Rating Rationale
April 17, 2018 | Mumbai
Technofab Engineering Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1075 Crore (Enhanced from Rs.915 Crore)
Long Term Rating CRISIL BBB+/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long term bank loan facilities of Technofab Engineering Ltd (TEL) to 'Negative' from Stable and reaffirmed the rating at CRISIL BBB+. The short term rating has been reaffirmed at 'CRISIL A2'.
 
The revised outlook reflects TEL's elongated working capital cycle. Gross current asset (GCA) were high in fiscal 2017 due buildup of retention money and receivables from state electricity boards (SEBs). The implementation of Goods and Services Tax (GST) also led to a slowdown in realizations from debtors during first half of fiscal 2018 as TEL had to modify the terms of its contracts.  Owing to the increased working capital requirement and engineering, procurement and construction (EPC) nature of business, TEL remains susceptible to risk of delays in realisations from debtors and implementation of orders. Realisations have improved with Rs 187 crore collected in quarter ended March 2018. The debtor position is expected to improve from September 2018 onwards as 15 projects were completed in fiscal 2018. SEBs, international orders and Power Grid Corporation of India Ltd (PGCIL; rated CRISIL AAA/Stable/CRISIL A1+) account for 40%, 20% and 7% of debtors, respectively. Improvement in debtor position will remain a key monitorable.
 
The rating reflects healthy outstanding orders of Rs 2,200 crore as on December 31, 2017 and the expected improvement in operating margin to 11-13% based on margin achieved in the nine months ended December 2017 due to cost efficiencies and change in revenue mix - margin was 6-9% between fiscals 2014 and 2016. Financial risk profile continues to benefit from a comfortable capital structure, with minimal long-term debt. Liquidity is expected to be adequate with around Rs 40 crore of liquid investments and unencumbered cash balances.

Analytical Approach

CRISIL has consolidated the business and financial risk profiles of TEL with its subsidiaries Arihant Flour Mills Pvt Ltd, Woodlands Instruments Pvt Ltd, and Rivu Infrastructural Developers Pvt Ltd because of strong financial and operational linkages between them. The company is availing interest bearing advances as a cheaper alternative to bank borrowings, which has been considered as part of debt.

Key Rating Drivers & Detailed Description
Strengths
* Established track record: TEL has an established track record of over four decades, with strong capabilities in executing turnkey projects. The company secured record order inflow of Rs 942 crore in fiscal 2017, and the order book has risen to Rs 2,200 crore in December 2017 from Rs 1,750 crores as of March 2017. The company has consolidated its position by closing about 15 projects during this fiscal year 2018. TEL has outstanding proposals of Rs 3,000 crore and follows the strategy of focusing on fewer quantity but large size orders.
 
* Diversified revenue profile: Business risk profile benefits from serving customers operating in diverse sectors and geographies. Of the outstanding order book, about 65% of projects are backed multilateral agencies like PGCIL, Asian Development Bank, World Bank and international development agencies. Electrical (substation and distribution) and water and waste-water treatment account for 56% and 39% of unexecuted orders, respectively. Nearly 33% of revenue is contributed by overseas customers, mostly from Sub-Saharan Africa and South-East Asia which are funded by bilateral agencies  
 
* Healthy capital structure: Financial risk profile benefits from a healthy networth of Rs 268 crore as on September 30, 2017, and minimal long-term debt. The steadily increasing networth has led to healthy gearing of 0.7 time over the past 4 years despite the large working capital borrowings. Gearing shall remain comfortable despite increase in working capital debt due to expansion in scale of operations.
 
Weaknesses
* Large working capital requirement due to EPC nature of business: Working capital requirement is sizeable due to milestone-based payment mechanism and build-up of retention money. Additionally, long standing receivables from certain customers have led to debtor days of over 400 as on September 30, 2017. Debtors of Rs 11.61 crore were written off as bad debts during fiscal 2017. Timely execution of orders and realisations of receivables will remain a key monitorable.
 
* Average debt protection metrics: Financial risk profile is constrained by interest coverage ratio of less than 2 times during the nine months through December 2017. Finance cost includes bank charges for bank guarantees. The reliance on external short term borrowings to fund working capital has also increased the finance costs.
Outlook: Negative

CRISIL believes TEL's working capital cycle will remain stretched, while it will maintain its market position in the EPC business, supported by healthy outstanding orders and established relationships with diverse customers. The ratings may be downgraded if working capital cycle remains stretched or delays in order execution impacts profitability. The outlook may be revised to 'Stable' in case of improvement in working capital cycle or significant capital infusion improves liquidity.

About the Company

Incorporated in 1971 by Mr Avinash Gupta, TEL provides EPC services by undertaking turnkey contracts for a diversified range of sectors and geographies. TEL undertakes Balance of Plant (BOP) projects for the power, electrical, water/waste water, oil and gas & nuclear sectors in domestic and overseas markets. Its corporate office is in Faridabad (Haryana) and it also has branch offices overseas in Africa and East Asia. The company is listed on the Bombay Stock Exchange and the National Stock Exchange.
 
On a standalone basis, for the nine months ended December 31, 2017, profit after tax was Rs 7.25 crore on net sales of Rs 268 crore, as against Rs 7.06 crore and Rs 281.5 crore, respectively, for the previous corresponding period.

Key Financial Indicators
Particulars Unit 2017 2016
Revenue Rs crore 402 463
Profit after tax (PAT) Rs crore 9 11
PAT margin % 2.2 2.4
Adjusted debt/adjusted networth Times 0.55 0.51
Interest coverage Times 1.8 1.96

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 crore)		 Rating assigned  with outlook
NA Bank Guarantee^^^ NA NA NA 375 CRISIL A2
NA Bank Guarantee^^ NA NA NA 83 CRISIL A2
NA Bank Guarantee# NA NA NA 107 CRISIL A2
NA Bank Guarantee## NA NA NA 45 CRISIL A2
NA Bank Guarantee NA NA NA 182 CRISIL A2
NA Cash Credit** NA NA NA 52 CRISIL BBB+/Negative
NA Cash Credit@ NA NA NA 15 CRISIL BBB+/Negative
NA Cash Credit NA NA NA 48 CRISIL BBB+/Negative
NA Proposed Long Term Bank Loan Facility NA NA NA 168 CRISIL BBB+/Negative
** Fully interchangeable with export packing credit and foreign bill purchase
@ Includes Rs.10 crore sub-limit of export packing credit and foreign bill purchase
^^ Includes a letters of credit sub-limit of Rs. 25 crore
## Includes a letter of credit sub-limit of Rs. 15 crore
^^^ Includes a letters of credit sub-limit of Rs. 59 crore
# Includes a letter of credit sub-limit of Rs. 27 crore
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  283  CRISIL BBB+/Negative    No Rating Change    No Rating Change  02-03-16  CRISIL BBB+/Stable  14-05-15  CRISIL A-/Negative  CRISIL A-/Stable 
Non Fund-based Bank Facilities  LT/ST  792  CRISIL A2    No Rating Change    No Rating Change  02-03-16  CRISIL A2    No Rating Change  CRISIL A2+ 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee^^^ 375 CRISIL A2 Bank Guarantee^^^ 375 CRISIL A2
Bank Guarantee^^ 83 CRISIL A2 Bank Guarantee^^ 135 CRISIL A2
Bank Guarantee# 107 CRISIL A2 Bank Guarantee# 100 CRISIL A2
Bank Guarantee## 45 CRISIL A2 Bank Guarantee## 60 CRISIL A2
Bank Guarantee 182 CRISIL A2 Bank Guarantee 130 CRISIL A2
Cash Credit** 52 CRISIL BBB+/Negative Cash Credit** 40 CRISIL BBB+/Stable
Cash Credit@ 15 CRISIL BBB+/Negative Cash Credit@ 24 CRISIL BBB+/Stable
Cash Credit 48 CRISIL BBB+/Negative Cash Credit 45 CRISIL BBB+/Stable
Proposed Long Term Bank Loan Facility 168 CRISIL BBB+/Negative Proposed Long Term Bank Loan Facility 6 CRISIL BBB+/Stable
Total 1075 -- Total 915 --
** Fully interchangeable with export packing credit and foreign bill purchase
@ Includes Rs.10 crore sub-limit of export packing credit and foreign bill purchase
^^ Includes a letters of credit sub-limit of Rs. 25 crore
## Includes a letter of credit sub-limit of Rs. 15 crore
^^^ Includes a letters of credit sub-limit of Rs. 59 crore
# Includes a letter of credit sub-limit of Rs. 27 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 Criteria for Consolidation
CRISILs Criteria for rating short term debt

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