Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Longstanding presence in the construction industry: Experience of more than four decades in the heavy electrical equipment and EPC industry has enabled the promoters to build strong relationships with reputed customers such as Gujarat Energy Transmission Corporation Ltd and Uttar Gujarat Vij Company Ltd. The promoters have also diversified into the engineering, procurement, and construction (EPC) business and built a small, though highly profitable, solar division. RPSL has a healthy outstanding orderbook to be executed in the next 2-3 years provide healthy medium-term revenue visibility. Timely execution of these orders will remain a key rating sensitivity factor.

Increasing scale of operations and healthy operating margin: Revenue is expected to improve at healthy rate in fiscal 2025 and is likely to grow over the medium term supported by healthy order book and timely execution of orders. Operating margin is expected at 11-12% over the medium term.

Comfortable financial risk profile: The financial risk profile may continue to strengthen over the medium term in the absence of any large, debt-funded capital expenditure (capex). Networth, gearing and total outside liabilities to tangible networth (TOLTNW) ratio were Rs 123.12 crore, 0.34 time and 0.97 time, respectively, as on March 31, 2024. Debt protection metrics were comfortable, as indicated by interest coverage and net cash accrual to adjusted debt ratios of 4.74 times and 0.64 time, respectively, in fiscal 2024. The interest coverage ratio is expected to improve over the medium term with a sharp rise in revenue along with improvement in profitability.

Weaknesses:

Susceptibility to risks inherent in tender-based business: As the company derives its entire revenue from tender-based orders, its ability to successfully bid for projects is critical. Furthermore, intense competition necessitates aggressive bidding, compromising on the operating margin. Given the cyclicality inherent in the construction industry, the ability to maintain profitability through operating efficiency becomes critical. RPSL is also susceptible to the risk of end-user concentration in revenue as majority of the topline accrues from Gujarat.

Large working capital requirement: Operations will likely remain working capital intensive over the medium term. Gross current assets were at more than 215 days as on March 31, 2024, driven by receivables of 146 days and inventory of 53 days. Payables of 55 days partly support the working capital cycle. Ability of the company to efficiently manage its working capital cycle will remain monitorable.