Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to the proposed non-convertible debentures (NCDs) of Tata Projects Ltd (TPL) and has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' rating on the existing NCDs and commercial paper programme of the company.

 

The rating centrally factors in the strong managerial and financial support available to TPL from Tata Sons Pvt Ltd (Tata Sons; ‘CRISIL AAA/Stable/CRISIL A1+’) which holds 57.31% equity stake in TPL. The company’s established market position, large-scale operations with diversified order book executing complex projects also support the business risk profile. These strengths are partially offset by large working capital requirement and modest financial risk profile.

 

Revenues grew around 5% year-on-year and operating margin improved to 4.1% in fiscal 2024 (against operating loss in fiscal 2023), led by strong order execution and lower provisioning. Unexecuted portion of the order book was strong at Rs 43,959 crore as on June 30, 2024, which provides healthy revenue visibility over the medium term. CRISIL Ratings understands that no further material provisions are expected going forward and therefore operating profitability is expected to improve gradually over the medium term. Moreover, TPL has a sizeable claim book, part of which is recognised in the balance sheet. It is expected that a significant portion of these claims would be recovered gradually, thereby improving cash flow.

 

Gross current assets (GCAs), excluding cash, remained sizeable, at 383 days as on March 31, 2024, against around 374 days as of March 2023. The GCAs are expected remain elevated as company completes execution of some of its large orders and would be expected to improve gradually over the medium term with higher expected execution given improving orderbook position and better collection of receivables. Furthermore, net debt increased during fiscal 2024, mainly to fund incremental working capital requirement. Along with claim realisation, moderation of the overall indebtedness of the company will remain a key monitorable. Moreover, weakening of the payment track record of central and state government entities, resulting in sustained pressure on GCAs and the overall indebtedness of TPL will bear watching too.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support available from Tata Sons. CRISIL Ratings has combined the financials of TPL's subsidiaries to reflect the operational and financial linkages with these entities.

 

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:

• Established pan-India position with a strong, diversified order book: TPL is a large and diversified player in the engineering, procurement and construction (EPC) space, with presence across urban built form, metros and tunnels, bridges, airports and ports, environment, power and metals, transportation, oil and gas hydrocarbon, transmission and distribution, and international business.

 

Strong order inflow in urban built form, metros, and airport projects have led to a well-diversified order pipeline. Order book of around Rs 44,000 crore (as of June 2024), well-diversified across different segments, and the growing share of urban infrastructure orders offers strong revenue visibility for the next 3-4 years.

 

TPL has executed complex projects such as the freight corridor, metros and heavy civil projects through the joint venture route with strong partners, aiming to build execution capability in new segments. The company has undertaken more independent projects in the past 2-3 years and bagged several large projects in the refinery, industrial, and power segments. The company maintains its prudent bidding strategy and has improved its pre-bid risk management practices with a focus on cash flow management, execution and profitability. The large share of independent projects, along with focus on high-margin projects, should improve profitability over the medium term.

 

• Strong managerial and financial support from Tata Sons, lending substantial financial flexibility: TPL, a part of the infrastructure vertical of the Tata group, has gained prominence due to its increasing scale of operations, execution of complex and prestigious projects, size of the addressable market in the EPC industry and ability to generate healthy returns in the long term. TPL is jointly held by several Tata group companies, with Tata Sons being its largest shareholder with 57.31% stake, and has senior Tata group executives on its board of directors. Being part of the Tata group, TPL derives significant financial flexibility and access to low-cost funds from banks and capital markets. Sustenance of support from Tata Sons and its ownership share in TPL are key rating sensitivity factors.

 

Weaknesses:

• Working capital-intensive operations: TPL has sizeable retention money blocked in completed as well as ongoing projects. Total receivables (including retention money) remained high at around Rs 6,200 crore as on March 31, 2024. Moreover, substantial claims related to change in scope and price variations continue to constrain the working capital cycle. Accordingly, the GCAs excluding cash remained sizeable at 383 days as on March 31, 2024, as against 374 days a year earlier. The risk of bad debt is largely mitigated as over 60% of the orders are for government bodies and public sector enterprises. Moreover, arrangements with sub-contractors in sync with milestone payments, claims, and retention money help ease the pressure. While the working capital intensity is expected to remain high in the near term, the management’s intent to focus on collection, liquidation of claims and judicious bidding for new projects with lower working capital intensity should keep the overall working capital requirement in check.

 

• Modest financial risk profile: Large working capital requirement and low capitalisation led to high total outside liabilities to tangible networth (TOL/TNW) ratio of over 6.4 times as on March 31, 2024 against 6.2 times as on March 31, 2023. Higher debt of ~Rs 5,130 crore (as on March 31, 2024) amidst slow collection of receivables and modest operating profits continue to constrain the interest coverage ratio, even though it improved to 1.31 times for fiscal 2024, against negative levels during fiscal 2023. Overall debt increased further to ~Rs 6,200 crore as on June 30, 2024, on account of slower billing and collections and the management expects it to remain around similar levels for the next 10-12 months. However, the expectation of further improvement in profitability and cash flows from collection of receivables as well as claims should help the level of indebtedness and lead the debt protection metrics to improve over the medium term.

Liquidity: Strong

Expected cash accrual of Rs 300-400 crore for fiscal 2025, along with unencumbered cash balance of over Rs 600 crore as on June 30, 2024, should be adequate to cover debt obligation of around Rs 544 crore and capex plans of Rs 400-450 crore for fiscal 2025. Liquidity is also supported by moderate utilisation of the fund-based bank limits at 64% on average in the 12 months through June 2024, resulting in unutilised bank limits of around Rs 1,000 crore and the financial flexibility derived as a part of the Tata group. TPL has also demonstrated the ability to successfully refinance its long-term debt obligation consistently in the past.

Outlook: Stable

CRISIL Ratings believes TPL will continue to benefit from its established market position in the EPC space and continue to receive strong managerial and financial support from the parent, Tata Sons.

Rating Sensitivity factors

Upward factors:

• Strong operating performance with sustained improvement in operating margin and capital structure, leading to improvement in interest coverage ratio above 3 times on a sustained basis;
• Significant improvement in the working capital cycle

 

Downward factors:

• Diminution in support philosophy or deterioration in the overall credit risk profile of Tata Sons by one notch or more
• Weak operational performance with sustained decline in operating margin, leading to lower cash accrual and continued pressure on credit metrics
• Stretched working capital cycle constraining the capital structure

About the Company

TPL, incorporated in 1979, is one of India's leading EPC companies. It operates through three strategic business groups: energy and industrial infrastructure, urban infrastructure, and services. A brief profile of TPL’s business segments:

 

Strategic business group	Description
Energy & Industrial	Energy and resources
	Transmission and distribution
	Advanced tech facilities
	Quality services
Buildings and Infrastructure	Urban built forms
	Heavy civil infra

 

TPL is held by several Tata group companies. The largest shareholder is Tata Sons, which holds 57.31% of the subscribed equity shares of TPL. Other stakeholders include The Tata Power Company Ltd ('CRISIL AA+/Stable/CRISIL A1+'; 30.81%), Tata Chemicals Ltd ('CRISIL AA+/Stable/CRISIL A1+'; 6.16%), Voltas Ltd (4.3%) and Tata Industries Ltd ('CRISIL AAA/Stable'; 1.42%).

 

The Tata group is a global enterprise, headquartered in India, comprising over 100 independent operating companies.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs. Crore)	Complexity Level	Rating assigned with outlook
INE725H08196	Non-convertible debentures	06-Jun-2024	8.25%	28-Apr-2027	250	Simple	CRISIL AA/Stable
NA	Non-convertible debentures*	NA	NA	NA	250	Simple	CRISIL AA/Stable
NA	Non-convertible debentures*	NA	NA	NA	500	Simple	CRISIL AA/Stable
NA	Commercial paper	NA	NA	7-365 days	2000	Simple	CRISIL A1+

*Yet to be placed