Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of KEC International Limited (KEC).

 

Operating income (on a consolidated basis) grew by 25% year-on-year during the first nine months of fiscal 2023, led by strong order inflow and execution, primarily in the railways and civil segments. However, earnings before interest, tax, depreciation and amortisation (EBIDTA) margin declined to 5% during the same period, from 7% in fiscal 2022 and 9.4% in fiscal 2021, constrained by higher prices of raw materials, primarily steel and aluminum, and weak performance of the subsidiary, SAE Towers (Brazil). The latter incurred an EBITDA loss of Rs 190-200 crore in the first nine months of fiscal 2023, thus exerting pressure on the consolidated margin.

 

EBIDTA margin may remain muted in fiscal 2023, amid continued pressure on input cost and ongoing legacy orders in the domestic T&D business, wherein prices are fixed. The company has completed the legacy orders of SAE Towers and has no plans to enter into new engineering, procurement and construction (EPC) orders in this territory. Orders in the domestic T&D business, fetching a negative margin, should also be completed by the first half of fiscal 2024. With catching up of indexation for input prices and no major losses likely from the Brazilian subsidiary, the consolidated operating margin should improve from fiscal 2024. Gradual improvement from the first quarter itself, leading to an overall operating margin of 7.5% for fiscal 2024, remains a key rating sensitivity factor.

 

High revenue growth and working capital intensity of the EPC business led to increase in working capital requirement and reliance on short-term debt. Overall, the decline in profitability, increased borrowings and higher interest rates led to an interest cover of 1.5 times for the first nine months of fiscal 2023, against 2.5 times and 3.5 times in fiscals 2022 and 2021, respectively. With improvement in profitability and working capital cycle likely to rationalise in fiscal 2024, the ratio should rise to over 2.5 times. Improvement in profitability aiding debt metrics will be a key rating sensitivity factor.

 

Nevertheless, the business risk profile should remain strong supported by established market position of KEC in the T&D segment, its growing non-T&D business and the strong order book. The company had outstanding orders worth more than Rs 28,000 crore as on December 31, 2022. Moreover, the financial flexibility remains adequate, supported by unencumbered cash and cash equivalent of Rs 330 crore, fund-based bank limit of Rs 3,000 crore (utilised at 76% on an average as on January 31, 2023) and its ability to raise funds at competitive rates.

 

The rating continues to reflect the leading market position of KEC in the transmission line tower (TLT) business, diversification in orders across geographies and business segments, and healthy financial flexibility, being part of the RPG group. These strengths are partially offset by the large working capital requirement and modest debt protection metrics.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of KEC and all its subsidiaries, as the companies are engaged in a similar line of business.

 

Acceptances have been considered as debt as these are interest-bearing obligations to banks.

 

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:

• Leading market position in the TLT business: KEC has been engaged in the TLT business for over five decades and is one of the largest manufacturers worldwide, with capacity of 422,200 tonne per annum (tpa). In India, KEC caters to reputed customers such as Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and various state transmission utilities. Order intake was strong at over Rs 15,500 crore during the nine months through fiscal 2023. Orders worth Rs 28,981 crore as on December 31, 2022, provide strong revenue visibility over the medium term. Leadership in the TLT segment and healthy growth in the non-T&D space should continue to support the business.

 

• Diversified revenue streams: While the T&D business accounted for around 45% of unexecuted orders as on December 31, 2022, KEC also has a healthy presence in engineering, procurement and construction (EPC) services for civil infrastructure (accounting for 28% of orders as on the same date). This was followed by the railways (17%) and other segments (9%). Furthermore, the orders are from various geographies. About 33% of the total unexecuted orders as on December 31, 2022, were from overseas markets. Exports are primarily to countries in SAARC, Africa, the Middle East, East Asia Pacific and the Commonwealth of Independent States. The wholly owned subsidiary - SAE Towers, USA, has a combined production capacity of around 1 lakh tpa in Brazil and Mexico, and mainly caters to the Americas. Diversified revenue streams reduce susceptibility to downturn in any particular segment or market.

 

• Healthy financial flexibility: As the flagship company of the RPG group, KEC benefits from the adequate financial flexibility, strong reputation and longstanding relationships with key stakeholders. The group is present across businesses such as tyres, pharmaceuticals, information technology and construction. The company also held cash and cash equivalent of around Rs 300 crore and bank limit of over Rs 2,400 crore as on March 31, 2022, which was enhanced to Rs 3,000 crore in fiscal 2023.

 

Weaknesses

• Large working capital requirement: Operations are working capital intensive, given the inherent nature of the EPC business and long project execution cycle of 2-3 years, which leads to higher reliance on short-term debt. Receivables are high as sizeable retention money gets blocked in projects till the end of the performance guarantee period and because bills are raised based on milestones in EPC projects undertaken for the railways and civil businesses. As on September 30, 2022, receivables (including net unbilled revenue) were high at 305 days, while payables were over 320 days. KEC had around Rs 550 crore receivables stuck in Afghanistan as on December 31, 2022. The entire amount relates to projects backed by multilateral agencies and hence, has not been written off. The company plans to smoothen the billing cycle to reduce working capital requirement, particularly in the railways business. Improvement in the working capital cycle remains a key monitorable as the business grows.

 

• Modest debt protection metrics: Debt protection metrics weakened further in fiscals 2022 and 2023 because of lower profitability and higher reliance on working capital debt. Borrowings including acceptances increased to Rs 5,932 crore as on December 31, 2022 (Rs 5,015 crore as on March 31, 2022). Interest coverage ratio declined to 1.5 times during the nine months ended December 31, 2022 from 2.5 times in fiscal 2022, and 3.5 times in fiscal 2021. Total outside liabilities to tangible networth (TOLTNW) ratio is high, estimated around 4 times as on March 31, 2023, against 3.7 times as on March 31, 2022, and 3.4 times a year earlier. With improving profitability in fiscal 2024 and completion of legacy projects in Brazil, financial metrics should improve from current levels. Sustained growth in revenue and profitability, resulting in higher networth and better debt protection metrics is a key monitorable.

Liquidity: Strong

Annual cash accrual of Rs 450-750 crore will sufficiently cover yearly debt of Rs 80-110 crore and moderate capital expenditure (capex) over the medium term. Working capital requirement will remain high, constraining liquidity. Cash and cash equivalent stood was around Rs 300 crore as on December 31, 2022. Bank limit of Rs 3,000 crore was utilised at 90% on an average for the 12 months through January 2023.

Rating Sensitivity Factors

Downward Factors

• Continued pressure on profitability leading to operating margin below 7% in fiscal 2024
• Stretched working capital cycle leading to weak interest cover on a sustained basis
• Significant debt-funded capex or acquisition weakening the financial risk profile

 

Environment, social and governance (ESG) profile

The ESG profile of KEC supports its already strong credit risk profile.

 

The EPC and power transmission sectors have significant impact on the environment, owing to risks linked to operations such as energy loss during transmission and waste generation. Also, given the nature of operations, the sector affects the local community and has various occupational health hazards associated with it. In line with this, KEC is focused on mitigating its environmental and social risks to ensure minimal impact.

 

Key ESG highlights

• KEC has installed solar plants in Jaipur, Nagpur and Dubai. It aims to reduce greenhouse gas emissions by 20% till fiscal 2026.
• KEC’s manufacturing plants have achieved the status of ‘Zero Wastewater Discharge’ and fully recycle both trade effluents and domestic wastewater. The company has also installed 14 rainwater harvesting points in all three transmission line plants in India.
• The company is committed to increasing the happiness quotient of its workforce to 85% by fiscal 2026.
• Gender diversity is an area for improvement, with females forming only around 4% of employee representation. The company aims to increase gender diversity by 25% by fiscal 2026.
• The governance structure is characterised by independent directors constituting over 70% of the board. The management has been effective in creating wealth for its shareholders.

About the Company

Established in 1945, KEC is the flagship company of the Harsh Goenka faction of the RPG group and a global infrastructure EPC major. It is present in the power T&D, cables, railways, civil infrastructure, solar and smart infrastructure segments. The company has six manufacturing facilities across India, Brazil, Mexico and Dubai, and is among the largest tower manufacturers globally with capacity of 422,200 tpa.

 

In September 2010, KEC acquired a 100% stake in US-based SAE Towers, the leading manufacturer of lattice transmission towers in the Americas, with production capacity of around 1 lakh tpa across Mexico and Brazil.

 

For the nine months ended December 31, 2022, KEC reported a PAT of Rs 104 crore on an operating income of Rs 11,757 crore against Rs 220 crore and Rs 9,467 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable