Rating Rationale
January 17, 2019 | Mumbai
Technofab Engineering Limited
Ratings downgraded to 'CRISIL BB/Negative/CRISIL A4+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.1075 Crore
Long Term Rating CRISIL BB/Negative (Downgraded from 'CRISIL BBB+/Negative')
Short Term Rating CRISIL A4+ (Downgraded from 'CRISIL A2')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities of Technofab Engineering Limited (TEL) to 'CRISIL BB/Negative/CRISIL A4+' from 'CRISIL BBB+/Negative/CRISIL A2'.

The rating action reflects tightening of liquidity position due to continued high working capital intensity. The working capital requirements have increased further on account of 32% increase in operating income in first half of fiscal 2019 compared to the corresponding period last fiscal; however, the enhancement in working capital limits has not yet taken place. The stretched liquidity position is reflecting in high bank limit utilization, minimal cash and bank balances and certain instances of irregularities in working capital limits with a bank.

TEL expects the liquidity position to improve with cash inflows of around Rs 150 crore from customer advances and realization of debtors during the last quarter of fiscal 2019. However, timely recovery of debtors, receipt of advances from the customers, arrangement of incremental working capital funding will remain a key monitorable.

The rating continues to factor established track record of the management and diversified revenue profile. These strengths are partially offset by large working capital requirement due to EPC nature of business, tight liquidity and average debt protection metrics.

Analytical Approach

CRISIL has fully 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 these entities. The company is availing interest bearing advances as a source of funding as a cheaper alternative to bank borrowings, which has been considered as part of debt. 

Please refer Annexure - Details of consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established track record: TEL has a long and established track record of over four decades, with strong capabilities in executing turnkey projects, as reflected in repeat orders from customers. With consistent order inflows, the order book remains strong at Rs 2,020 crore in September 2018 providing revenue visibility of more than 3 years. TEL has large outstanding proposals and follows the strategy of focusing on large size orders.

* Diversified revenue profile: Business risk profile benefits from serving customers operating in diverse sectors and geographies. Electrical (transmission, distribution and substations), water and waste-water treatment and others including industrial segment comprising 51%, 48% and 1% respectively of the order book. Around one third of the revenue comes from overseas, mostly Sub Saharan Africa and South East Asia. Around 50% of the projects are funded by multilateral agencies like World Bank and Asian Development Bank while the rest is mostly funded by Central Government and State Government of India.

Weaknesses
* Large working capital requirement due to EPC nature of business: TEL has large working capital requirement 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 365 days as on March 31, 2018 (remained above 350 days as of September 2018). Timely execution of orders and realisations of receivables will remain a key monitorable.

* Tight liquidity: Liquidity is constrained due to high utilization of bank limits ~95-100% and less than Rs 10 crs cash/bank balances (including FDs under lien with bankers over and above margin money). The company is facing liquidity issues due to stretched debtor cycle and increased execution. The tight liquidity has led to a few instances of devolvement of letter of credits and an instance of overdrawal in cash credit account. CRISIL notes that TEL had fixed deposit sufficient to cover the overdue amount during the time of overdrawal with the same bank. Delays in sanction of enhanced working capital limits can further impact the liquidity position.

* Average debt protection metrics: Financial risk profile is constrained by interest coverage ratio of less than 2 times during the six months through September 2018. Finance cost includes interest cost and 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 liquidity 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 further downgraded if liquidity position tightens or 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 improving liquidity.

Liquidity
The liquidity is weak marked by high utilization of working capital limits and minimal cash and bank balance. The bank limit utilization is ~95-100% while TEL has cash and bank balances of about Rs 10 crore. Although, net cash accruals are expected to remain at similar levels as last year with no long term repayment obligations, delays in enhancement of working capital limits has led to build up of pressure on liquidity. Faster recovery from debtors and advances from the customers are expected to ease the working capital intensity but will remain a key monitorable.

About the Company

TEL, incorporated in 1971 by Mr. Avinash Gupta, provides EPC services on a turnkey basis. It undertakes balance-of-plant and electro-mechanical projects in the power, oil and gas, water and waste-water treatment, and other industrial and infrastructure sectors in India and abroad. Its corporate office and manufacturing unit for fabrication and assembly are in Faridabad (Haryana). The company is listed on the Bombay Stock Exchange and the National Stock Exchange.

On a standalone basis, for the six months ended September 30, 2018, PAT was Rs 6 crore on revenue from operations of Rs 212 crore, against PAT of Rs 4 crore on revenue from operations of Rs 160 crore for the previous corresponding period.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs crore 435 402
Profit After Tax (PAT) Rs crore 14 9
PAT Margin % 3.3 2.2
Adjusted debt/adjusted networth Times 0.38 0.42
Interest coverage Times 1.8 1.8

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 Bank Guarantee^^^ NA NA NA 375 CRISIL A4+
NA Bank Guarantee^^ NA NA NA 83 CRISIL A4+
NA Bank Guarantee# NA NA NA 107 CRISIL A4+
NA Bank Guarantee## NA NA NA 45 CRISIL A4+
NA Bank Guarantee NA NA NA 182 CRISIL A4+
NA Cash Credit** NA NA NA 52 CRISIL BB/Negative
NA Cash Credit@ NA NA NA 15 CRISIL BB/Negative
NA Cash Credit NA NA NA 48 CRISIL BB/Negative
NA Proposed Long Term Bank Loan Facility NA NA NA 168 CRISIL BB/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 - Details of Consolidation
Arihant Flour Mills Private Limited
Woodlands Instruments Private Limited
Rivu Infrastructural Developers Private Limited
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  283.00  CRISIL BB/Negative      17-04-18  CRISIL BBB+/Negative  21-02-17  CRISIL BBB+/Stable  02-03-16  CRISIL BBB+/Stable  CRISIL A-/Negative 
Non Fund-based Bank Facilities  LT/ST  792.00  CRISIL A4+      17-04-18  CRISIL A2  21-02-17  CRISIL A2  02-03-16  CRISIL A2  CRISIL A2+ 
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^^^ 375 CRISIL A4+ Bank Guarantee^^^ 375 CRISIL A2
Bank Guarantee^^ 83 CRISIL A4+ Bank Guarantee^^ 83 CRISIL A2
Bank Guarantee# 107 CRISIL A4+ Bank Guarantee# 107 CRISIL A2
Bank Guarantee## 45 CRISIL A4+ Bank Guarantee## 45 CRISIL A2
Bank Guarantee 182 CRISIL A4+ Bank Guarantee 182 CRISIL A2
Cash Credit** 52 CRISIL BB/Negative Cash Credit** 52 CRISIL BBB+/Negative
Cash Credit@ 15 CRISIL BB/Negative Cash Credit@ 15 CRISIL BBB+/Negative
Cash Credit 48 CRISIL BB/Negative Cash Credit 48 CRISIL BBB+/Negative
Proposed Long Term Bank Loan Facility 168 CRISIL BB/Negative Proposed Long Term Bank Loan Facility 168 CRISIL BBB+/Negative
Total 1075 -- Total 1075 --
**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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