Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL BBB/Stable/CRISIL A3+' ratings to the bank facilities of Vascon Engineers Limited (VEL).

 

The ratings reflect expectation of sustained improvement in the operating performance of VEL because of focus on the stable cash-generating engineering, procurement and construction (EPC) business over the medium term and maintenance of a healthy capital structure and liquidity profile, aided by equity infusion to support the debt protection metrics. 

 

Consolidated revenue is expected to increase by 20-23% in fiscal 2023, aided by EPC revenue which is expected to reach Rs. 550-600 crore in fiscal 2023 driven by orders of Rs 1,777 crore as on June 30, 2022. Furthermore, 76% of the order book constitutes government projects, which provides visibility of cash flow over the medium term. Real estate collections are expected to increase gradually and will improve in the ongoing fiscal compared with Rs 73 crore in fiscal 2022 owing to liquidation of inventory of Rs 400.73 crore as on March 31, 2022, and receipt of pending receivables.

 

Operating performance improved in fiscal 2022, with revenue increasing by 30% and operating margin growing to 3.4% from 0.4% in fiscal 2021. This was on account of recovery in the execution of EPC projects, which were delayed amid the Covid-19 pandemic, and stable performance of GMP Technical Solutions Pvt Ltd, supported by revenue of Rs 194 crore from the segment in fiscal 2022 and improvement in the operating margin to 9% in fiscal 2022 compared with 7% in fiscal 2021. As a result, net cash accrual (Profit after tax and depreciation excluding dividends) improved to Rs 47 crore in fiscal 2022. Earnings before interest, taxes, depreciation and amortisation from EPC and GMP will likely improve to Rs 40-50 crore p.a. over the next two fiscals from Rs 44 crore in fiscal 2022, while net cash flow from real estate should sustain because of steady collections expected in fiscal 2023.   

 

Also, the company reduced its debt by Rs 73 crore over the past two fiscals, with the total gross debt (including interest bearing mobilisation advances) standing at Rs 194 crore as of March 2022 against Rs 267 crore as of March 2020. The debt was largely paid off through Rs 70 crore received from preferential share allotment to investors and the remaining through internal accruals. Consequently, capital structure has improved, with gearing of 0.22 as on March 31, 2022, compared with 0.34 time as on March 31, 2021, and expected to remain below 0.5 time over the medium term.

 

Unencumbered cash and equivalents stood at Rs 10.76 crore as on June 30, 2022 at the standalone level. Liquidity is further supported by average unutilised fund based bank lines of Rs. 9.0 crore during last twelve months ending Jul 31, 2022. VEL is likely to maintain cushion of 10% of the working capital limit and unencumbered cash and equivalents of Rs 7 crore for any exigency.

 

These strengths are partially offset by large working capital requirement, large slow-moving real estate inventory and exposure to intense competition and cyclicality in the EPC segment.

Analytical Approach

CRISIL Ratings has considered the consolidated financial and business risk profile of VEL along with its subsidiaries. The consolidation is on account of the common management and business synergies among the group companies.

 

Subsidiaries of the company include Marvel Housing Pvt Ltd, Vascon Value Homes Pvt Ltd, GMP Technical Solutions Pvt Ltd, GMP Technical Solutions Middle East (Step Subsidiary), Almet Corporation Ltd, Marathawada Realtors Pvt Ltd and Vascon EPC Ltd. Associates and joint ventures of VEL include Phoenix Ventures, Cosmos Premises Pvt Ltd, Vascon Saga Construction LLP, Vascon Qatar WLL, Mumbai Estates Pvt Ltd and Ajanta Enterprises.

 

Extent of Consolidation: Full

 

Interest-bearing mobilisation advances have been treated as debt.

 

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 position in EPC (buildings), supported by healthy order book and counterparty profile

VEL benefits from the established track record of the management in executing construction contracts for the infrastructure, real estate and manufacturing segments on an EPC basis. The company also has strong technical capabilities and domain expertise in the construction and execution of complex projects.

 

The company had orders worth Rs 1,777 crore as on June 30, 2022, and plans to continue to focus on government projects. Furthermore, almost 76% of the orders are derived from government projects compared with 29% in fiscal 2018, which lends visibility to the uninterrupted cash flow, thereby providing assurance of stable operating performance over the medium term and supporting the business risk profile. Revenue from the EPC segment increased by 38% to Rs 443 crore in fiscal 2022 and is likely to grow to Rs. 550-600 crore in fiscal 2023. This is reflected in performance in the first quarter of fiscal 2023, where EPC revenue increased to Rs 141 crore (88% year-on-year growth) and operating margin to 9% (from 7% in fiscal 2022), supported by healthy order execution.

 

Demand from the real estate segments is witnessing gradual recovery as the economy moves towards a normal execution cycle, with revenue expected to reach over Rs 75 crore in fiscal 2023. The revenue recognition has been low in the past few fiscals due to adoption of IND AS 115 accounting standards which requires revenue to be recognised only at the time of completion of the projects.

 

Healthy capital structure and comfortable financial risk profile

While the company’s consolidated revenue improved to Rs 657 crore in fiscal 2022 from Rs 507 crore in fiscal 2021, its reliance on debt was low at around Rs 194 crore as on March 31, 2022. Continued healthy accretion to reserve has resulted in strong networth of Rs 806 crore as on as on March 31, 2022. Supported by strong networth and low debt, gearing (0.22 time as on March 31, 2022) has been stable at less than 0.4 time over the past four years and is expected to remain below 0.5 time the medium term. The total outside liabilities to tangible networth ratio was healthy at below 1 time (0.80 time as on March 31, 2022) over this period and will remain below 1 time in fiscal 2023. Moderate growth in revenue and increase in profitability led to cash accrual of Rs 47 crore in fiscal 2022 compared with Rs 28 crore in fiscal 2021. Debt protection metrics were strong, as reflected in adjusted interest coverage ratio of 3.09 times in fiscal 2022, which is expected to remain stable at 2.8-3.4 times over the medium term.

 

VEL reduced its debt by Rs 73 crore over the past two fiscals through money received from preferential share allotment to investors and the remaining through internal accruals. Unencumbered cash and equivalents stood at Rs 10.76 crore as on June 30, 2022 at the standalone level. It continues to focus on liquidity management by monetising the non-core assets.

 

Weaknesses

Large working capital requirement and large slow-moving real estate inventory

The company’s operations are working capital intensive operations on account of its real estate business. Inventory remained stretched over the last two years because of the strong backlog as a result of unsold real estate units, which stood at Rs 400.73 crore as on March 31, 2022. Receivables have been on an improving trend since the government bodies became the main counterparty for the EPC business. The company will continue to focus on government-related projects, which will help keep the receivables low. With a proportion of revenue from the EPC business expected to be stable over the medium term, receivables are likely to remain at 90-100 days. However, liquidation of some of the slow-moving inventory will remain a key monitorable.

 

Exposure to risks related to saleability of real estate projects

Saleability and implementation risks in the real estate sector persist, as reflected by sharp fluctuations in real estate income, sales and collections over the four fiscals through March 2018. In light of the weak demand scenario in the past, certain projects have demonstrated limited progress. Ability to liquidate real estate inventory of Rs 400.73 crore as on March 31, 2022, delay in completion or launch of real estate projects and any additional debt taken on to support real estate cash flow mismatch will remain a key monitorable.

Liquidity: Adequate

Unencumbered cash and equivalents stood at Rs 10.76 crore as on June 30, 2022. Fund-based bank lines of Rs 9.0 crore remained unutilised over the 12 months ended July 31, 2022. Cash accrual, expected at over Rs 30 crore per annum, along with cash generation from the real estate business, will sufficiently cover yearly debt obligation of Rs 8-30 crore over the medium term. The firm has adequate financial flexibility to withstand any adverse conditions or downturns in the business. VEL continues to focus on liquidity management by monetising the non-core assets.

Outlook: Stable

The credit risk profile of VEL should continue to benefit from its healthy order book, improving operating performance, strong capital structure and adequate liquidity.

Rating Sensitivity Factors

Upward factors

• Significant improvement in revenue while sustaining net cash accrual over Rs. 30 crore and improvement in net cash flow of real estate segment
• Sustenance of healthy capital structure, financial risk profile and adequate liquidity supported by sustenance of interest coverage over 3 times

 

Downward factors

• Operating performance further deteriorates, owing to lower-than-expected collections in the real estate business to below Rs. 60 crore.
• Substantial delay in execution of orders or increase in real estate inventory, which may lead to increase in debt thereby weakening capital structure.

About the Company

VEL, based in Pune, is engaged in the EPC, real estate construction and development business. The company was incorporated in January 1986 by Mr Vasudevan and commenced operations through construction of the Patalganga factory of Cipla in November 1986. Up until 1998, the company was a real estate contractor, executing contracts for third parties.

 

The real estate business of VEL comprises construction of residential and office complexes along with information technology parks, industrial units, shopping malls, multiplexes, educational institutions and hotels. Under the EPC segment, VEL has executed construction contracts. It primarily caters to government departments and authorities. The company, which has presence of more than 30 years in the EPC and real estate industry, has delivered over 200 projects with area of around 50 million square feet under the EPC as well as real estate business. 

 

Over the three months ended June 30, 2022, VEL registered revenue of Rs 201 crore and profit after tax (PAT) of Rs 11 crore against Rs 112 crore and Rs (7) crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not applicable