assets would be essential in order to sustain GCL’s current growth trajectory. The company plans to divest its HAM assets, which would keep the balance sheet asset light.

GCL has moderate capex requirement of around Rs 100 crore annually. Accrual of more than Rs 700 crore per annum over the medium term should cover these requirements, with minimal reliance on external debt. Significant increase in debt on account of large debt-funded capex plans, significant cost overruns in existing HAM projects or substantial exposure to new ones necessitating sizeable equity investment will remain key rating sensitivity factors.

* Efficient working capital management

GCAs has been in the rage of 100-125 days in past five years, owing to a healthy realisation cycle (around a month). Given that a large proportion of the orders are either from strong counterparties such as NHAI or Asian development Bank (ADB)/World Bank funded projects, realisation is timely – debtors were 20 days as on March 31, 2021. In the current fiscal, the interim payments (relaxation on milestone based payments as a part of COVID relief plan) made by NHAI for its ongoing projects have also supported working capital requirements. Working capital management is also supported by efficient utilisation of resources and low inventory (~40 days as on March 31, 2021). The company focuses on easy mobilisation of its resources, thereby improving the turnaround time and reducing the idleness of machinery and equipment. Furthermore, the company benefits from the ability to stretch its payables (90 days as on March 31, 2021). The company has not relied on interest-bearing mobilisation advance in the past, this would continue in the future as well.

Weaknesses

* Limited diversity in revenue profile

Operations continue to be focused on road projects, which contribute the bulk of the company’s revenue, unlike EPC players with presence in multiple segments, such as commercial, residential, and industrial construction and infrastructure (railways, irrigation, dams, and power). The operating performance should remain susceptible to concentration arising from focus on road projects, thus increasing exposure to cyclicality and risk of delayed payment. Further, the company's orders are concentrated in North India leading to geographical concentration risk. Nevertheless, increasing geographical diversity and plans to diversify into other segments such as railways would partly mitigate the concentration risk over the medium term.

* Exposure to intense competition inherent 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 the company to bid aggressively to get contracts, which restricts the operating margin to a moderate level. Also, given the cyclicality inherent in the construction industry, the ability to maintain profitability margin through operating efficiency becomes critical.