Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities and commercial paper programme of Techno Electric and Engineering Company Ltd (TEECL).

 

Operating income declined by 12% in fiscal 2020 owing to lower order inflow in the engineering, procurement and construction (EPC) business during the year, along with impact of Covid-19 pandemic resultant disruptions towards the end of fourth quarter. Revenue from the EPC division declined to Rs 784 crore from Rs 875 crore in the previous year. However, company’s earnings before interest, tax, depreciation and amortisation (EBITDA) margin remained healthy at 25.0% in fiscal 2020, against 25.4% in fiscal 2019, supported by execution of high margin EPC orders during the year.

 

Operating performance was impacted during the first nine months of fiscal 2021, due to the prolonged nationwide lockdown and supply chain disruptions during the first half of the fiscal. However, while operating income declined by 11% year-on-year during this period, EBIDTA margin improved to 29.2% against 27.5% in the corresponding period of the previous year. This was led by heathy execution of existing orders in the EPC business, along with improvement in performance of wind assets.

 

TEECL had outstanding EPC orders of Rs 1,995 crore as on December 31, 2020. While opportunities in the EPC market may increase over the medium term, led by high investments envisaged in the power transmission and distribution (T&D) segment; the ability to increase order flow will remain a key monitorable. Working capital intensity has increased, with gross current assets stretching to 345 days as on March 31, 2020, from 277 days as on March 31, 2019. The increase was partially due to rise in receivables, both in the EPC and wind business. Timely receipt of long-pending receivables in wind business from Tamil Nadu Generation & Distribution Corporation Ltd (TANGEDCO), will be a key monitorable.

 

The company is planning to undertake EPC of data center projects and also intends to initially own one of such asset in this vertical. The company is expected to be a minority owner in the asset by way of investment in a special purpose vehicle (SPV) with a joint venture (JV) partner. Building of order book and successful EPC execution of the projects would be monitorables for this new segment.

 

The financial risk profile continues to be robust, backed by low working capital debt and healthy networth, nil long-term debt, an asset-light EPC model, and absence of major capital expenditure (capex) plans. While the company may invest up to Rs 120-125 crore during fiscal 2022 in the data center SPV for a minority stake, liquidity should remain strong backed by available cash equivalents and liquid investments of Rs 423 crore as on December 31, 2020, and expected annual cash accrual of Rs 150-200 crore in fiscals 2021 and 2022.

 

The ratings continue to reflect established market position of TEECL in executing substation-based EPC projects, strong operational efficiency and robust financial risk profile. These strengths are partially offset by exposure to intense competition and stretched working capital cycle, risks associated with wind assets, such as an adverse change in regulations, and variability in wind speed and pattern.

Analytical Approach

CRISIL Ratings has considered a standalone approach to arrive at the ratings of TEECL. The JV company, Kohima Marini Transmission Ltd (Kohima; signed definitive agreement to sell 26% stake) has not been consolidated as TEECL holds less than 50% stake in the entity, and has not guaranteed their debt. Moreover, equity contribution towards Kohima is unlikely as the project is operational. Any change in the management's policy regarding support to the JVs/associates will be a key rating sensitivity factor.

Key Rating Drivers & Detailed Description

Strengths

• Established market position in EPC business in the power sector: TEECL has been in the EPC business for around three decades, and has an established track record in setting up high voltage substations in India. The key clientele, comprising Power Grid Corporation of India Ltd ('CRISIL AAA/Stable/CRISIL A1+'), NTPC Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+'), and state transmission companies; account for the bulk of capex in the power generation/transmission sector in the country. With strong technical capabilities, the company has a strong market position in executing 765 kilovolt (KV) extra high voltage (EHV) substation projects and a track record of efficient execution, as reflected in its higher-than-industry operating margin. As on December 31, 2020, TEECL had unexecuted orders of Rs 1,995 crore.

 

• High operating efficiency: Operating efficiency is driven by strong technical capabilities, with value-added nature of projects, selective bidding strategy of high-margin orders, and demonstrated track record of timely execution. While the overall return on capital employed (RoCE) declined to 14% in fiscal 2020 from 18% the previous year; RoCE in the EPC business has remained over 50% driven by the asset-light business model. Operating margin in the EPC segment was around 20% for the nine months through December 2020, and is better than most peers. The performance is expected to sustain over the medium term.

 

• Robust financial risk profile: Financial risk profile is robust, backed by low working capital debt and healthy networth, and absence of long-term debt. Low reliance on working capital borrowing resulted in the company being debt free as on March 31, 2020. Total debt remains low at Rs 86 crore as on December 31, 2020. Debt protection metrics are robust, with interest coverage ratio of over 35 times in the nine months through December 2020.

 

Weaknesses

• Exposure to intense competition: Competition is intense in the power T&D business due to low entry barriers. Profitability is susceptible to a downturn in demand environment and structural issues and volatility in the power sector. Any large scale project deferrals or slower project execution due to macroeconomic factors lead to cost overruns for players in the industry, which would impact their profitability, given that they have limited flexibility to pass on the same. However, these risks are partly offset by the strong technical capabilities and market position of the company in the EHV substation-based projects.

 

• Stretched working capital cycle:  Operations are working capital intensive and should remain so over the medium term, owing to the inherent nature of the EPC business and long project execution cycle (2-3 years). Overall, gross current assets increased to 345 days as on March 31, 2020, from 277 days as on March 31, 2019. However, advances received from customers relieves some of the pressure on working capital.

 

Receivables have been sizeable in both, EPC and wind segments. In the wind business, payments continue to be delayed by the counterparty in Tamil Nadu, TANGEDCO. While the company had received Rs 38 crore from the counterparty through Power Finance Corporation Ltd (PFC)/ Rural Electrification Corporation (REC) liquidity infusion in December 2020, timely receipt of long-pending receivables from TANGEDCO will remain a key monitorable.

Liquidity: Strong

Liquidity is strong, driven by sizeable cash equivalents and liquid investments aggregating Rs 423 crore as on December 31, 2020, and absence of any term debt. TEECL also has additional investments in corporate bonds and non-convertible debentures amounting Rs 232 crore as of December 2020. Although, the company intends to distribute a portion of annual profit to its shareholders by way of dividend, and has moderate investment plans, liquidity should remain strong with expected net cash accrual of Rs 150-200 crore in fiscals 2021 and 2022.

Outlook Stable

Operating performance of TEECL will continue to benefit, backed by its strong execution track record in the T&D industry, unexecuted order book, and diversification plans.

Rating Sensitivity factors

Upward factors

• Significant growth in revenue and increase in order inflow, leading to order book to revenue ratio of above 3 times on sustained basis while maintaining healthy profitability.
• Sustained improvement in wind plant load factors, and faster realisation of receivables, ensuring overall better working capital management and cash flow.

 

Downward factors

• Decline in order inflow, leading to order book to revenue ratio of below 1.5 times on sustained basis, along with lower-than-expected cash accrual because of low profitability in the EPC business or reduced wind power generation
• Stretch in working capital cycle due to delay in realisation of receivables
• Higher-than-expected investment/capex or outflow owing to buyback/dividend, or significant impairment of investment in corporate bonds/non-convertible debentures, thereby weakening liquidity

About the Company

TEECL, headquartered in Kolkata, undertakes turnkey EPC projects, predominantly in the power sector, across generation and T&D segments. The company has strong technical capabilities in design and execution of 765 KV EHV substation projects.

 

TEECL entered the renewable power generation space in 2009 with 45 megawatt (MW) of wind energy assets by acquiring Super Wind. It acquired Simran Wind Project Ltd (Simran) in 2009, which had installed capacity of 50.45 MW that was subsequently scaled up to 162.35 MW. The company divested 44.45 MW and 33 MW of capacity of Simran in May 2015 and January 2017, respectively. TEECL got its current name post its merger with Simran. The company currently owns wind power assets of 129.9 MW in Tamil Nadu (111.9 MW) and Karnataka (18 MW).

 

For the nine months ended December 31, 2020, TEECL reported operating income of Rs 674 crore and profit after tax (PAT) of Rs 188 crore, as against Rs 762 crore and Rs 174 crore, respectively, in the corresponding period of the previous year.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

As on/for the period ended March 31		2020	2019
Operating income	Rs crore	871	986
PAT	Rs crore	177	182
PAT margin	%	20.3	18.4
Adjusted debt/adjusted networth	Times	--	0.03
Adjusted Interest coverage	Times	35.91	23.14

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

* Fully interchangeable with non-fund based limits

# includes sub-limit of Rs.5 crore for fund-based facilities 

$ includes sub-limit of Rs.85 crore for fund-based facilities

^ Fully interchangeable with fund-based facilities

% includes sub-limit of Rs.10 crore for fund-based facilities