Rating Rationale
August 18, 2020 | Mumbai
Shoft Shipyard Private Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.275 Crore
Long Term Rating CRISIL BBB/Positive (Reaffirmed)
Short Term Rating CRISIL A3+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Shoft Shipyard Pvt Ltd (SSPL) at 'CRISIL BBB/Positive/CRISIL A3+'.
 
The reaffirmation in the ratings reflects strong business & financial risk profile of the company. SSPL currently has confirmed, outstanding orders over Rs 400 crore, to be executed in next few fiscals. The current order book continues to remain above 4 times the revenue recorded in fiscal 2020, and supports revenue visibility. In addition, SSPL may receive more orders from its customers over the medium term. Time taken to execute the current orders and ability to maintain ramped-up scale will be closely monitored. The rating also factors in an impact of COVID-19 on the operations of the company. While the operations at the Bharuch plant were shut completely during the lockdown, the company has scaled-up its operations from May 2020 onwards. Ability of the company to execute and deliver orders on time will be key monitorable
 
The ratings continue to reflect SSPL's healthy business risk profile marked by healthy profitability, above-average financial risk profile, and the promoters' extensive experience and proven technical capabilities in the ship-building industry. These rating strengths are partially offset by range-bound and average scale of operation and susceptibility to order-backed nature of business and timely execution of orders.

Key Rating Drivers & Detailed Description
Strengths: 
* Promoter's extensive experience and technical capabilities
The promoter, Mr Sahay Raj, is a qualified naval architect from the Indian Institute of Technology (IIT), Kharagpur, and has been in the shipbuilding industry for over 3 decades. SSPL has built and delivered more than 50 ships so far and won several national security and commercial orders. SSPL was one of the few private sector ship building companies in India to be awarded warship manufacturing license from Government of India.
 
The company has delivered and completed several ships for the Indian Navy, DRDO (R&D wing of Navy), Indian Coast Guard and PSUs like Dredging Corporation of India, Gujarat Maritime Board, Union territory of Lakshadweep Administration and Inland Waterways Authority of India. SSPL regularly undertakes subcontract assignments for submarine and warship building from larger shipbuilding undertakings such as Mazagon Dock Shipbuilders Ltd. (MDL) and Goa Shipyard Ltd. The large shipyard at Bharuch (Gujarat) and technical expertise support SSPL's market position as a leading private ship builder in India.
 
The company has orders from MDL, Assam Inland Water transport Development Society, Indian Coast guard in the current financial year.
 
* Above-average financial risk profile
Capital structure continues to remain comfortable, marked by low gearing and total outside liabilities to tangible networth ratio of 0.20 and 0.44 time, respectively, as on March 31, 2020. Capital structure should remain comfortable going forward as well because of anticipated moderate capex. SSPL does not require any large capital expenditure, its major bank limit requirement of Bank Guarantee (BG) to avail advance stage payments. This allows SSPL to fund a part of its working capital requirements through advances against BGs limiting its reliance on fund based limits. The company's debt protection metrics are healthy with an interest coverage ratio of 20 times, and net cash accruals to adjusted debt (NCAAD) ratio of 1.27 times, in fiscal 2020. SSPL may require additional bank guarantee for bidding new orders and simultaneously executing current orders. The financial closure of the enhanced BG lines will remain critical for order execution and working capital management.
 
Weaknesses:
* Average scale of operations
SSPL's operating income remained average at Rs 82 crore in fiscal 2020 (stood at Rs 81 crore in fiscal 2019). Revenue was range-bound at Rs 50-85 crore in the last 7 years. This is despite the large outstanding orders, timely execution of orders.
 
* Susceptibility to order-backed nature of business and timely execution of orders
SSPL operates in a tender-based industry which has prequalification criteria with respect to track record and physical infrastructure. Business certainty depends on timely order execution. Furthermore, the execution of orders is dependent on various external factors clearances/changes from customers. Further as company is mainly into defense work, the quality and scrutiny of the same is of heightened degree which sometimes slackens the pace of order execution. SSPL currently derives significant portion of its revenue from the Indian defense sector, primarily orders received from Mazagon Dock Shipbuilders Ltd (MDL) and Indian Navy. Any major changes/delays in orders from MDL, which contributes majorly to order book may impact the topline and earnings of the company.
Liquidity Adequate

Liquidity is adequate with healthy cash accruals and unencumbered cash and cash equivalents. Cash accruals have shown an improving trend. It improved to Rs 13 crore in fiscal 2019 from Rs 8 crore in fiscal 2018. It further improved to Rs 20.6 crore in fiscal 2020. Cash accruals are expected to remain between Rs 13-14 crore over the medium term against modest repayment obligation below Rs 1 crore. Overdraft limit of Rs 5 crore was utilized sparingly. Unencumbered cash and cash equivalent stood at Rs 5.9 crore and current ratio comfortable at 2.53 times as on March 31, 2020. Bank facility is expected to be enhanced from Rs 76 crore to Rs 120 crore to support working capital and bidding for more defense contracts.

Outlook: Positive

CRISIL believes SSPL will continue to benefit from the extensive experience of its promoters, strength in the business and strong financial risk profile.

Rating Sensitivity factors
Upward Factor
* Improvement in topline by 15% at healthy operating margin
* Significant improvement in the order book
* Sustenance of working capital management and financial risk profile
 
Downward Factor
* Significant decline in revenue or profitability
* Large debt funded unanticipated capex thereby constraining financial flexibility
* Decline in order book adequacy (order book to revenue) below 2 times
About the Company

Set up by Mr Sahay Raj as a sole proprietorship in 1987, SSPL was reconstituted as a private limited company in 2001. SSPL constructs special-purpose ships at its shipyard in Bharuch. SSPL has a warship building licence from the Government of India.

Key Financial Indicators
Particulars Unit 2020* 2019
Revenue Rs. Cr. 82 81
Profit After Tax Rs. Cr. 20.58 10.26
PAT Margins % 25.1% 12.7%
Adjusted Debt/Adjusted Net worth Times 0.20 0.05
Interest coverage Times 20.2 8.65
*provisional

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Bank Guarantee NA NA NA 83.85 NA CRISIL A3+
NA Letter of Credit NA NA NA 1 NA CRISIL A3+
NA Long Term Loan NA NA Mar-2022 1.56 NA CRISIL BBB/Positive
NA Overdraft NA NA NA 21.35 NA CRISIL A3+
NA Overdraft NA NA NA 5 NA CRISIL BBB/Positive
NA Proposed Non Fund based limits NA NA NA 162.24 NA CRISIL A3+
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  27.91  CRISIL BBB/Positive/ CRISIL A3+      02-05-19  CRISIL BBB/Positive  30-04-18  CRISIL BBB/Stable  19-01-17  CRISIL BBB/Stable  CRISIL BBB/Stable 
            30-04-19  CRISIL BBB/Positive           
Non Fund-based Bank Facilities  LT/ST  247.09  CRISIL A3+      02-05-19  CRISIL A3+  30-04-18  CRISIL A3+  19-01-17  CRISIL A3+  CRISIL A3+ 
            30-04-19  CRISIL A3+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 83.85 CRISIL A3+ Bank Guarantee 85 CRISIL A3+
Letter of Credit 1 CRISIL A3+ Letter of Credit 1 CRISIL A3+
Long Term Loan 1.56 CRISIL BBB/Positive Long Term Loan 1.98 CRISIL BBB/Positive
Overdraft 21.35 CRISIL A3+ Overdraft 10 CRISIL BBB/Positive
Overdraft 5 CRISIL BBB/Positive Proposed Non Fund based limits 164 CRISIL A3+
Proposed Non Fund based limits 162.24 CRISIL A3+ Proposed Working Capital Facility 13.02 CRISIL BBB/Positive
Total 275 -- Total 275 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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