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 continues to have a strong order book position of ~ Rs 16,047 as on June 30, 2023 crore (Rs. 17000 cr in March 2023 and Rs. 12268 crore in March 2022) owing to higher participation in HAM projects. Revenue has 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 fiscal 23. Of 21 HAMs, 7 have achieved commercial operation date (COD) or provisional COD. All these projects have become operational on average 5 to 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 16047 crore as on June 30, 2023 in hand translates into order–to-revenue ratio of 2.34 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, rehabilitation and upgrading of existing 2 lane to 4 lane from Bhangbar (Near Ranital) to Kangra bypass section of NH-88; 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 3 HAM projects from Sadbhav namely Jodhpur Ring Road, BRT Bangalore Tiger Reserve and Nainital Highway. 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. Although operating margins moderated slightly to 13.75% in first quarter of current fiscal, these are expected to sustain at 14-15% supported by expected higher execution of orders, moderation in raw material prices and early completion bonuses. 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 ~85 days as on March 31, 2023 and are expected to sustain over the medium term.

Robust financial risk profile

Tangible networth stood at around ~Rs 3700 crore and adjusted gearing at around 0.03 times, as on March 31, 2023. Networth should improve to ~ Rs 4,500 crore while gearing is expected at 0.06-0.08 time, as on March 31, 2024, due to strong execution of order book and minimal reliance on external debt.

Net cash accrual to adjusted debt (NCAAD) and adjusted interest coverage ratios stood at 8.46 times and 36 times, respectively, in fiscal 2023.

The TOLTNW ratio is also expected to remain below 0.30 time over the medium term (0.16 time 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 25-35 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 fiscal 2024 and Rs. 500-600 crore annually in the medium term. Annual net cash accrual of around Rs 800 - 850 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.

Annexure – List of entities consolidated

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