Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities and fixed deposit programme of Roadway Solutions India Infra Limited (RSIIL) to ‘CRISIL A-/FA/Stable/CRISIL A2+’ from ‘CRISIL BBB+/FA-/Stable/CRISIL A2’.

 

The upgrade reflects expectation of sustained improvement in the balance sheet and operating performance of RSIIL, over the medium term. In fiscal 2022, RSIIL reported revenue growth of 19% year-on-year with stable operating margin of 17%. The company had a stronger balance sheet, as reflected in reduction in receivables leading to significantly lower creditors and improvement in total outside liabilities to adjusted networth (TOLANW) ratio to 2.58 times as on March 31, 2022, from 7.04 times as on March 31, 2021. Sustenance of healthy operating margin and reduced TOLANW ratio will further strengthen the financial risk profile. These metrics will remain key rating sensitivity factors for the company, going forward.

 

Revenue growth in fiscal 2022 and the last three years has been driven by large engineering, procurement and construction (EPC) order on the Mumbai-Nagpur Expressway. At present, RSIIL has a strong order book of about Rs 6,500 crore as on March 31, 2022, providing healthy revenue visibility. Revenue is expected to grow over 25% in fiscal 2023. However, the proportion of hybrid annuity model (HAM) projects in the nascent stage (less than 20% completion) is over 90% in the overall order book, which poses implementation risk. These projects relate to the Vadodara Mumbai Expressway (VME) and recently undertaken HAM projects for the Ministry of Road Transport and Highways (MoRTH). Two out of the five projects are yet to receive appointed date. Timely progress on HAM projects will be critical for revenue growth over the medium term.

 

During fiscal 2022, inflow of orders remained concentrated towards HAM projects, thus skewing the mix of EPC and HAM projects in the overall order book as previously awarded EPC projects neared completion. Going ahead, RSIIL is planning to optimize its order book between both types of projects to ensure steady growth and healthy cash flow. CRISIL Ratings believes timely execution of HAM projects and fresh addition of new EPC projects will remain a key sensitivity factor. Besides registering strong revenue growth, RSIIL has sustained healthy operating margin of 17% in the last two years, which has improved from around 11% in fiscal 2020 and is expected to remain at over 15% over the medium term. This is mainly due to contiguous stretch of HAM projects in the order book, leading to savings in machinery, manpower and project monitoring costs, combined with economies of scale and low proportion of sub-contracting followed by the management.

 

In fiscal 2022, debtors have reduced significantly as the company realised about Rs 500 crore in the last quarter of the fiscal from few large projects that neared completion. This subsequently led to reduction in creditors, resulting in improvement in the total outside liabilities to tangible networth (TOLTNW) ratio to 2.5 times. Accrual is expected to be steady, leading to lower TOLTNW ratio that is less than 2.25 times supporting the financial risk profile. Also, adjusted gearing will remain less than 1 time while interest coverage ratio is expected to remain above 6.5 times over the medium term. The company will generate sufficient accrual of around Rs 250 crore to meet term debt obligation of Rs 30-50 crore annually.

 

Furthermore, for the HAM projects, the company needs to invest Rs 400 crore per annum in fiscals 2023 and 2024 as equity commitment. This will be funded by cash generation and cash surplus available with the company. As on March 31, 2022, cash and cash equivalent were Rs 581 crore, out of which Rs 397 crore was unencumbered. The company is likely to provide corporate guarantee for the debt taken on the VME and MoRTH HAM projects. This has been factored in the analysis of the financial risk profile of RSIIL.

 

The ratings also factor in the improving market position of the company in the road construction sector, specifically in Maharashtra and Gujarat, backed by healthy order book, above-average revenue growth and improving operating efficiency. The financial risk profile is also improving with reduction in TOLTNW ratio and maintenance of healthy liquidity. These strengths are partially offset by limited track record in handling large HAM projects, low diversity in revenue and exposure to intense competition.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has considered the standalone financials of RSIIL and has moderately consolidated its special purpose vehicles (SPVs) to the extent of support required over the medium term. The debt in these SPVs is non-recourse to the parent and in line with the CRISIL Ratings moderate consolidation approach. The investment requirement expected cost overrun in under-implementation projects, as well as cash flow mismatches in operational projects have been factored into the financials of RSIIL.

 

Also, goodwill of Rs 521 crore in fiscal 2018 arising on the scheme of demerger has been knocked off from networth in the same year. Goodwill was created in 2018 on account of the demerger of RSIIL with Roadway Solutions India Pvt Ltd.

 

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:

• Improving market position in Maharashtra and Gujarat, and healthy order book

Revenue registered 22% compound annual growth rate over the three fiscals through 2022, supported by large orders from the road segment, which is RSIIL’s core competency. Major part of the operations are in the western regions, mainly Maharashtra and Gujarat. The company has undertaken both EPC and HAM projects for Maharashtra State Road Development Corporation (MSRDC), Public Works Department (PWD) and National Highways Authority of India (NHAI).

 

In fiscals 2021-22, it executed a part of a high-value order for Mumbai-Nagpur expressway and also booked revenue from the VME Package 10 HAM project that translated into strong revenue growth. Longstanding presence, enhanced size of operations, strong execution capability, and relaxation of eligibility norms by NHAI to encourage larger participation by developers have enabled RSIIL to bid and secure larger HAM orders.

 

The order book was Rs 6,500 crore as on March 21, 2022. The order book to sales ratio of 4.4 times provides strong medium-term revenue visibility. While orders comprise both EPC and HAM projects, the latter dominate due to receipt of three large HAM projects in fiscal 2021 in the Vadodara-Mumbai stretch, amounting to nearly Rs 4,300 crore and recent orders of Rs 2,000 crore for MoRTH. As on date, the company has five HAM projects in Maharashtra which are expected to be completed by fiscal 2023.

 

• Improvement in operating efficiency driven by above-average revenue growth and healthy operating margin

Operating margin has remained at 11-14% over fiscals 2018-20. However, it improved by nearly 600 basis points in fiscal 2021 and sustained in fiscal 2022, driven by execution of large orders and HAM projects. Over the years, the company has invested and built its own equipment bank and experienced team. Furthermore, as part of its backward integration operations, RSIIL’s two group companies (Roadway Solutions Precast Concrete Pvt Ltd and Roadway Solutions Technologies Pvt Ltd) undertake precast, quarrying, and research and development operations. This supports integration of operations, right from manufacturing of materials to road construction to operations and maintenance. Also, 65% of the current order book comprises three new HAM projects of back-to-back stretches on the Vadodara-Mumbai expressway. The other two HAM projects are also contiguous and will lead to savings on machinery, manpower and project monitoring costs, combined with economies of scale and low proportion of sub-contracting followed by the management of RSIIL. As a result, operating profitability is likely to be 14-16% over the medium term.

 

Furthermore, with improvement in scale of operations, return on capital employed is likely to be healthy at above 20%, over the medium term, while asset turnover is likely to be 2 times.

 

• Improving financial risk profile on account of reduction in TOLTNW ratio and healthy liquid surplus

The financial risk profile is supported by moderate capital structure with networth of Rs 359 crore (adjusted for goodwill arising out of demerger amounting to Rs 521 crore) as on March 31, 2022; debt was Rs 386 crore. Capex and equity requirement of Rs 500 crore per annum will be funded through a mix of debt and internal accrual. Although debt is expected to increase over the medium term to support execution of large projects received recently, gearing is expected to remain at less than 1 time, over the medium term, due to steady accretion to reserves.

 

With improvement in working capital management, debtors have reduced significantly leading to reduction in creditors in fiscal 2022 over fiscal 2021. Thus, the TOLTNW ratio has improved to 2.58 times from over 7.04 times previously. Over the years, this is expected to reduce further due to steady cash accrual and is expected to be lower than 2 times. This will result in improvement in the financial risk profile. Sustenance of improvement in TOLANW and current ratios will remain key rating monitorables. 

 

Unencumbered cash and equivalent stood at Rs 397 crore (out of total cash and equivalent of Rs 581 crore) as on March 31, 2022. The unencumbered liquidity surplus is expected to sustain at Rs 200-300 crore despite large investments for funding the capex and equity requirements of the HAM projects, for which the company will also partly contract debt. Besides, utilisation of the fund-based limit remained at 77% on average for the six months through March 2022.

 

Additionally, liquidity will be supported by repayment of intercorporate deposits (ICDs) given to existing SPVs and dividends or upstreaming of surplus cash flow from completed HAM projects. As on March 31, 2022, the ICDs given to SPVs amounted to Rs 185 crore (excluding accrued interest) for five HAM projects, while their consolidated external debt was Rs 49 crore. These projects are expected to be completed in the near term and, over their concession period of the next 10 years, are expected to generate aggregate annuity receiptof Rs 1,000 crore. As debt in these SPVs is low, surplus cash flow of Rs 30-35 crore per annum will be used to retire ICDs given by RSIIL, while Rs 40-45 crore will be up-streamed annually to the company. This will help RSIIL meet part of its equity commitment of Rs 400-450 crore towards five HAM projects (VME and MoRTH projects). The remaining funding will come from external debt (45%) and grant from NHAI (40%). No major equity requirement would be there for new HAM projects of MoRTH.

 

Any large investment in a new HAM project or sizeable dividend payout to the promoters will remain a key monitorable.

 

Weaknesses:

• Limited track record in executing large orders, moderate implementation risk and limited diversity in revenue profile

Previously, the company undertook small orders, but recently it has been awarded large-size HAM projects. Although its project on the Mumbai-Nagpur Expressway is close to completion, RSIIL’s track record of tying up funding and executing large projects is limited. Moreover, over 90% of the order book consists of nascent stage large HAM projects which exposes the company to implementation risk. Despite high concentration of HAM projects, there is sufficient revenue visibility to fund the equity requirement of under-construction projects. Also, the company is supported by the inherent benefits of HAM, such as 80% of land to be available before the appointed date is given, change in scope of projects for delay of more than 180 days for the balance 20% and termination clause.

 

The HAM projects have achieved less than 20% progress. The VME package 8 and 9 have not received the appointed date. VME package 10 and projects on Aravali-Waked stretch have seen some progress. These three projects are expected to complete the first milestone in the first half of fiscal 2023. Timely execution of these projects remain critical rating factors.

 

Furthermore, operations continue to be focused on road projects, unlike other established EPC players with presence in multiple segments The company’s operating performance may remain susceptible to concentration risk arising from its focus on road projects and to risk of delayed payment. Since all orders are in Maharashtra and Gujarat, the company is exposed to geographical concentration risk.

 

• Exposure to intense competition inherent in the construction industry

The company remains exposed to inherent cyclicality in the construction industry and volatility in profits amid high fragmentation in the EPC segment. Though industry prospects seem bright over the medium term with increased central government focus on the infrastructure sector (especially roads and highways), most of the projects are tender-based which limits material improvement in operating profitability as players face intense competition and bid aggressively for contracts.

Liquidity: Adequate

Liquidity is supported by healthy cash accrual, unutilised bank lines, and healthy cash and cash equivalent though offset by large payables. Net cash accrual is expected to be Rs 250 crore per annum and should be sufficient to meet annual debt obligation of Rs 30-50 crore, over the medium term. Furthermore, the company expects to receive Rs 40-50 crore in fiscal 2023 from completed HAM projects and Rs 100 crore per annum thereon. This will support liquidity. Utilisation of the fund-based bank limit was modest at 77% on average for the six months through March 2022, while non-fund-based facilities were utilised at 75% on average. Cash balance was healthy at around Rs 581 crore as on March 31, 2022, of which Rs 397 crore remain unencumbered. Even though cash surpluses will reduce to partly fund equity commitments in SPVs, they will remain healthy.

Outlook: Stable

The company will continue to benefit over the medium term from its improving position in the road EPC sector in Maharashtra and Gujarat, large order book and proven operating efficiencies. The financial risk profile is expected to improve gradually, supported by steady cash generation and reduction in payables.

Rating Sensitivity factors

Upward factors

• Substantial increase in scale of operations, driven by improvement in geographical and segment diversity while maintaining operating margin, leading to cash accrual of over Rs 300 crore with revenue growth supported by progress on underlying HAM projects, timely completion of milestones for HAM order book and release of funds
• Improvement of the TOLTNW ratio to below 1.5 times through sustained reduction in payables, leading to efficient working capital management and cash flow and surplus liquidity

 

Downward factors

• Any delay in projects leading to stagnation in revenue while operating margin declines to below 10%
• Significant stretch in the working capital cycle limiting improvement in payables and leading to TOLTNW ratio of over 3.5 times
• Large capex or investments in existing or new HAM projects necessitating sizeable equity investment, further weakening the financial risk profile
• Sizeable reduction in cash surpluses to below Rs 200 crore

About the Company

RSIIL was demerged from Roadway Solutions India Pvt Ltd (formed in 2005) on November 5, 2018. Founded by Mr Ameet Gadhoke and his brother, Mr Navjeet Gadhoke, RSIIL is an established road EPC player present mainly in Maharashtra. The promoters hold the entire stake in the company.

At present, the company is undertaking 12 projects in the roads and highways sector. It bagged three HAM projects worth Rs 4,300 crore on the VME and has a total order book of Rs 6,500 crore as on March 31, 2022.

Key Financial Indicators

As on/for the period ended March 31		2022*	2021
Revenue	Rs crore	1507	1266
Profit after tax (PAT)	Rs crore	151	103
PAT margins	%	10.0	8.1
Adjusted debt/adjusted networth	Times	1.08	1.63
Interest coverage	Times	9.25	4.39

*Provisional

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 Levels	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	60	NA	CRISIL A-/Stable
NA	Overdraft Facility	NA	NA	NA	164.47	NA	CRISIL A-/Stable
NA	Working Capital Term Loan	NA	NA	Jun-24	37.7	NA	CRISIL A-/Stable
NA	Term Loan	NA	NA	Jun-26	237.56	NA	CRISIL A-/Stable
NA	Bank guarantee	NA	NA	NA	453.63	NA	CRISIL A2+
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	245.73	NA	CRISIL A-/Stable
NA	Proposed Non Fund based limits	NA	NA	NA	692.58	NA	CRISIL A2+
NA	Proposed Term Loan	NA	NA	NA	108.33	NA	CRISIL A-/Stable
NA	Fixed Deposits@	NA	NA	NA	NA	Simple	FA/Stable

@yet to be allocated

Annexure – List of entities consolidated

Entity consolidated	Extent of consolidation	Rationale for consolidation
Roadway Solution Mahabaleshwar Roads Project Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Roadway Solutions Lonavala Highway Project Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Roadway Solutions Narayanpur Roads Project Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Roadway Solutions Pandharpur Roads Project Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Roadway Solution Hinjawadi Highway Project Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Vadodara Mumbai Expressway 8 Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Vadodara Mumbai Expressway Package 9 Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Vadodara Mumbai Expressway Pkg 10 Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Arawali-Kante Multi Projects Pvt Ltd	Moderate	Corporate guarantee to be extended by RSIIL
Kante-Waked Multi Projects Pvt Ltd	Moderate	Corporate guarantee to be extended by RSIIL