Detailed Rationale

CRISIL Ratings has reaffirmed its  ‘CRISIL A/Positive/CRISIL A1’ ratings on the bank loan facilities of R.V.R. Projects Pvt Ltd (RVR).

 

On January 29, 2024, CRISIL Ratings has revised its outlook on the long term bank facilities of RVR to ‘Positive’ from ‘Stable’ while reaffirming the rating at 'CRISIL A'. The short-term rating has been reaffirmed at ‘CRISIL A1’.

 

The rating continues to factor healthy operating performance and expected sustenance of the same over the medium term. Operating income grew by 43% to reach Rs. 1823 crores during fiscal 2023 due to higher execution of orders and is expected to increase further over Rs 2,000 crore due to healthy executable orderbook position of Rs 9,607 crore as of April 2023 (excludes stuck orders). Although, the Earnings before interest taxes depreciation and amortization (EBITDA) margin moderated to ~17% in fiscal 2023 from 19.2% previous fiscal due to rise in input costs, the same have shown recovery in first half of fiscal 2024 with easing of material costs and expected to remain ~18% over the medium term.

 

Receivables position improved significantly to 27 days from 97 days during fiscal 2023 with realization of one of the old dues and this has improved the liquidity position as well. The unencumbered cash and equivalents stood comfortable at Rs. 167 crores as on March 31, 2023 (Rs. 267 crores as on March 31, 2022) while the fund based utilization remained nil during most of the period of last 12 months through December 2023. The working capital position is expected to sustain over the medium term. Financial risk profile also remained strong with low external debt as on March 31, 2023 and is expected to sustain with no major capital expenditure (capex)/investment plans.

 

The ratings continue to reflect the company’s established track record in executing engineering-procurement, construction (EPC) contracts, healthy order pipeline providing revenue visibility for the medium term, and strong financial risk profile. These strengths are partially offset by segmental and customer concentration in revenue, susceptibility to volatility in working capital cycle, and exposure to intense competition and cyclicality in the construction industry.

Analytical Approach

For arriving at the ratings, unsecured loans from promoters of Rs 103.01 crore as on March 31, 2023 (Rs 42.62 crore as on March 31, 2022) have been treated as debt. These loans are interest-free and repayable on demand. There is a track record of withdrawal of these loans from the business in the past. The existing funds may also be withdrawn in case of higher than expected surplus generation. Interest bearing mobilisation advances have also been treated as debt (Rs 35 crore as on March 31, 2023 against Rs 86.74 crore in previous fiscal).

Key Rating Drivers & Detailed Description

Strengths:

• Established track record in executing EPC contracts: RVR benefits from its established track record of more than two decades in the EPC business across various segments, including defence, building construction, ports, irrigation, and roads. Over the years, the company has developed strong relationships with several state government departments, Defense Research and Development Organisation (DRDO), and other public sector undertakings by virtue of implementing projects under stringent timelines and security arrangements, while maintaining high quality standards. The company is rated as a Class 1 contractor and is one of the few players on DRDO's panel of contractors that implements works across civil, electrical, and mechanical segments.

 

Over the last decade, the company has also diversified into ports, irrigation, water supply and roads segments. The company is now majorly focusing on water supply and irrigation projects which comprise around 80% of the order book.

 

• Healthy order pipeline providing revenue visibility over the medium term: Of the order pipeline of around Rs 11,806 crore as of April 2023, executable orders account for Rs 9,607 crore. Executable order book to revenue (fiscal 2023) ratio is high at 5.3 times, with most orders to be executed over a period of 36 to 42 months, thereby providing healthy revenue visibility over the medium term. Sustenance of the order book to revenue ratio will remain a key monitorable.

 

• Strong financial risk profile: RVR has low dependence on external borrowing, leading to moderate debt of Rs 208 crore as on March 31, 2023 which comprises of unsecured loans from promoters of Rs. 103 crore, interest-bearing mobilisation advances of Rs. 35 crore and working capital utilization of Rs. 70 cr. With healthy net worth of Rs 1294 crore as on March 31, 2023, gearing and total outside liabilities to tangible net worth ratios were strong at 0.16 times and 0.31 times, respectively. Low debt and healthy profitability has also resulted in strong debt protection metrics with adjusted interest coverage and net cash accrual to adjusted debt ratios of 17.30 and 1.16 for fiscal 2023. Sustenance of the strong operating performance with lower reliance on debt is likely to keep the debt protection metrics and capital structure strong over the medium term. Adjusted interest coverage ratio is likely to remain over 15 times and gearing ratio is expected to remain below 0.15 times in the medium term.

 

Weaknesses:

• Segmental and customer concentration in revenue: The company has strengths in terms of executing projects in different segments such as transportation, irrigation, water supply, tunnels, industrial buildings, marine structures and pipings, electrical and conveyor systems. However, orders from the irrigation and water supply segment comprised around 80% of total executable orders as of April 2023 and the remaining correspond to roads, defence, and building construction segments. Moreover, the company has a single irrigation project in Madhya Pradesh of Rs. 5162 crore which comprises around ~54% of total executable order book as on April 2023. Orders from the defence segment, which constituted majority of the orders till fiscal 2015, have slowed down in the past few fiscals, resulting in order book concentration towards irrigation. While orders from defense segment are expected to remain moderate in the future, the company is focusing on diversification of the order book with entry into segments like water supply and roads. Diversification of the order book will remain a key monitorable.

 

• Susceptibility to volatility in working capital cycle: Receivables position improved significantly to 27 days from 97 days during fiscal 2023 with realization of one of the old dues and this has improved the liquidity position as well. The unencumbered cash and equivalents stood comfortable at Rs. 167 crores as on March 31, 2023 (Rs. 267 crores as on March 31, 2022) while the fund based utilization remained nil during most of the period of last 12 months through Dec 2023. The working capital position is expected to sustain over the medium term.

 

• Exposure to intense competition and cyclicality in the construction industry: The construction industry is fragmented, leading to intense competition at the bidding stage. Operating margin is restricted on account of thin margins while bidding for projects. Moreover, growth of players is susceptible to changes in government regulations and economic conditions.  Intense competition and cyclicality will continue to affect RVR’s growth and profitability.

Liquidity: Strong

Unencumbered cash and equivalents stood at Rs. 167 crores as on March 31, 2023. Fund based bank limit utilization (limit as on Dec 2023 was Rs. 162 crore) was completely unutilized as on December 2023 and the long term debt is nil. Unencumbered cash and equivalents, unutilized fund based bank lines and annual cash accrual over Rs 250 crore should be adequate for meeting any incremental working capital requirements over the medium term. Non-fund based limit was utilized 58% in the 12 months through December 2023.

Outlook: Positive

CRISIL Ratings believes RVR’s business risk profile may improve with established market position, execution capabilities as well as strong order pipeline while the financial risk profile should remain strong backed by low dependence on external borrowing, adequate working capital cycle and healthy liquidity level.

Rating Sensitivity factors

Upward factors:

• Improvement in operating performance leading to increase in net cash accruals to over Rs 250-300 crore while maintaining the strong orderbook position for revenue visibility
• Sustenance of strong financial risk profile especially liquidity position
• Sustenance of healthy working capital cycle

 

Downward factors:

• Weakening of the operating performance leading to the net cash accruals going below Rs. 180-200 crore and/ or deterioration of the order book position lowering the revenue visibility.
• Delay in the payments from the counterparties weakening the working capital cycle and the liquidity position.
• Large debt-funded capex/ investments weakening the financial risk profile

About the Company

Incorporated in 1999 and promoted by Mr Rayala Venkateswara Rao, RVR executes projects as an EPC contractor in the industrial, institutional, technical, piling, marine, dredging, and residential segments. Over the past decade, it has diversified into EPC works in the ports, irrigation, water supply, and roads segments.

Key Financial Indicators*

Financials as on/for the period ended March 31	Unit	2023	2022
Operating Income	Rs.Crore	1,823	1,272
Profit after tax (PAT)	Rs.Crore	226	140
PAT margin	%	12.41	11.0
Adjusted debt/adjusted networth	Times	0.16	0.12
Adjusted Interest coverage	Times	17.30	13.29

 *CRISIL Ratings adjusted numbers

Any other information: Not Applicable