Detailed Rationale

CRISIL Ratings has removed its rating on the long-term bank facilities of Paharpur Cooling Towers Ltd (PCTL) from 'Rating Watch with Positive Implications' and has upgraded the rating to ‘CRISIL AA-’ from 'CRISIL A+' and assigned a ‘Positive’ outlook. CRISIL Ratings has also reaffirmed its 'CRISIL A1+' rating on the short-term bank facilities and commercial paper programme of the company.

 

CRISIL Ratings has resolved the watch following the consummation of the acquisition of 44.64% stake in thyssenkrupp Industries India Pvt Ltd (tkII) by PCTL, taking PCTL’s stake in tkII to 55.64%. The long-term rating was placed on watch on April 16, 2024, following the communication from PCTL highlighting that it had signed a definitive agreement on January 22, 2024, to acquire 44.64% stake in tkII from the majority shareholder thyssenkrupp AG (tkAG; rated BB/B with Stable outlook by S&P Global Ratings). The company, additionally, received approval from the Competition Commission of India for the acquisition on April 16, 2024.

 

The upgrade in the long-term rating reflects the sustained improvement in the operating performance of PCTL supported by healthy order execution, especially in the cooling tower (CT) India business and SPG dry cooling business (SPG). Operating income for the company is estimated to have grown by 18% year-on-year in fiscal 2024 to ~Rs. 3800 crore while maintaining a healthy operating profitability of ~10%. CRISIL Ratings expects continued improvement in the business risk profile of PCTL post the acquisition of tkII, with significantly larger scale (revenues doubling in fiscal 2025), product and geographical diversity, and profitability sustaining at current levels. tkII has a strong presence across various sectors such as sugar, material handling equipment (MHE), cement and energy, which adds to business diversity. The strong order book will aid revenue growth over the medium term, with stable operating profitability, also benefitting absolute operating profits.

 

The company has sustained its healthy financial risk profile, with consolidated debt estimated around Rs 490 crore as on March 31, 2024, resulting in strong gearing and other debt protection metrics. Even post consolidation with tkII (which is debt free), the financial risk profile of the combined entity is expected to remain strong with moderate debt levels, resulting in continuing healthy debt protection metrics.

 

The ratings continue to reflect the dominant market position and healthy order book of PCTL in the cooling tower segment, increasing business diversity with the acquisition of tkII, which too has a healthy order book, continuing strong financial risk profile, and ample financial flexibility. These strengths are partially offset by the large working capital requirement and modest, but improving, operating performance of the SPG business.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of PCTL and its subsidiaries including tkII, having common businesses and financial fungibility. tkII will be consolidated from fiscal 2025 onwards.

 

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:

• Dominant position in the cooling tower segment for PCTL to be aided by allied business segments for tkII: PCTL enjoys a dominant market position in the domestic cooling tower segment, backed by experience of more than seven decades. This is complemented by a diversified product portfolio (catering to coal, gas, waste to energy and solar and thermal projects both in India and abroad), and strong technical and execution capabilities. The acquisition of the dry cooling business of SPG (in 2016) reaffirms the management strategy to further strengthen its market position and rebalance the portfolio between the wet and dry cooling businesses. Through the SPG acquisition, the company has gained access to its technology, patents, brand, and global customer base. The acquisition of majority stake in tkII - which has a leading presence across diversified sectors such as sugar, mining and bulk material handling (MHE), cement and energy; will further strengthen PCTL's focus on the capital goods industry, with PCTL benefiting from deeper penetration in the sugar and cement sectors, and increased wallet share expected in the engineering, procurement and construction (EPC) segment. Incrementally, PCTL is expected to see further geographical diversity given tkII's long track record and established market position both in India and abroad.

 

• Robust order books of both entities provide strong revenue visibility: PCTL has witnessed traction in the cooling tower business with trends of negative revenue growth reversing since fiscal 2018. In fiscal 2024, the domestic cooling tower business led by improved contribution from its dry cooling segment and steady performance of its civil segment, supported strong growth. The SPG business, which saw degrowth in fiscal 2022, owing to challenges in timely execution of orderbook, has seen sustained growth. This was owing to healthy order execution and receipt of substantial orders. Order inflow (excluding SPG) in fiscal 2024 stood at Rs 1640 crore against Rs 1,494 crore in fiscal 2023. Order backlog (excluding SPG) at Rs 3,097 crore as on March 31, 2024 provides revenue visibility for the medium term. Additionally, SPG has an order booking of USD 180.9 million in fiscal 2024 and an order backlog of USD 127.9 million as of March 2024. The strong orderbook provides revenue visibility for the company over the near-medium team, which is also expected to support the profitability of the company, backed by scale economies.

 
tkII has a strong order book of Rs 5,033 crore as on March 31, 2024 (Rs 5,121 crore as on September 30, 2022) across the energy, mining, cement and sugar segments, where it provides turnkey plant and engineering solutions along with its service division. This has been on account of a strong order inflow seen in the last few fiscals across the boilers and MHE segments, which together constitute about two thirds of fiscal 2024 revenue profile (constituted about half of fiscal 2023 revenue). Revenue for tkII has steadily improved from Rs 1700-1800 crore in fiscals 2020 and 2021, to Rs ~3200 crore in fiscal 2024. The orderbook which currently equates to ~1.5 times fiscal 2024 revenue provides near-to-medium-term revenue visibility.

 

The strong orderbook profile along with extensive experience across the capital goods industry for both entities will aid the overall business risk profile of PCTL in the medium term. That said, timely execution of orderbook in both entities and the successful integration of businesses, will remain monitorable.

 

• Strong financial risk profile and ample liquidity: PCTL’s financial risk profile remains strong supported by an estimated networth of ~ Rs.3,722 crore and an estimated gearing of 0.13 time as on March 31, 2024. The debt on the balance sheet remains limited at ~ Rs 490 crore.

 

Acquisition of 44.64% of shareholding of tkII requiring funds of Rs ~750 crore was funded through a mix of internal accrual and liquid cash surplus. tkII has no debt on its balance sheet, and is likely to remain debt free, due to the strong cash generating ability. Capital expenditure (capex) needs are expected to be modest going forward and can easily be met from annual cash accruals estimated over Rs 500 crore. Debt metrics such as debt/EBITDA (earnings before interest, tax, depreciation and amortisation) and interest cover, which improved from 1.6 times and 8.0 time in fiscal 2023 to 1.2 times and 10.8 time, respectively, in fiscal 2024, are expected to see sustained improvement in fiscal 2025 and beyond, due to strong absolute operating profits and minimal reliance on debt.

 

Financial flexibility is augmented by substantial quoted investment portfolio of over Rs 2,400 crore as on March 31, 2024, and sizeable non-core assets. CRISIL Ratings expects some moderation in liquid surplus due to part funding of tkII acquisition, but the same will still be sizeable, adding to the financial flexibility of PCTL.

 

Weaknesses:

• Revenue concentration in the power sector: High exposure of revenue to the power sector has historically led to cyclicality in order inflow and execution on the one hand, and delays in payments and build-up of receivables on the other. However, expected investment on the coal thermal side (25-30 gigawatt capacity addition over the next 4-5 years) and established presence in the cooling tower business should support PCTL with new order inflows. With the acquisition of stake in tkII, PCTL, at a consolidated level, may see a degree of diversification benefits given the former’s operation across various industries. That said, energy business for tkII also remains a leading contributor to its revenue (30% in fiscal 2024).

 

• Large working capital requirement: The working capital cycle remains stretched driven by receivables of 166 days as on March 31, 2023, and is expected to remain at similar level for fiscal 2024 and over the medium term. However, the share of receivables greater than 180 days decreased to ~27% as on March 31, 2023 from ~40% as on March 31, 2022. Gross current assets (GCAs) improved to 281 days from 299 days a year earlier due to improvement in inventory and debtor days supported by higher scale of operations. Inventory levels for the company remains high as evident from inventory days of 80 days as on March 31, 2023, however this has reduced from 103 days in the previous year and 105 days in fiscal 2021. Efficient working capital management with the ability to further improve coupled with growing scale of operations will remain monitorable.

 

Meanwhile, for tkII, GCAs stood at 314 days as on March 31, 2024, improving from 405 day a year earlier due to improvement in inventory and debtor days.

Liquidity: Strong

Liquidity is strong, driven by PCTL’s quoted investment portfolio with a market value of over Rs 2,400 crore as on March 31, 2024. Liquid surpluses could moderate slightly due to part funding of acquisition of stake in tkII but will remain sizeable. The available liquidity and the company’s cash accrual over the medium term would be sufficient to meet modest debt obligation and capex spend. Bank limit utilisation was 62% on average over the 12 months through June 2024, adding to financial flexibility.

Outlook: Positive

CRISIL Ratings believes the business risk profile of PCTL will continue to improve backed by strong order book of PCTL and tkII, resulting in higher execution and stable operating profitability, while modest debt and capex plans will ensure minimal reliance on debt, resulting in continuing strong financial risk profile. PCTL’s large investment portfolio will also support its financial flexibility.

Rating Sensitivity factors

Upward factors

• Continued improvement in business performance with successful integration of tkII leading to sizeable increase in scale of operations, enhancing the business risk profile
• Sustenance of operating profitability at ~8-10%, which along with healthy revenue growth will lead to strong annual cash flows
• Prudent capex spends and improvement in working capital management, leading to continuing strong financial risk profile
• Sustenance of sizeable liquid surpluses

 

Downward factors

• Significant weakening of operating performance, or imposition of any large late delivery payments, or integrated related challenges post-acquisition of tkII resulting in moderation of operating profitability below 6%
• Any major, debt-funded capex or acquisition, subsequently weaking the financial risk profile
• Significant reduction in liquid surpluses, due to further acquisitions, capital reduction, material dividend payouts or share buy-backs.

About the Company

Incorporated in 1949 in Kolkata, PCTL is the world’s largest manufacturer of process cooling equipment with exports to over 60 countries. The company derives most of its revenue from the power sector. In March 2016, PCTL completed the acquisition of the dry cooling business of SPX Corporation Inc, one of the world leaders in the dry cooling business, for USD 55 million. In May 2024, PCTL concluded the acquisition of 44.64% stake (resulting in increased total shareholding of ~55.64%) in tkII, a leading provider of EPC services across sugar, mining, cement, energy and the services industries. In addition, PCTL has wind power generation capacity of 63.9 megawatt.

 

tkII generated profit after tax (PAT) of Rs 156 crore in fiscal 2024 (Rs 132.5 crore in fiscal 2023), on revenue of Rs 3275.8 crore (Rs 2506.1 crore in fiscal 2023).

Key Financial Indicators (PCTL consolidated)

Particulars	Unit	2023	2022
Revenue	Rs crore	3,235	2,389.5
Profit after tax (PAT)	Rs crore	239	34
Operating margin	%	10.0	3.4
Adjusted debt/adjusted networth	Times	0.15	0.2
Interest coverage	Times	7.99	4.3

CRISIL Ratings-adjusted numbers

Any other information: Not applicable