Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of thyssenkrupp Industrial Solutions (India) Private Limited (TISPL) at ‘CRISIL A+/Stable/CRISIL A1’.

 

The ratings continue to reflect TISPL’s established market position in the engineering, procurement, and construction (EPC), and EPC management (EPCM) segments in India, backed by strong business linkages with the parent, Thyssenkrupp Industrial Solutions AG (TKISAG; a subsidiary of thyssenkrupp AG; rated 'BB-/Stable/B' by S&P Global Ratings). The ratings also factor in the company’s strong order book and healthy financial risk profile, as reflected by comfortable capital structure, and strong liquidity. These strengths are partially offset by exposure to intense competition and cyclicality in the EPC and EPCM segments, and moderate working capital intensive operations.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the EPC and EPCM segments, backed by strong business linkages with the parent

TISPL has shifted its focus towards the EPC segment involving design, engineering, procurement and construction of plants for the chemical, petrochemical, fertiliser, refinery and metallurgical industries in India. Also, the company leverages the established global business position and brand name of its parent, TKISAG, and TISPL’s established track record of execution to get orders from these segments. Under the EPCM business, the company works as a consultant and assists  its customers in the different stages of project implementation. It includes basic and detailed engineering and project management & supervision services.

 

Cost effectiveness of technically skilled manpower in India makes TISPL the preferred provider of engineering design support for the global EPC projects of its parent. Moreover, the company will remain critical to the parent’s operations in India especially in the field of Coke Oven and Green hydrogen/ammonia, further TISPL will continue to enhance the competitive advantages of its parent globally. Of the total outstanding orders of Rs 2,460 crore as on March 31, 2022, orders from the parent form only 1%, as compared to 3% during previous fiscal. This is primarily because of improving independent competency, thereby bidding for large ticket size EPC and EPCM project on standalone basis. Orders from Numaligarh Refinery, IOCL, Grasim Industries Limited and Mundra Petrochem Limited will contribute to growth over next 2 years

 

While TISPL operates as an independent subsidiary, it also benefits from operational support through transfer of technological know-how from its parent. New technologies including coke oven for steel industry and green hydrogen/ammonia for chemical and fertilizer industries. Some technologies like Nitric Acid. Caustic Soda have been acquired through technology sharing with parent, and are expected to drive growth going forward.

 

• Strong order book position providing revenue visibility in medium term

Order book of Rs 2,460 crore as on March 2022, has improved from Rs 1,100 crore as on March 31, 2021 and is at the highest level in last 5 fiscals. Consequently, order book to revenue ratio has improved to 4.2 times as on March 31, 2022, thereby providing better revenue visibility. With higher focus on EPC-lump sum turnkey projects, order book is expected to further improve over the medium term. TISPL received a large EPC project of Rs 1,150 crore in fiscal 2022 and has submitted offers or is in the process of submitting offers in the segment, which should aid order book growth. In addition to this, the company is also venturing into projects utilising newly acquired technologies of coke oven and green hydrogen/ammonia. The company has already started scouting for business  in the coke oven segment. Company has already submitted bids valued at around Rs 1,500 crores in Ammonia tank and PBR projects . These are expected to improve order book diversity and revenue visibility over the medium term.

 

• Healthy financial risk profile

Financial risk profile is supported by zero debt and low total outside liabilities to tangible net worth ratio of 0.95 time as on March 31, 2022. With the discontinuation of the cash pool mechanism in March 2021, financial risk profile has been strengthened further; Net worth was healthy at Rs 398 crore as on March 31, 2022. Net cash accrual was moderate at Rs 44 crore in fiscal 2022 supported by an operating margin to 7% in fiscal 2022; it is expected to remain adequate at over Rs 50 crore against no debt obligation over the medium term. Given moderate accruals and limited capital expenditure (capex) and working capital requirements, no debt is expected to be drawn over the medium term as well. Financial risk profile is also supported by strong liquidity in the form of cash balance and fixed deposits which stood at Rs 245 crore as on March 31, 2022.

 

Weaknesses:

• Exposure to intense competition and cyclicality in the EPC and EPCM segments

The company remains exposed to risks related to cyclicality and intense competition in the EPC and EPCM segments, and resulting in volatility in operating margin. TISPL depends on capex plans of companies operating in the end-user industries whose investment cycle depends on the economic scenario and outlook on their respective sectors. This was observed in fiscals 2017 and 2018 when order book of the company suffered significantly. Increasing proportion of EPC in revenue profile is expected to increase execution risk. Track record of managing execution risk will remain key monitorable

 

Furthermore, operating margin is constrained by intense competition in the industry and high fixed costs, especially employee costs, which limit operating profitability to 6-8%. However, with adopted change in business model, we expect the margin to standardized around 8 – 10% in the medium term . Maintenance of operating margin and return on capital employed (RoCE) at these levels will remain key rating sensitivity factors.

 

• Moderate working capital-intensity in operations

With shift in business model, TISPL has become a predominant EPC player, wherein the company handles EPC Lump Sum Turnkey (EPC-LSTK) services to its clients in India and across the world. The EPC business is working capital intensive because of the large scale of lump-sum turnkey contracts and fairly long gestation periods. With focus on executing large-ticket EPC projects to scale up operations, working capital requirements is expected to increase going forward. Gross current assets (net-off cash) were high at 302 days as on March 31,2022  and expect the GCA to be around 150 to 180 days going forward.  Any increase in the same on account of addition of EPC orders will remain a monitorable. Unencumbered cash balances equivalent to working capital requirements of 6 months should mitigate the risk of stretch in working capital cycle partly.

 

In addition to EPC contracts, TISPL was primarily an EPCM player, wherein the company handles the engineering and designing part of projects and provides project management & supervision services to its clients. However, TISPL’s work is linked to execution of underlying EPC contracts, which can impact the company’s cash flow. Though TISPL finances a large portion of its working capital requirement through advances from customers, and receives credit, any significant delay in project execution could stretch the working capital cycle.

Liquidity: Strong

Liquidity is supported by healthy cash and cash equivalents, moderate utilisation of non-fund based bank limits, and no long-term debt. Unencumbered cash and cash equivalents were Rs 242 crore as on March 31, 2021. The company primarily depends on non-fund based facilities to fund its working capital requirement, wherein utilisation averaged 68% for the 12 months through April 2022. The company also has fund-based limit worth Rs 2.00 [as on date]  [or 0.80 crore as on 31.03.2022] crore, which remained un-utilised during this period. Furthermore, the company has no long-term debt and is not likely to depend on external debt in the future. Net cash accrual, though expected to be moderate at Rs 60 – 80 crore over the medium term, will be sufficient to fund incremental working capital requirement and maintenance capex.

Outlook: Stable

TISPL should continue to benefit from its established market position as an engineering consulting company, and will maintain its strong financial risk profile, backed by no external debt.

Rating Sensitivity factors

Upward factors:

• Increase in revenue to over Rs 1,000 crore, while maintaining operating profitability at moderate levels
• Sustenance of healthy financial risk profile and cash surplus over Rs 150 crore

 

Downward factors:

• Deterioration in operating performance leading to cash accruals below Rs 40 crore on sustained basis
• Stretch in working capital cycle leading to increase in leverage

About the Company

TISPL, incorporated in 1977, as Uhde India Pvt. Ltd, got its present name in October 2014, after the merger of Uhde GmbH (then TISPL’s immediate parent) with TKISAG. TISPL is an established engineering consultancy company involved in the design and construction of plants for the chemical, petrochemical, fertiliser, refinery, and metallurgical industries in India and abroad. The company is one of the largest international group companies of TKISAG, a business area and a wholly-owned subsidiary of thyssenkrupp AG, Germany. TKISAG currently holds 80.43% shareholding in the company.

 

The company offers EPCM services and executes EPC lump-sum turnkey projects in India and abroad. It also works on the basic and detailed engineering design projects for its parent, TKISAG. Additionally, it also sells membrane cell electrolysers for caustic soda-chlorine projects in India and abroad. Parent company has business presence in over 50 countries worldwide and has successfully implemented over 650 projects for its clients till date.

Key Financial Indicators

YTD Performance		Apr 22 - Sep 22
Operating Income	Rs Crore	503
EBIT	Rs Crore	21
EBIT margin	%	4%

 

Financials as on / for the period ended March 31		2022	2021
Revenue	Rs crore	591	431
Profit after tax (PAT)	Rs crore	32	30.7
PAT margin	%	5.4%	7.1%
Adjusted debt/adjusted net worth	Times	0.00	0.00
Interest coverage	Times	6.86	8.98

 

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	Letter of credit & Bank Guarantee	NA	NA	NA	611	NA	CRISIL A1
NA	Overdraft Facility	NA	NA	NA	2	NA	CRISIL A+/Stable
NA	Fund-Based Facilities	NA	NA	NA	1	NA	CRISIL A+/Stable
NA	Non-Fund Based Limit	NA	NA	NA	129	NA	CRISIL A1