Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of S P Singla Constructions Private Limited (SPSCPL) to ‘CRISIL A+/Stable’ from ‘CRISIL A/Positive’ and reaffirmed its rating on the short-term bank facilities at 'CRISIL A1'.

 

The upgrade follows the sustained improvement in operating performance as indicated by healthy revenue growth with improving profitability. Besides, the order book remains robust, providing good revenue visibility for the next 2-3 years. The financial risk profile also continues to be adequate and has been improving. 

 

While revenue was marginally impacted in fiscal 2020 due to the sudden Covid-19 pandemic-induced lockdown in March 2020, the company was able to quickly recommence operations, and thus limit any material impact on its performance in fiscal 2021. Revenue in fiscal 2021 is expected at over Rs 2,000 crore, and will comfortably surpass that in fiscal 2020, while operating profitability is expected at 11.5-12%. With the nation-wide lockdown easing and sufficient availability of raw material and labour, the company continued its growth momentum and its performance in the first half of fiscal 2021 matched that in fiscal 2020.

 

A robust order book of around Rs 8,540 crore as on October 30, 2020 (more than four times the revenue in fiscal 2020) provides good revenue visibility for the medium term, and is expected to result in healthy double-digit growth per fiscal. The company has secured three large orders of over Rs 3,500 crore in fiscal 2021, thus far. Healthy execution and an improved scale are expected to also benefit operating profitability over the medium term. CRISIL Ratings believes the company has strong execution capabilities to undertake larger, more complex projects, on its own, or could offer sub-contracting options to large developers.

 

The financial risk profile remained adequate with the adjusted total outside liabilities to tangible networth (TOLTNW) ratio comfortable at 1.37 times as on March 31, 2020. Further, debt protection metrics were comfortable, supported by healthy cash accrual and moderate capital expenditure (capex). The financial risk profile is expected to continue to improve, with the TOLTNW ratio expected at 1-1.2 times over the medium term.

 

The ratings continues to reflect a healthy business risk profile with an established market position and extensive experience of the promoters in executing river overbridge projects, an adequate financial risk profile, and efficient working capital management. These rating strengths are partially offset by exposure to cyclicality inherent in the construction industry and limited segmental diversity.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has taken a standalone view on SPSCPL. Also, CRISIL Ratings has considered interest-bearing mobilisation advances as part of debt.

Key Rating Drivers & Detailed Description

Strengths

• Healthy business risk profile

There was a strong compound annual growth rate of 19% in revenue over the three fiscals through 2020, supported by healthy project execution. Despite the pandemic, revenue grew by 10% in fiscal 2020 while the operating margin stood at 11.6% - 120 basis points higher than the previous fiscal, while performance in the first half of fiscal 2021 matched that of the corresponding period of the previous fiscal. Operations have stabilised and are being carried out at their pre-pandemic efficiency and hence revenue for fiscal 2021 is expected to surpass that of fiscal 2020. Further, a strong order book of more than four times the revenue in fiscal 2020 provides good revenue visibility for the medium term. Healthy order execution and higher revenue are expected to result in steady improvement in operating profitability in the near term. The company is expected to win more orders of higher ticket size, which will support increase in the operating margin. The largest project till date (won in March 2019, bridge project in Guwahati) is being executed in a timely manner with 20% of the works completed as of November 2020.

 

• Extensive experience of the promoters and established track record in executing river overbridge projects

The company is led by Mr Sat Paul Singla, who is a civil engineer and has experience of about three decades in designing, engineering and construction of bridges over rivers. The top management comprises qualified and experienced members, with average experience of more than 30 years. The company has expertise in constructing various types of bridges such as girder, extra dosed, and cable stayed, and has constructed the most number of cable-stayed bridges in the country. It has adequate technical and project management capabilities to handle multiple projects at a time. This has supported the overall performance; it has completed more than 400 bridges, including flyovers and railway overbridges, in 16 states of India.

 

• Adequate and improving financial risk profile

The networth was substantial at Rs 659 crore, backed by steady net cash accrual, and debt moderate at Rs 383 crore (of which Rs 148 crore was interest-bearing mobilisation advance), as on March 31, 2020. This resulted in improvement in the TOLTNW ratio to 1.37 times as on March 31, 2020, from 1.98 times as on March 31, 2017; the ratio is expected to reduce to below 1.2 times over the medium term. Steady cash accrual and moderate debt have resulted in adequate debt protection metrics: net cash accrual to total debt and interest coverage ratios were 0.35 time (adjusted for one-time tax refund of Rs 77 crore) and 3.84 times, respectively, for fiscal 2020.

 

The company has recognised tax income in fiscals 2019 and 2020 as a result of higher tax paid in earlier fiscals. This has resulted in Rs 145 crore of tax asset as on March 31, 2020. Realisation of the tax asset is expected in the next 2-3 years and will be a monitorable.

 

The company doesn’t take developmental risks and executes engineering, procurement, construction projects, which limit its requirement of equity infusion in the projects. However, it plans to take up projects offered on the hybrid annuity model if they have significant structural work (more than 60% of the total work). The impact of any such large capital investment on debt levels and the capital structure will be a monitorable.

 

• Efficient working capital management

The company makes prudent selection of projects with strong counterparties to ensure timely payments. This has resulted in healthy cash flow and moderate gross current assets of 155 days as on March 31, 2020. As on November 30, 2020, there were no receivables outstanding for more than six months). The largest project till date (the one in Guwahati) is funded by the National Development Bank, Shanghai, where payments are being received within 30 days.

 

Weaknesses

• Limited diversity in revenue, leading to a modest scale of operations

Operations continue to be focused on bridge projects, which contribute the bulk of the revenue, unlike construction players with presence in multiple segments, such as commercial, residential, and industrial construction and infrastructure (irrigation, dams and power). Therefore, despite a presence of over three decades, the scale of operations remains modest compared with some diversified peers, though in the bridges segment, SPSCPL would be one of the leaders, especially in northern India.

 

Nevertheless, the order book remains robust, at almost four times the fiscal 2020 revenue, providing good revenue visibility. Also, increasing geographical diversity from various segments such as railways and metros (for construction of bridges and structures) mitigates the risk of segmental concentration. Further improvement in the revenue mix through better segmental diversity can enhance the market standing relative to peers.

 

• Exposure to cyclicality inherent in the construction industry

Revenue remains susceptible to economic cycles that impact the construction industry. Furthermore, the company mainly caters to government agencies, expenditure of which is directly linked to the economy. The large number of players in the construction segment results in intense competition, which puts pressure on profitability. This risk is, however, mitigated by the presence largely in construction of bridges, which requires higher technical expertise thereby limiting the number of qualified bidders.

 

However, given the cyclicality inherent in the construction industry, the ability to improve profitability while maintaining operating efficiency becomes critical. Also, the requirement of equipment is higher in case of bridge projects, relative to roads, leading to higher lease rentals, which also impacts the operating profitability.

Liquidity: Strong

Liquidity is supported by healthy cash accrual, unutilised bank lines, and moderate cash and cash equivalents. Cash accrual (adjusted for one-time tax reduction) was around Rs 133 crore in fiscal 2020 and is expected at over Rs 150 crore, sufficient to service average maturing debt obligation of Rs 40 crore, per fiscal in fiscals 2021 and 2022. Fund-based bank limit utilisation has remained moderate at around 74% during the 12 months through November 2020. The company primarily uses non-fund-based facilities for meeting working capital requirement. Timely and sufficient enhancement in the bank lines is critical to support growth. Unencumbered cash and equivalents were Rs 57 crore as on December 31, 2020.

Outlook Stable

SPSCPL should continue to benefit from its established market position, sustain the improvement in operating performance, and maintain a healthy capital structure, over the medium term.

Rating Sensitivity Factors

Upward factors

• Sustained healthy double-digit revenue growth (15-20% per fiscal) and improvement in operating profitability (more than 12.5-13%) over the medium term
• Better segmental diversity in revenue mix
• Sustenance of prudent working capital management and comfortable debt metrics

 

Downward factors

• Weak business growth, and a sustained dip in operating profitability to below 9-10%
• Higher-than-expected borrowings due to a stretch in the working capital cycle, large equity requirement in any projects secured or for capex, impacting debt metrics; for instance the TOLTNW ratio rising to 1.6-1.8 times

About the Company

SP Singla, based in Panchkula, Haryana, and incorporated in 1996, is promoted by Mr Sat Paul Singla, a civil engineer. Activities include investigative works, and designing, engineering and constructing bridges over rivers. It also constructs roads over and under bridges at railway crossings, flyovers, underpasses, and grade-separators across cities in India. It has a subsidiary, SPS Realtors Pvt Ltd, however, currently no operations are being carried out in this entity. To increase its technical expertise and execute large projects, the company has entered into joint ventures (JVs) with Som Datt Builders Pvt Ltd, Gammon India Ltd and Arvind Techno Engineers Pvt Ltd and two JVs with PNC Infratech Ltd.

Key Financial Indicators

Particulars	Unit	2020	2019
Revenue	Rs.Crore	1786	1634
Profit After Tax (PAT)	Rs.Crore	183	134
PAT Margin	%	10.2	8.2
Adjusted debt/adjusted networth^	Times	0.58	0.72
Interest coverage	Times	3.84	3.48

^Includes interest bearing mobilization advances

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
NA	Cash Credit	NA	NA	NA	250.0	NA	CRISIL A+/Stable
NA	Letter of Credit & Bank Guarantee	NA	NA	NA	1915.0	NA	CRISIL A1
NA	Proposed Non Fund Based Limits	NA	NA	NA	580.0	NA	CRISIL A1
NA	Proposed Fund Based Bank Limits	NA	NA	NA	55.0	NA	CRISIL A+/Stable