Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to Rs.300 crore non convertible debentures of Kalpataru Projects International Limited (KPIL) and reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and other debt programmes.

 

The ratings are driven by the strong business risk profile of KPIL due to its established market position in the T&D segment, growing non-T&D business and strong order book. Outstanding consolidated orders worth Rs 47,332 crore as on June 30, 2023, at a combined level, present adequate revenue visibility. Operating income[1] improved 15% year-on-year as on fiscal 2023 primarily due to better execution in the non-transmission and distribution (T&D) business. Earnings before interest, depreciation, tax and amortisation (EBIDTA) margin declined to 9.0% against 9.7% for the same period last year due to increase in material expenses, primarily steel and freight cost. Softening of commodity prices and synergy benefits from the amalgamation should help the margin improve over the medium term.

 

Financial risk profile is marked by increase in gross debt during fiscal 2023 to fund the high capital expenditure (capex) and increasing working capital requirement, which led to rise in gearing. Steady debt levels, coupled with better profitability and cash accrual, should enhance debt protection metrics in fiscal 2024. Also, liquidity remains strong, supported by unencumbered cash and equivalent of around Rs 700 crore and an undrawn bank limit of around Rs 150 crore as on as on June 30, 2023.

 

The ratings continue to reflect the strong track record of KPIL in the transmission line tower (TLT) business, diversified revenue streams and healthy financial risk profile. These strengths are partially offset by the large working capital requirement given the inherent nature of the EPC business, and exposure to subsidiaries & Road SPVs. KPIL plans to divest few non-core assets including road projects, real estate project in Indore and logistics over near to medium term. Additionally, the company plans to expedite project closures in order to improve its working capital cycle.

 

CRISIL Ratings takes note of the Income Tax search, which was initiated on Aug 4, 2023, and concluded on Aug 12, 2023 on several premises of Kalpataru group. According to the management, no material impact is anticipated on KPIL as on date, due to these searches. Any update regarding the same will be closely monitored.

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of KPIL (including erstwhile JMC projects) and its subsidiaries, Shree Shubham Logistics Ltd (SSL), and Energy Link (India) Ltd (EnergyLink) — collectively referred to as the Kalpataru group. CRISIL Ratings has moderately integrated the business and financial risk profiles of the road special-purpose vehicles (SPVs) as the projects have been funded through debt without recourse to KPIL. However, CRISIL Ratings has factored in the commitment made to the SPVs in the form of equity, cost overruns and guarantees.

 

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 market position in the TLT business: The Kalpataru group has a track record of over four decades in the T&D business. KPIL is one of the leading players in the domestic market with reputed customers such as Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and various state transmission utilities. Consolidated orders worth Rs 47,332 crore as on June 30, 2023, provide strong revenue visibility over the medium term. Favourable prospects for the international & domestic T&D, building construction, water and urban infrastructure space should continue to support the business.

 

Diversified revenue streams: The order book is fairly diversified with the T&D segment contributing ~33% of revenue as on June 30, 2023, followed by water projects (26%), buildings and factories (22%), railways (9%), urban infrastructure projects (7%), and the oil & gas segment (3%). Further, 40% of the order book is from the international market. The company also has a vast presence overseas, as it mainly exports to countries in Asia, Africa, Central and Latin America, the Middle East, Commonwealth of Independent States, Australia and Europe. Diversified revenue streams both in terms of segments and markets, reduce the susceptibility to downturns in any one business or geography.

 

Healthy financial risk profile: Capital structure is marked by a comfortable gearing of 0.57 time and moderate total outside liabilities to tangible networth (TOL/TNW) ratio of 2.44 times as on March 31, 2023, as against 0.61 time and 2.19 times, respectively, in previous fiscal.  The increase in TOL/TNW ratio is majorly on account of increase in customer advances amidst higher order inflow and payables resulting from stretched working capital requirement. The working capital got stretched on account of increase in unbilled revenue due to certain large projects billing linked to completion of projects. As the unbilled revenue is released this fiscal TOL/TNW ratio is expected to improve, supported by optimized working capital management and steady cash accrual. Gross debt for KPIL rose to around Rs 2,880 crore as on March 31, 2023, from Rs 2,370 crore as on March 31, 2022 on account of higher capex and working capital requirement amidst higher order execution. Interest coverage ratio was healthy at around 3.2 times in fiscal 2023. Sustained growth in cash accrual and reduction in debt, leading to stronger debt protection metrics, are key monitorables.

 

Weaknesses:

Working capital-intensive operations: The engineering, procurement and construction business involves large working capital requirement, and the project execution cycle of 2-2.5 years leads to higher reliance on short-term debt. Sizeable retention money remains blocked in projects till the end of the performance guarantee period. Receivables (including net unbilled revenue) rose to around 257 days as on March 31, 2023, from 232 days as on March 31, 2022. Improvement in working capital management remains a key monitorable in line with growth in business.

 

High exposure to group companies: Standalone exposure to subsidiaries and SPVs was high at around Rs 1,734 crore as on March 31, 2023, excluding assets held for sale (around Rs 1,608 crore as on March 31, 2022), as support to overseas projects increased. Road projects also required net infusion of Rs 141 crore in fiscal 2022 and another Rs 71 crore in fiscal 2023, largely due to skewed debt profile leading to mismatch in cash flow. However, the investments are unlikely to constrain the cash flow and financial risk profile of the group, which will be cushioned healthy performance of KPIL and efficient working capital management. Nonetheless, incremental exposure in these entities would be closely monitored.

Liquidity: Strong

Cash and equivalents were around Rs 700 crore as on June 30, 2023. Bank limit of around Rs 150 crore remained unutilised as of June 30, 2023. The available liquidity and expected annual cash accrual of Rs 800-1,000 crore should comfortably cover repayment obligation of around Rs 355 crore and capex of around Rs 300 crore in fiscal 2024.

 

Environment, social and governance (ESG) profile

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

 

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

 

Key ESG highlights

• KPIL set up two Biomass power plants in the state of Rajasthan with a combined capacity of 15.8 MW (7.8 MW and 8.0 MW) using the Direct Combustion Boiler technology
• KPIL has installed a 350 KW rooftop solar plant at its Gandhinagar factory, which generates 3.54 lakh units, equivalent to about 251 Ton of CO2 reduction in fiscal 2023
• The company has a goal of zero harm. To achieve the same, the company aims to integrate safety in every aspect of construction work procedure. Currently KPIL has LTIFR of 0.30.
• The governance structure is characterised by around 60% of the board comprising independent directors. The management has been effective in creating wealth for its shareholders

 

There is growing importance of ESG among investors and lenders. The commitment of KPIL to ESG principles will play a key role in enhancing stakeholder confidence, given high share of market borrowing in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

KPIL should continue to benefit from its established market position in the TLT industry and its healthy order book with a diversified revenue profile.

About the Company

Established in 1981 by Mr Mofatraj P Munot, KPIL is a leading player in the domestic T&D sector. The company undertakes turnkey contracts for setting up transmission lines and substations for extra-high-voltage power transmission. Over the years, it has diversified into civil contracts, railways, and oil and gas pipeline construction.

 

JMC, established in 1986, undertakes construction contracts for infrastructure projects (including bridges, flyovers, highways and captive power plants), industrial projects, buildings, residential and water projects. JMC was amalgamated with KPIL with effect from January 4, 2023 with an appointed date as April 1, 2022.

 

SSL offers end-to-end logistical solutions in western India in the agricultural sector, spanning warehousing, cold storage and commodity-funding services, collateral management and commodity exports. EnergyLink is in the real estate business and is executing a real estate project in Indore through its wholly owned subsidiary, Saicharan Properties Ltd.

Any other information: Not applicable

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
INE220B08092	Non-convertible debentures	9-De-2022	Linked to Repo Rate	9-Dec-2025	99	Simple	CRISIL AA/Stable
INE220B08100	Non-convertible debentures	28-June-2023	8.07	29-June-2026	300	Simple	CRISIL AA/Stable
NA	Non-convertible debentures*	NA	NA	NA	300	Simple	CRISIL AA/Stable
NA	Non-convertible debentures*	NA	NA	NA	1	Simple	CRISIL AA/Stable
NA	Commercial paper	NA	NA	7-365 days	250.0	Simple	CRISIL A1+
NA	Cash credit	NA	NA	NA	1800	NA	CRISIL AA/Stable
NA	Proposed Cash Credit Limit	NA	NA	NA	250.0	NA	CRISIL AA/Stable
NA	Term loan	June 2020	7.1%	June 2024	75	NA	CRISIL AA/Stable
NA	Fund-based facilities	NA	NA	NA	120.0	NA	CRISIL A1+
NA	Letter of credit & bank guarantee	NA	NA	NA	16146.0	NA	CRISIL A1+
NA	Proposed Letter of Credit & bank guarantee	NA	NA	NA	1623.0	NA	CRISIL A1+

*Not issued