Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of South West Pinnacle Exploration Ltd (SWPEL) at ‘CRISIL BBB/Stable/CRISIL A3+’.

 

The reaffirmation in ratings reflect the expectation of continued sound operating performance over the medium term led by healthy order book, acquisition of new clients and entry into new business domains. The operating income increased around 5% year-on-year to over Rs 124 crore in fiscal 2023, while the operating margin declined to 16.7% (Rs 118 crore and 23.5%, respectively, in fiscal 2022) on account of 21.6% of the revenue earned from very low margin coal trading business. Adjusted for the same, operating margins remained healthy at above 20% in fiscal 23. Order book of around Rs 222 crore as on March 31, 2023, provides adequate revenue visibility over the next 1-2 years. Furthermore, SWPEL has bid for orders of Rs 250 crore.

 

That said, operations remain working capital intensive given the nature of business yet there has been some improvement in receivables levels during the year. Receivables and inventory are estimated at 161 days and 147 days, respectively, as on March 31, 2023, compared with 203 days and 139 days respectively, a year earlier. Timely realization of receivables and moderation in inventory leading to reduction in the working capital cycle will be key monitorables.

 

SWPEL was awarded a partially explored coal block in Jharkhand for commercial coal mining. The mine development activities have started, and the company plans to start coal production by end of FY 2026. The company is likely to undertake capital expenditure (capex) of around Rs 200 crore till the commencement of coal production, that is, till FY 2026, mainly towards payment to government agencies, equipment, land acquisition and other infrastructure development. Funding for the capex has not yet been finalized and the company is considering various options including debt, follow-on public offer (FPO), qualified institutional placement (QIP), internal accrual, receipts against offtake agreements and/or any other mode of funding as per the market scenario at the time of fund raising.

 

The process of obtaining approvals  from various authorities at district and state levels including that of PL cum ML is  going on and  SWEPL expects that Geological Report would be submitted in next 9-12 months to be followed by finalization  of the mining plan. The capex requirement for fiscal 2024 is estimated at Rs 20-25 crore. Prudent funding of the capex and its impact on the capital structure will be key monitorables.

 

The company has 2 operational rigs in Oman for undertaking regular exploration and drilling operations. Additionally, the company had formed a JV named as Alara Resources LLC with Alara Oman Operations PTY, a 100% subsidiary of Alara, Australia, Southwest Pinnacle Exploration Ltd and AL Tasnim of Oman.  The JV was awarded an 11-year copper mining contract valued at $125 million. The project has been outsourced to Al Tasnim (30% partner in JV) at a reasonable margin. CRISIL ratings understands that there is no equity commitment other than existing investment of Rs 1.12 crores and any debt servicing liability at SWEPL level for the JV operations. Any major cash outflow impacting SWEPL’s financial risk profile would remain monitorable.

 

The ratings continue to reflect the company’s strong technical expertise in drilling and exploration and its diversified customer base. These strengths are partially offset by the large working capital requirement and the risks inherent in the tender-based business.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SWPEL.

Key Rating Drivers & Detailed Description

Strengths:

Strong technical expertise in drilling and exploration, and diversified customer profile

The company has experience of over 17 years in drilling and exploration of coal, minerals, coal-bed methane, oil and gas, and aquifer mapping. It expanded into the seismic services domain in fiscal 2020, winning a contract worth Rs 73 crore from Oil India ltd. Reinforcing its position in the domain, the company became the first of its kind by bagging integrated orders from Central Mine Planning & Design Institute Ltd (CMPDI) for drilling as well as 2D seismic data acquisition and processing.

 

It has 41 operational rigs with capacity to drill between 300 and 2,500 metres. The client base is diversified across segments and geographies and included both public and private sector players, such as Oil India Ltd, CMPDI, Central Ground Water Board, Directorate of Geology Dept. of Mines, SAIL, NMDC Ltd., Odisha Lift Irrigation Corporation Ltd (OLIC), Odisha Mineral Corporation, Mineral Exploration Corporation Ltd (MECL), Geological Survey of India, Hindustan Zinc Ltd, JSW Steal Ltd., Arcelor Mittal India P. Ltd., Vedanta Ltd., Reliance Ltd., and Hindalco Industries Ltd. This minimizes risk of exposure to any one particular industry or client. Furthermore, the company has the ability to operate in multiple segments using the same resources and without requiring major additional capex.

 

In fiscal 2023, SWPEL received orders from new clients such as Vedanta Limited, Arcelor Mittal, JSW Steel and repeat order from Reliance Industries for CBM production valuing over Rs 84 Crores with a potential to go upto Rs 270 Crores in future. Presently, company is running 12 operations on Pan India basis.              

 

Healthy financial risk profile

Gearing is estimated to be healthy at 0.57 times as on March 31, 2023, while debt protection metrics were strong, with interest coverage and net cash accrual to total debt ratios estimated at 4.02 times and 0.24 time, respectively, in fiscal 2023.

 

The funding pattern for the coal mining project has not been finalized. Prudent funding of the required capex and its impact on the capital structure will be key monitorables.

 

Weaknesses:

Working capital-intensive operations

Operations remain working capital intensive due to sizeable receivables and inventory. Receivables remained over 150 days in the past two years on account of a large chunk of retention money and unbilled revenue, though around 50% is due for payment in less than 30 days.

 

Inventories remained over 130 days in the past two years. The bulk of the ancillary equipment that is part of rigs has to be kept as inventory at all times on site, on account of the nature of operations, including attachments, which enhances the total inventory value. Also, the company has operations across India, mostly in remote areas, and has to maintain adequate inventory at all sites to ensure smooth operations.

 

CRISIL Ratings will continue to monitor the working capital cycle of SWPEL and any stretch in receivables will remain a key monitorable.

 

Risks inherent in tender-based business

The company has to bid for tenders floated by public sector entities while contracts from private sector entities are mostly by invitation. Delay in awarding contracts, insufficient number of bidders, or lack of private sector contracts can adversely affect order inflow and revenue growth.

 

However, to mitigate some of these risks, SWPEL has entered new domains such as seismic services, aquifer mapping and underground drilling which has helped improve the order pipeline. SWPEL has also bagged many new orders from Private sector clients recently like Vedanta Limited, JSW steels, Arcelor Mittal India and Reliance Industries etc. Timely execution of order book of Rs 222 crore as on March 31, 2023, as well as build-up of further orders will remain key monitorables.

Liquidity: Adequate

The company had cash and cash equivalent of Rs 10 crore as on March 31, 2023. Bank limit of Rs 42.2 crore was utilized 81% on average for the 12 months through March 2023. Long-term debt is estimated at Rs 22 crore as on March 31, 2023, of which Rs 8 crore is payable in FY2024. The cash accrual at Rs 15 crore in FY 2023, should be sufficient to cover debt obligation and incremental working capital requirement over the medium term.

Outlook: Stable

CRISIL Ratings believes SWPEL will sustain its credit risk profile supported by healthy order book providing revenue visibility over the medium term.

Rating Sensitivity factors

Upward Factors:

• Substantial build-up of orders and healthy revenue growth of more than 20% along with sustained operating margin
• Significant reduction in receivables and inventory leading to rationalisation of working capital cycle

 

Downward Factors:

• If revenue growth is muted and operating margins goes below 20%
• Further rise in inventory or receivables adversely impacting the working capital cycle
• In case of significant debt-funded capex is done in future, it will be constraining the financial risk profile.

About the Company

Incorporated in November 2006 by Mr Vikas Jain and his co-promoter, Mr Piyush Jain, SWPEL undertakes drilling and exploration of coal, minerals and coal-bed methane. The company has expanded into aquifer (water) mapping programmes for state and central government agencies besides 3D and 2D seismic data acquisition and processing for renowned oil and gas companies in India. It also provides consultancy for geological field services, mobile field services, and other allied services. The company has 41 operational rigs with capacity to drill between 300 and 2,500 metres. The company was listed on the SME platform of NSE ‘Emerge’ on February 19, 2018 and migrated to the main board of NSE within a span of one year on April 18, 2019. It has been regularly paying divined since its’ listing in 2018.

 

After winning mining services contract in Oman thru its’s JV and  acquisition of coal block in the state of Jharkhand, SWPE has become a full fledged exploration cum mining company .

 

For fiscal 2023, operating income is estimated at Rs 124 crore and profit after tax at Rs 8 crore.

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
NA	Bank Guarantee&	NA	NA	NA	25	NA	CRISIL A3+
NA	Cash Credit^	NA	NA	NA	20	NA	CRISIL BBB/Stable
NA	Cash Credit%	NA	NA	NA	20	NA	CRISIL BBB/Stable

&Interchangeable with letter of credit up to Rs 3.0 crore

^Upto Rs.5 Crores interchangeable to BG Limit

%Including dropline overdraft up to Rs 4 crore