Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Transrail Lighting Limited (Transrail) to ‘CRISIL A/Stable/CRISIL A1’.

 

The rating action takes into consideration significant expansion in the order book in the T&D segment, providing healthy revenue visibility over the medium term. Revenue is expected to cross Rs 3500 crores in the current fiscal and Rs. 5000 crores in fiscal 2024, driven by healthy execution of the current order book. The business risk profile will also continue to remain strong driven by the strong technological capabilities of Transrail, its increasing market presence and established clientele, and the favourable prospects for the international T&D and domestic non-T&D space.

 

Order book grew to around Rs 11000 crore (including L1 position of Rs. 5100 crores) as of June 2022, led by strong order inflow during the first quarter of fiscal 2023. Company’s focus on increasing share of international orders will also benefit the performance, as these are typically higher margin orders. Export orders constitute 68% of the current order book. Increased orders from the non-T&D segment have helped diversify the order book. In fiscal 2023, net cash accrual is expected to increase to Rs 200-450 crore while operating profitability is expected to sustain at 12-14% in the medium term, supported by easing commodity prices and increasing share of orders which have pass-through clauses.

 

Revenue grew by 8% in fiscal 2022 to Rs. 2370 crores from Rs. 2159 crores in fiscal 2021, owing to strong order book execution, especially in the international T&D space. However, earnings before interest, tax, depreciation and amortisation (EBIDTA) margin declined to 10.8% from 13.6% in the previous year. The decline in profitability was industry wide because of higher prices of raw materials, primarily steel and aluminium which could not be fully passed on to customers.

 

The company’s financial risk profile is characterised by healthy capital structure resulting from networth estimated at around Rs. 850 crores as on March 31, 2023. Despite expected increase in the debt to around Rs.500 crores, gearing is expected to improve to 0.6 times in the current fiscal as compared to 0.7 times in fiscal 2022. However, total outside liabilities to tangible networth (TOLTNW) ratio is expected to remain elevated at 3-5 times over the medium term owing to expected higher customer advances and increased utilisation of working capital limits while interest coverage is expected to be moderate at 2.5-4 times. Improvement in TOL/TNW and interest coverage will remain key monitorables.

 

Expected annual cash accrual of Rs 200-450 crore will be sufficient to meet yearly debt repayment of Rs 50-100 crore, over the medium term. Liquidity remains adequate with cash and equivalents of Rs 102 crore as on March 31, 2022, along with undrawn lines of Rs. 90-100 crores on an average. Additionally, promoters have also infused in funds of Rs 57 crores cumulatively over fiscals 2021 and 2022 and are expected to provide need-based support.

 

The ratings continue to reflect the established position of Transrail in the engineering, procurement and construction (EPC) business catering to the power sector, strong order pipeline and improving revenue diversity. The strengths are partially offset by exposure to intense competition and working capital-intensive operations.

 

On July 12, 2022, CRISIL Ratings had upgraded its ratings on the bank facilities of Transrail to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’.

Analytical Approach

CRISIL Ratings has evaluated the business and financial risk profile of Transrail on a standalone basis.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the EPC business: The three-decade-long experience of the management, the integrated services offered by the company, and healthy relationships with customers should continue to support the business risk profile. These factors ensure repeat orders from clients such as Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and Tamil Nadu Transmission Corporation Ltd. Substation business and high-end transmission line projects enhance the range of offerings and enable the company to bid for turnkey projects in the T&D segment. Transrail is also backward integrated through its manufacturing of towers, poles and conductors, which supports stronger operating margins. Diversification into related and other segments, such as civil construction, supports the business.

 

• Improving financial risk profile: Networth, which was negligible when operations commenced on January 1, 2016, under the new promoters, has increased to Rs 670 crore as on March 31, 2022. Resultantly, financial risk profile has been improving, driven by better cash generation and prudent working capital management. Overall gearing has improved to ~0.7 times as on March 31, 2022 as compared to 0.8 times as on March 31, 2021. Despite addition of debt, NCA/AD and gearing is expected to improve to 40-80% and 0.4-0.6 times respectively over the next two fiscals on the back of healthy accrual and scheduled term debt repayment. The ability to sustain improvement in revenue, and profitability, leading to growing networth and better debt protection metrics, will remain a key monitorable. Any larger than expected debt funded acquisition or capex could have an adverse impact on the financial risk profile.

 

Weaknesses:

• Exposure to intense competition: Competition is intense in the power T&D business due to low entry barriers. Profitability is susceptible to any downturn in demand and structural issues and volatility in the power sector. Any large scale project deferrals or slow project execution due to macroeconomic factors could lead to cost overruns, which would impact profitability, given the limited flexibility to pass on cost increases. The company’s increasing exposure to international projects in newer geographies may pose risks as well. However, these risks are mitigated by the strong capabilities of Transrail in the power T&D EPC segment and manufacturing of towers and conductors.

 

• Working capital-intensive operations: Operations are working capital intensive owing to the inherent nature of the EPC business and the long project execution cycle of 2-3 years, which result in high reliance on short-term debt. Gross current assets of Transrail elongated to 350 days as on March 31, 2022, from 272 days a year earlier due to stretch in inventory holding days during the fiscal. Receivables also increased to 102 days as on March 31, 2022, as against 84 days a year earlier. Receivables are typically high in the business due to the sizeable retention money blocked in completed projects till the end of the performance guarantee period. Receivable risk is also mitigated due to majority of its projects being backed by governments and multi-lateral institutions. Efficient working capital management with growing scale of operations will remain a key monitorable.

Liquidity: Adequate

Liquidity remains adequate, backed by unencumbered cash equivalent of around Rs 102 crore and unutilised fund-based bank lines of Rs 100-120 crore as on March 31, 2022. Bank limit utilisation improved to 75% on average over the last 12 months through April 2022. Sustained improvement in bank limit utilisation will be a key monitorable. The available liquidity and expected annual cash accrual of Rs 200-450 crore during fiscals 2023 and 2024 should be sufficient to meet annual debt obligation and moderate capital expenditure.

Outlook: Stable

CRISIL Ratings believes Transrail will continue to benefit from its increased scale of operations and strong order book. Improving financial risk profile will also continue to benefit the credit risk profile.

Rating Sensitivity factors

Upward factors

• Significant increase in scale of operations led by healthy order execution and sustenance of operating margins at 13-14%, leading to strong annual cash generation, and
• Improvement in debt metrics (e.g. interest coverage) driven by better accruals, prudent management of working capital and modest capital spending

 

Downward factors

• Weak operational performance with steady decline in operating margin impacting cash generation
• Elongation in working capital cycle and higher than anticipated capital spending, impacting debt metrics; interest cover below 2 times.
• Substantial debt funded capital expenditure, acquisition, leading to leading to increase in leverage

About the Company

Transrail is a leading EPC company with over three decades of experience in providing comprehensive solutions on a turnkey basis globally. It is present across the power T&D, lighting infrastructure, substations and railways sectors. The company has in-house manufacturing facilities for towers, conductors and poles.

 

Transrail offers solutions ranging from design and testing to fabrication, supply of materials, erection, stringing and commissioning. Its lighting infrastructure solutions business designs and installs engineered polygonal galvanised poles for power T&D, high masts, street lights and stadium masts, among others. The company caters to customers across India, Africa, the Americas and Asia.

 

In 2016, the T&D business division of Gammon India was transferred to Transrail through a business transfer agreement and a scheme of arrangement approved by the National Company Law Tribunal.

Key Financial Indicators

As on/for the period ended March 31	Unit	2021	2020
Operating Income	Rs.Crore	2159	1,839
Profit after tax (PAT)	Rs.Crore	102	102
PAT margin	%	4.7	5.6
Adjusted debt/adjusted networth	Times	0.75	0.84
Interest coverage	Times	2.19	2.14

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs. Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	294.39	NA	CRISIL A/Stable
NA	Term Loan	NA	NA	Oct-22	124.48	NA	CRISIL A/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	50.00	NA	CRISIL A/Stable
NA	Proposed Term Loan	NA	NA	NA	1401.69	NA	CRISIL A/Stable
NA	Non-Fund Based Limit	NA	NA	NA	3199.44	NA	CRISIL A1