Rating Rationale
May 08, 2023 | Mumbai
Gawar Construction Limited
Rating upgraded to 'CRISIL AA/Stable'; Rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.3300 Crore (Enhanced from Rs.2700 Crore)
Long Term RatingCRISIL AA/Stable (Upgraded from 'CRISIL AA-/Positive')
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Gawar Construction Limited (GCL) to 'CRISIL AA/Stable' from 'CRISIL AA-/Positive'.

 

The upgrade reflects a steady improvement in GCL's business risk profile, supported by strong operating performance, healthy order book and stable working capital cycle while maintaining healthy financial risk profile. GCL’s scale of operations is expected to increase to over Rs 8000 crore during next two fiscals from Rs 7000 crore in fiscal 2023 due to strengthened order book of Rs 17000 crore and order book to revenue of~2.4 times providing healthy revenue visibility. Revenue grew at a compound annual rate of 13% during the past five years FY19-FY23 from Rs. 3819 crore Rs ~7,000 crore. Further the company is well diversified across 19 states. Operating margins continues to remain healthy at ~14-15% in FY23 despite of raw material inflation. This is supported due to higher HAM execution and offset supported by early completion bonus of Rs. 169.49 crore received in FY23. Operating margins are expected to sustain at 14-15% supported by efficiency in execution and early completion bonuses.

 

Working capital cycle remained comfortable with gross current assets (GCAs) of ~118 days as on March 31, 2023 and is expected to sustain in the medium term. Despite significant ramp up in operations, the financial risk profile has been healthy as reliance on debt has been Low. While the company's revenue has shown healthy growth in the five fiscals through 2018, Capital structure remained comfortable, with gearing and total outside liabilities to tangible networth (TOLTNW) ratio of 0.03 time and 0.17 time, respectively, as on March 31, 2023. The financial risk profile should remain strong over the medium term despite large investment in hybrid annuity model (HAM) assets and acquisition of road assets from Sadbhav Group supported by strong average annual cash accrual of over Rs 800-900 crore over the medium term.

 

CRISIL Ratings on the bank loan facilities GCL continue to reflect the company's established position in the construction industry, backed by strong project execution capabilities, robust order flow, efficient working capital management, and comfortable financial risk profile. These strengths are partially offset by exposure to risks related to segmental concentration and inherent cyclicality in the construction industry.

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 17,000 crore in the last five fiscals owing to higher participation in HAM projects. Hence, revenue registered a compound annual growth rate of around 13% in the five fiscals through 2023; operating income was ~Rs 7,000 crore in fiscal 2023 (year-on-year growth of ~9.0%).

 

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 21 HAM projects including 5 new HAM won in FY23. Of 21 HAMs, 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. 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 17,000 crore in hand translates into order–to-revenue (fiscal 2022) ratio of 2.41 times. About half of the orders are HAM projects and order book is geographically diversified across 19 states. The company won 5 HAM projects in fiscal 2023 worth ~4000 crores.

 

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; rehabilitation and upgrading of existing 2 lane to 4 lane from Bhangbar (Near Ranital) to Kangra bypass section of NH-88; 4-Laning of Dewas Ujjain section; 4-Lane Champa-Korba-Katghora section on NH-149B; Pathankot-Mandi section PKG-IB, IIA & VA; 4-Laning of NH-5 from Shakral village to Dhalli section of Shimla Bypass PKG-II; 4-Laning of Bhiwani-Hansi road section of NH 148B, Four Laning of Abohar (Design chainage 75.500, Existing Km. 49+070 of NH-07) to Fazilka, four laning of Basukinath-Deoghar Section of NH 114A, 4-Laning of Behsuma – Bijnor Section of NH-119, Construction of Rudrapur bypass section) 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; 6-Lane Urban Extension Road-II Najafgarh to Nangloi; 4-Lane access control expressway Sidhra to Ban village section of NH-44 of Delhi-Amritsar Katra Expressway), will drive healthy revenue growth this fiscal

 

Further GCL have already acquired 2 HAM projects from Sadbhav namely Jodhpur Ring Road and BRT Bangalore Tiger Reserve. GCL will continue to pursue inorganic growth also to acquire stuck HAM projects. GCL will have strong portfolio of operational HAM assets in the medium term which will have steady income.

 

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 ~15% in fiscal 2023 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. ROCE is healthy around 30 times due to asset light model reflected in moderate level of subcontracting. Efficient working capital management supported by strong sourcing tie-ups and healthy collection efficiency. The GCAs were ~118 days as on March 31, 2023 and are expected to sustain over the medium term.

 

Robust financial risk profile

Tangible networth is estimated at around ~Rs 2,500 crore and adjusted gearing at around 0.04 time, as on March 31, 2023. 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.

 

Revenue for FY23 showed a revenue growth of ~9% driven by healthy order book and is expected to grow by ~9-10% in the medium term. Operating margin largely remained stable at 15% despite of increase in key raw materials due to support from bonus received from early completion and is expected to be in the range of 14-15% over the medium term.

 

Net cash accrual to adjusted debt (NCAAD) and adjusted interest coverage ratios are estimated at 8.4 times and 82.36 times, respectively, in fiscal 2023.

 

The TOLTNW ratio is also expected to remain below 0.30 time over the medium term (0.17 time estimated as on March 31, 2023). With the equity requirement envisaged and expected debt for acquisition of road projects from Sadbhav Group, Interest coverage ratio is expected to be in the range of 25-28 times over the medium term.

 

GCL had infused net equity funding of around Rs 500 crores in fiscals 2023 and annual equity requirement of around Rs. 800 crore in FY2024 and Rs. 200-300 crore annually in the medium term. Annual accrual of around Rs 850 - 950 crore, over the medium term, should cover these requirements with minimal reliance on external debt along with existing surplus cash & cash equivalent of over Rs. 400 Crores.

 

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

 

Significant increase in debt on account of large, debt-funded capex plans, higher cost of acquisition for Sadbhav projects high-cost overruns in existing HAM projects and new projects from Sadbhav 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 60-90 crore. Utilisation of fund-based limit was 15% for the 5 months through September 2022, while non-fund-based limit was utilised at 68% on average. Unencumbered cash and bank balances of Rs. 53.23 Crore & Unencumbered investment & fixed deposit is Rs. 350.22 Crore as on 09.03.2023.

Outlook: Stable

CRISIL Ratings believes GCL will continue to benefit from its established position in the construction industry and a comfortable financial risk profile.

Rating Sensitivity factors

Upward factors

* Substantial increase in scale and profitability supported by improvement in geographic and segmental diversity, resulting in net cash accruals of over Rs.1000-1200 crore

* Sustained improvement in financial risk profile through divestment of stake in HAM projects, prudent working capital management leading to significant build-up of cash surplus

 

Downward factors

* Decline in revenue and profitability resulting in cash accruals of less than Rs.500 cr on a sustained basis

* Significant stretch in working capital cycle

* Large capex or sizeable investments in existing or new HAM projects necessitating sizeable equity investment thereby weakening the financial risk profile leading to gearing of over 1 time

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 21 HAM projects. EPC works of the under-construction HAM projects is undertaken by GCL.

Key Financial Indicators

Particulars

Unit

2023 (Pro)

2022 (Aud)

Revenue

Rs crore

7054

6,531

Profit after tax (PAT)

Rs crore

797

740

PAT margin

%

11.2

11.3

Adjusted gearing

Times

0.03

0.04

Interest coverage

Times

78.12

76.34

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs crore)		 Complexity 
levels		 Rating assigned
with outlook
NA Fund-based facilties NA NA NA 200 NA CRISIL AA/Stable 
NA Non fund-based facilities* NA NA NA 150 NA CRISIL AA/Stable 
NA Non fund-based facilities** NA NA NA 56 NA CRISIL AA/Stable 
NA Non fund-based facilities# NA NA NA 300 NA CRISIL AA/Stable 
NA Non fund-based facilities## NA NA NA 175 NA CRISIL AA/Stable 
NA Non fund-based facilities NA NA NA 1996 NA CRISIL AA/Stable 
NA Proposed long term bank loan facility NA NA NA 123 NA CRISIL AA/Stable 
NA Term Loan@ NA NA Feb-27 300 NA CRISIL AA/Stable 

* Rs 50 crore Sub-limit of non fund based

** Rs 15 crore sub-limit of non fund based

# Rs 60 crore sub-limit of non fund based

## Rs 10 crore sub-limit of non fund based

@It is Medium Term Loan

Annexure – List of entities consolidated

Entity consolidated Extent of consolidation Rationale for consolidation
Gawar Rohna Jhajjar Highway Pvt Ltd Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations 
Gawar Khajuwala BAP Highway Pvt Ltd Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Narnaul Highway Pvt Ltd Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Rohna Sonepat Highways Pvt Ltd Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Hardiya Hasanpur Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Hasanpur Bakhtiyarpur Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Kiratpur Nerchowk Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Dewas Ujjain Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Korba Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Kangra Highways Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Pathankot Mandi Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Sihuni Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Shimla Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Pathankot Highways Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Bhiwani Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Fazilka Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Basukinath Highways Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Bijnor Highways Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Gawar Rudrapur Highway Private Limited Moderate No recourse of project debt to GCL; expected support towards cash flow mismatches during operations
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 623.0 CRISIL AA/Stable   -- 30-08-22 CRISIL AA-/Positive 09-09-21 CRISIL AA-/Stable 16-10-20 CRISIL AA-/Stable CRISIL A+/Stable
      --   -- 16-08-22 CRISIL AA-/Positive 07-09-21 CRISIL AA-/Stable 06-02-20 CRISIL A+/Positive --
      --   --   -- 02-07-21 CRISIL AA-/Stable   -- --
      --   --   -- 15-01-21 CRISIL AA-/Stable   -- --
Non-Fund Based Facilities LT 2677.0 CRISIL AA/Stable   -- 30-08-22 CRISIL AA-/Positive 09-09-21 CRISIL AA-/Stable 16-10-20 CRISIL AA-/Stable CRISIL A+/Stable
      --   -- 16-08-22 CRISIL AA-/Positive 07-09-21 CRISIL AA-/Stable 06-02-20 CRISIL A+/Positive --
      --   --   -- 02-07-21 CRISIL AA-/Stable   -- --
      --   --   -- 15-01-21 CRISIL AA-/Stable   -- --
Commercial Paper ST   --   --   --   -- 16-10-20 Withdrawn CRISIL A1+
      --   --   --   -- 06-02-20 CRISIL A1+ --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Fund-Based Facilities 15 Union Bank of India CRISIL AA/Stable
Fund-Based Facilities 13 IndusInd Bank Limited CRISIL AA/Stable
Fund-Based Facilities 5 IDBI Bank Limited CRISIL AA/Stable
Fund-Based Facilities 21 The Federal Bank Limited CRISIL AA/Stable
Fund-Based Facilities 50 Axis Bank Limited CRISIL AA/Stable
Fund-Based Facilities 1 ICICI Bank Limited CRISIL AA/Stable
Fund-Based Facilities 95 HDFC Bank Limited CRISIL AA/Stable
Non-Fund Based Limit 177 HDFC Bank Limited CRISIL AA/Stable
Non-Fund Based Limit## 175 Indian Bank CRISIL AA/Stable
Non-Fund Based Limit 220 YES Bank Limited CRISIL AA/Stable
Non-Fund Based Limit 350 State Bank of India CRISIL AA/Stable
Non-Fund Based Limit 210 Union Bank of India CRISIL AA/Stable
Non-Fund Based Limit 70 IDBI Bank Limited CRISIL AA/Stable
Non-Fund Based Limit 120 ICICI Bank Limited CRISIL AA/Stable
Non-Fund Based Limit 267 IndusInd Bank Limited CRISIL AA/Stable
Non-Fund Based Limit* 150 IDFC FIRST Bank Limited CRISIL AA/Stable
Non-Fund Based Limit** 56 RBL Bank Limited CRISIL AA/Stable
Non-Fund Based Limit# 300 Standard Chartered Bank Limited CRISIL AA/Stable
Non-Fund Based Limit 250 Axis Bank Limited CRISIL AA/Stable
Non-Fund Based Limit 279 The Federal Bank Limited CRISIL AA/Stable
Non-Fund Based Limit 53 HDFC Bank Limited CRISIL AA/Stable
Proposed Fund-Based Bank Limits 123 Not Applicable CRISIL AA/Stable
Term Loan@ 300 Kotak Mahindra Bank Limited CRISIL AA/Stable
This Annexure has been updated on 08-May-2023 in line with the lender-wise facility details as on 16-Aug-2022 received from the rated entity.
* Rs 50 crore Sub-limit of non fund based
** Rs 15 crore sub-limit of non fund based
# Rs 60 crore sub-limit of non fund based
## Rs 10 crore sub-limit of non fund based
@It is Medium Term Loan
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Construction Industry
CRISILs Criteria for Consolidation

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