Rating Rationale
November 28, 2018 | Mumbai
South West Pinnacle Exploration Limited
Ratings upgraded to 'CRISIL BBB/Stable/CRISIL A3+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.50 Crore
Long Term Rating CRISIL BBB/Stable (Upgraded from 'CRISIL BBB-/Stable')
Short Term Rating CRISIL A3+ (Upgraded from 'CRISIL A3')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its ratings on the bank facilities of South West Pinnacle Exploration Limited (South West Pinnacle) to 'CRISIL BBB/Stable/CRISIL A3+' from 'CRISIL BBB-/Stable/CRISIL A3'.

The upgrade reflects improvement in financial risk profile, after the company was listed on the National Stock Exchange ' (Small and Medium Enterprise) growth platform [NSE-SME] on February 19, 2018. The capital structure was healthy, with gearing below 1 time and debt protection metrics were comfortable during fiscal 2018. Business risk profile should improve over the medium term, supported by a strong order pipeline and healthy and sustainable operating efficiencies. Earnings before interest, tax, depreciation and amortization (EBITDA) margin and return on capital employed (RoCE) improved to 29.8% and 17.7%, respectively, during fiscal 2018, from 25.4% and 15.4%, respectively, during fiscal 2017.

The ratings continue to reflect the company's strong technical expertise in drilling and exploration of coal, minerals, coal-bed methane, oil and gas, and aquifer mapping, and the diversified customer base. These strengths are partially offset by working capital-intensive and tender-based nature of business.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of South West Pinnacle and its associate and subsidiary companies, as they are in similar lines of business, with strong financial, managerial and operational linkages.

Key Rating Drivers & Detailed Description
Strengths
* Strong technical expertise in drilling and exploration, and diversified customer profile
The company has over 10 years of experience in drilling and exploration of coal, minerals, coal-bed methane, oil and gas, and aquifer mapping. It has also expanded into Lift Irrigation Canal and Horizontal Directional Drilling during fiscal 2018. It currently has 44 operational rigs with capacity to drill between 300-2500 metres. Clients base is diversified across segment and geographies and includes both public and private sector players, such as Atomic Minerals Directorate for Exploration, Central Mine Planning and Design Institute, Central Ground Water Board, Mineral Exploration Corporation, ONGC Energy Centre Trust, Odisha Coal and Power Ltd, Reliance Industries Ltd ('CRISIL AAA/Stable/CRISIL A1+') Geological Survey of India, Hindalco Industries Ltd ('CRISIL AA/Positive/CRISIL A1+'), and Hindustan Zinc Ltd ('CRISIL AAA/Stable/CRISIL A1+'). This minimises risk of exposure to any one particular industry. Further, company is able to operate under multiple segments with the same resources, without incurring any additional capital expenditure (capex).
'
* Healthy financial risk profile
Networth has improved after the company got listed on the NSE-SME platform. Gearing was healthy at 0.63 time as on March 31, 2018, while debt protection metrics were strong, with interest coverage ratio and net cash accrual to total debt ratios at 3.9 times and 0.3 time as of March 31, 2018. Capital structure should remain healthy, aided by expected cash accrual of Rs 20-25 crore in fiscal 2019, and absence of any major capex towards purchase of rigs.

Weaknesses
* Working capital-intensive operations
Bulk of the ancillary equipment that is part of the rigs, has to be kept as inventory at all times at the site, owing to the nature of operations. Thus, inventory was higher at 171 days as on March 31, 2018, as against 139 days as on March 31, 2017. Receivables to rose sharply to 167 days, from 62 days due to implementation of Goods and Services Tax (GST) from July 1, 2017; this led to realignment of work orders and stretch in receivables from the government. However, most of the payments were realised in April-May, 2018. CRISIL still believes receivables will remain high around 120 days in the medium term. Total working capital limit of Rs 43 crore was hence, utilised at an average of 74% for 12 months through October 2018. Ability to effectively manage working capital will remain a key monitorable.

* Volatility in order book and revenue growth, to tender-based business, and small scale of operations
The company caters to public and private sector customers. While it has to bid for tenders floated by public entities, contracts from the latter 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, also given the small scale of operations. This was evident in fiscal 2017, when a contract related to aquifer mapping had to be cancelled as the company was the sole bidder. Timely execution of company's existing order book of Rs 269 crore as of October 1, 2018, over next 2-3 years, will remain a key monitorable.
Outlook: Stable

CRISIL believes South West Pinnacle will maintain its stable financial and business risk profiles over the medium term, driven by the diversified revenue streams and healthy order pipeline.

Upside scenario
* Substantial growth in revenue and stable operating margin
* Improvement in financial risk profile

Downside scenario
* Any major debt-funded capex
* Sharp decline in operating margin
* Sharp rise in inventory or receivable days, thus, adversely impacting its working capital.

About the Company

Incorporated in November 2006, by promoter, Mr Vikas Jain and co-promoter, Mr Piyush Jain, South West Pinnacle 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. It also provides consultancy for geological field services, mobile field services, and other allied services. The company has 44 operational rigs with capacity to drill between 300-2,500 metres. The company was listed on the NSE-SME growth platform on February 19, 2018 and was renamed to South West Pinnacle Exploration Ltd from changed from South West Pinnacle Exploration Pvt Ltd.

Key Financial Indicators (CRISIL Adjusted)
Particulars Unit 2018 2017
Revenue Rs crore 75 72
Profit After Tax (PAT) Rs crore 6 4
PAT Margin % 7.9 6.2
Adjusted Debt/Adjusted Networth Times 0.63 1.32
Interest Coverage Times 3.93 3.24

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs. Cr)		 Rating Assigned
with Outlook
NA Cash Credit* NA NA NA 17.0 CRISIL BBB/Stable
NA Bill Discounting NA NA NA 4.0 CRISIL BBB/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 7.0 CRISIL BBB/Stable
NA Bank Guarantee# NA NA NA 22.0 CRISIL A3+
*Including drop-line overdraft up to Rs 5 crore
#Interchangeable with letter of credit up to Rs 3.0 crore.
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  28.00  CRISIL BBB/Stable      06-09-17  CRISIL BBB-/Stable    --    --  -- 
            27-07-17  CRISIL BBB-/Stable           
Non Fund-based Bank Facilities  LT/ST  22.00  CRISIL A3+      06-09-17  CRISIL A3    --    --  -- 
            27-07-17  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# 22 CRISIL A3+ Bank Guarantee# 22 CRISIL A3
Bill Discounting 4 CRISIL BBB/Stable Bill Discounting 4 CRISIL BBB-/Stable
Cash Credit* 17 CRISIL BBB/Stable Cash Credit** 17 CRISIL BBB-/Stable
Proposed Long Term Bank Loan Facility 7 CRISIL BBB/Stable Proposed Long Term Bank Loan Facility 7 CRISIL BBB-/Stable
Total 50 -- Total 50 --
*Including drop-line overdraft up to Rs 5 crore
#Interchangeable with letter of credit up to Rs 3.0 crore.
**Interchangeable with working capital demand loan up to Rs 7.5 crore
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 Bank Loan Ratings

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