Rating Rationale
June 30, 2020 | Mumbai
KEC International Limited
CP reaffirmed; NCD withdrawn
 
Rating Action
Rs.100 Crore Non Convertible Debentures CRISIL AA-/Stable (Withdrawn)
Rs.1000 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the commercial paper of KEC International Limited (KEC). CRISIL has withdrawn its rating on the non-convertible debentures (NCDs) of Rs.100 crore (see Annexure: Details of rating withdrawn) at the company's request as the instrument has not yet been placed. The rating action is in line with CRISIL's policy on withdrawal of ratings.
 
During fiscal 2020, KEC registered healthy operating performance with year-on-year growth of 9% in operating income to Rs 11,966 crore and improvement in operating margin to 11.0% from 10.1% in fiscal 2019, led by strong execution in the railways segment.
 
Though operations have been temporarily disrupted by the nationwide lockdown during March-June 2020 to Covid-19, the business risk profile should remain strong driven by presence in diverse businesses and healthy order book of Rs 20,503 crore as on March 31, 2020. Moreover, liquidity remains healthy supported by undrawn bank lines of Rs 833 crore as on March 31, 2020, as well as unencumbered cash and bank balance, which should help tide over the current situation.
 
The rating continues to reflect the company's leading market position in the transmission line tower (TLT) business, geographically diversified orders, and healthy financial flexibility as part of the RPG group. These strengths are partially offset by working capital-intensive operations and modest, though improving, debt protection metrics.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of KEC and all its subsidiaries given their common business.

Please refer Annexure - List of entities consolidated, for details of the entities considered and the analytical treatment for consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Leading market position in the TLT business: KEC has been in the TLT business for over five decades and is among the largest manufacturers in the world, with capacity of 362,200 tonne per annum (TPA). In India, KEC is a leading player with reputed customers such as Power Grid Corporation of India Ltd (PGCIL; 'CRISIL AAA/Stable/CRISIL A1+') and various state transmission utilities. While the order inflow was Rs 11,331 crore during fiscal 2020, orders of Rs 20,503 crore as on March 31, 2020, provide strong revenue visibility for the medium term.

Favourable industry scenario, with higher investments envisaged in the power T&D segment in India over the medium term and inflow of international orders should continue to support the business.

* Diversified revenue: While 54% of unexecuted orders were in the TLT business as on March 31, 2020 (down from 64% as on March 31, 2019), they were from diverse geographies. About 36% of the unexecuted orders were from overseas. Exports are primarily to countries in SAARC, Africa, the Middle East, East Asia Pacific and the Commonwealth of Independent States. Presence in the Americas is also healthy through wholly owned subsidiary SAE Towers, USA, which has a combined production capacity of around 1 lakh TPA in Brazil and Mexico. KEC also has presence in engineering, procurement and construction (EPC) services for railways (29% of orders in fiscal 2020), civil infrastructure (13%), cables (1%) and smart infrastructure (1%). The diversified revenue helps reduce susceptibility to downturn in any one segment.

During fiscal 2020, KEC registered healthy operating performance with year-on-year growth of 9% in operating income to Rs 11,966 crore and improvement in operating margin to 11.0% from 10.1% in fiscal 2019, led by strong execution in the railways segment.

Operating performance in the near term is likely to be impacted by the Covid-19 pandemic and the resultant disruption in operations in the first quarter of the fiscal. However, the company's leading market position with diversified revenue and sizeable orders should help maintain operating performance over the medium term.

* Healthy financial flexibility: As the flagship company of the RPG group, KEC benefits from the group's financial flexibility and strong reputation, and the promoters' longstanding relationships with key stakeholders. The group has presence in diverse businesses such as tyres, pharmaceuticals, information technology and construction. KEC's financial flexibility is also supported by cash and bank balance of Rs 176 crore and undrawn bank lines of Rs 833 crore as on March 31, 2020.

Weaknesses
* Working capital-intensive operations: Large working capital requirement inherent in the engineering and construction industry keeps reliance on short-term debt high. Receivables are typically over 150 days due to sizeable retention money blocked in completed projects till the end of the performance guarantee period. As on March 31, 2020, receivables were 166 days as against 165 days as on March 31, 2019. Payables too are large over 290 days, with back-to-back payment clauses in most contracts allowing for passing on any delay in realisations in receivables. A sustained increase in amount due from customers and other current assets kept the gross current assets high at 307 days as on March 31, 2020, against 308 days a year earlier.

Sustained efficient working capital management as the business grows will remain a key monitorable.

* Modest, though improving, debt protection metrics: Debt protection metrics remain modest, with high total outside liabilities to tangible networth (TOLTNW) and debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) ratios. While the TOLTNW ratio improved to 3.4 times as on March 31, 2020, from 3.7 times as on March 31, 2019, supported by improving profitability and better working capital management, debt to EBIDTA ratio slipped to 1.8 time from 1.7 time due to increased debt.

The financial risk profile, however, is expected to improve gradually with reduction in indebtedness driven by gradual realisation of retention money, sustained cash accrual and efficient working capital management. The pace of improvement will remain a key monitorable.
Liquidity Strong

Cash accrual was healthy at Rs 524 crore during fiscal 2020, and cash equivalent/liquid investments stood at Rs 176 crore as on March 31, 2020. Liquidity is supported by unutilised bank line of Rs 833 crore as of March 2020. The available liquidity and expected annual cash accrual of Rs 600-750 crore during fiscals 2021 and 2022 should be sufficient to meet debt obligation and moderate capex plan.

Rating Sensitivity Factors
Upward Factors
* Strong revenue growth, with sustained improvement in the operating margin above 12.5%, leading to higher cash accrual
* Equity infusion or improvement in working capital management, resulting in better-than-expected debt protection metrics

Downward Factors
* Sustained decline in operating margin to less than 10%, with stagnant revenue leading to reduced cash accrual
* Weakening of the financial risk profile due to a further stretch in the working capital cycle or large, debt-funded capital expenditure.

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 has presence 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 362,200 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 over Mexico and Brazil.

Key Financial Indicators (CRISIL-adjusted numbers)
As on/for the period ended March 31 Unit 2020 2019
Revenue Rs crore 11,966 11,001
PAT Rs crore 566 468
PAT margin % 4.7 4.3
Adjusted debt/adjusted networth Times 0.88 0.80
Adjusted Interest coverage Times 3.34 3.74

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs.Crore)
Complexity level Rating assigned with outlook
NA Commercial Paper NA NA 7-365 days 1000 Simple CRISIL A1+
 
Annexure - Details of Ratings Withdrawn
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Complexity level Issue size
(Rs.Crore)
NA Non-Convertible Debentures* NA NA NA Simple 100
*Yet to be issued
 
Annexure - List of Entities Consolidated
Name of entity Extent of consolidation Rationale of consolidation
SAE Towers Holdings LLC, USA Full Strong managerial, operational and financial linkages
SAE Towers Brazil Subsidiary Company LLC, USA Full Strong managerial, operational and financial linkages
SAE Towers Mexico Subsidiary Holding Company LLC, USA Full Strong managerial, operational and financial linkages
SAE Towers Mexico S de RL de CV, Mexico Full Strong managerial, operational and financial linkages
SAE Towers Brazil Torres de Transmission Ltda, Brazil Full Strong managerial, operational and financial linkages
SAE Prestadora de Servicios Mexico, S de RL de CV, Mexico Full Strong managerial, operational and financial linkages
SAE Towers Ltd, USA Full Strong managerial, operational and financial linkages
SAE Engenharia E Construcao Ltda, Brazil Full Strong managerial, operational and financial linkages
KEC Engineering & Construction Services, S de RL de CV Full Strong managerial, operational and financial linkages
KEC Investment Holdings, Mauritius Full Strong managerial, operational and financial linkages
KEC Global Mauritius, Mauritius Full Strong managerial, operational and financial linkages
KEC International (Malaysia) SDN.BHD Full Strong managerial, operational and financial linkages
RPG Transmission Nigeria Ltd, Nigeria Full Strong managerial, operational and financial linkages
KEC Global FZ - LLC, Ras UL Khaimah, UAE Full Strong managerial, operational and financial linkages
KEC Towers LLC Full Strong managerial, operational and financial linkages
KEC Power India Pvt Ltd, India Full Strong managerial, operational and financial linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1000.00  CRISIL A1+      24-06-19  CRISIL A1+  29-06-18  CRISIL A1+  26-10-17  CRISIL A1+  -- 
                    04-10-17  CRISIL A1+   
Non Convertible Debentures  LT  0.00
29-06-20 
Withdrawn      24-06-19  CRISIL AA-/Stable  29-06-18  CRISIL AA-/Stable  26-10-17  CRISIL AA-/Stable  -- 
All amounts are in Rs.Cr.
 
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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