Detailed Rationale

Crisil Ratings has assigned its ‘Crisil AA-/Stable/Crisil A1+’ ratings to the bank loan facilities and commercial paper programme of Afcons Infrastructure Ltd (Afcons; part of Shapoorji Pallonji Group).

 

The ratings reflect the strong business profile of Afcons, demonstrated by its established track record and ability to execute complex infrastructure engineering projects in India and overseas. Aided by robust order inflow of Rs 12,677 crore in the first half of fiscal 2025, the company had an order book of Rs 34,152 crore as of September 2024 across the urban infrastructure, hydro and underground including water and irrigation projects, surface transport, marine, and oil and gas segments. Around 83% of the order book is domestic, while around 17% is overseas and involves varied counterparties. This level of diversification shall reduce risk associated with a particular segment, geography or counterparty.

 

As of September 2024, around 50% of the order book was in early stages of execution with less than 10% completion, on account of the recent order inflow. However, given the company’s track record of timely project execution, the risk of delays in these projects is expected to be low.

 

The company exhibits healthy operating efficiency, as reflected in the double-digit operating margin on a sustained basis and strong return on capital employed (RoCE) of more than 17% in the past five years. However, the company has sizeable receivables under arbitration and contract assets, pertaining to uncertified work in four projects. While this is owing to the nature of engineering, procurement and construction (EPC) business and is typical for players across the industry, it will be monitorable from a credit risk standpoint. No material write-off of bad debt or provisioning over the past 10 years (except on two occasions amounting to around Rs 300 crore) demonstrates the company’s ability to execute projects as per the agreements and realise due monies from the debtors.

 

The company has maintained average cash and equivalent of more than Rs 600 crore from fiscal 2020 onwards, which supports its financial flexibility. The company has access to fund-based working capital limits with average utilisation of 75% over the past 12 months, providing an additional cushion of around Rs 630 crore. Financial flexibility is also aided by available lines of interest-free mobilisation advances of Rs 500 crore not yet tapped by the company.

 

These rating strengths are partially offset by large working capital requirement in the EPC business, moderate leverage indicators, delays in realisation of arbitration receivables and pending certification of bills in a few projects. The company historically had higher leverage, with a five-year average total outside liabilities to tangible networth (TOL/TNW) ratio of around 4 times. However, the same will improve in fiscal 2025 (around 3.5 times in fiscal 2024) on account of proceeds from the initial public offering (IPO).

 

The company has negligible operating and financial linkages with entities of the Shapoorji Pallonji Group, with only ~4% of its total revenue and 1% of orders in fiscal 2024 coming from group entities (towards the tunnel works at Pandoh-Takoli highway and breakwater at Chhara where Afcons is as an EPC contractor for its group companies). As of September 2024, there were receivables of around Rs 370 crore under these projects which are in advanced stages of completion. Similarly, work-related advance of around Rs 100 crore extended to Shapoorji Pallonji and Company Pvt Ltd (SPCPL) in fiscal 2019 is expected to be realised this fiscal. Timely realisation of these receivables/advances shall remain monitorable. Barring these, Afcons has not extended any loans/advances/equity to other group companies for many years. Its dividend payout has also been below Rs 30 crore annually. The company’s management has articulated to continue the status quo on related party transactions and Crisil Ratings expects these to remain negligible.

 

Shapoorji Pallonji Group has large debt in its key promoter holding companies, which is non-recourse to the cash flow of Afcons. Crisil Ratings understands that the debt will either be refinanced or be serviced through asset monetisation plans of the group without any bearing on the cash flow of Afcons. Besides, Afcons has largely been managed professionally and independently and did not extend financial support towards servicing of debt in promoter companies. This is expected to continue and any action by the company contrary to this understanding shall be a key rating sensitivity factor.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of Afcons and its subsidiaries as all the entities are in the same business. The list of entities consolidated is provided in the annexure.

 

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:

• Strong business profile with established market position in the EPC segment: The company has a strong track record of timely execution of complex engineering projects in India and overseas. It has executed marquee infrastructure projects such as Atal Tunnel and Chenab Rail Bridge in India, and Ghana Rail and Zambia City Decongestion overseas. Additionally, the company has demonstrated its expertise in executing underground metros and tunnel works by undertaking multiple metro projects and is currently undertaking a section of the Mumbai-Ahmedabad High Speed Rail Corridor.

 

As of September 2024, the company had an order book of Rs 34,152 crore, which is well diversified across urban infrastructure (~56%), hydro and underground (~25%), marine (~7%), with the remainder fragmented across roads, railways, bridges, tunnel works, and oil and gas. These provide strong revenue visibility over three fiscals.

 

• Healthy operating efficiency on a sustained basis: The company has healthy operating efficiency with a five-year average operating margin of 10.3% (including foreign currency translation gains or losses) due to selective bidding and limited competition at the time of bidding in complex engineering space. The working capital cycle of Afcons is commensurate with industry benchmarks and likely to remain so. The operating efficiency is also reflected in healthy RoCE of more than 17% in the past five years, which is likely to sustain over the medium term.

Crisil Ratings believes Afcons will maintain its healthy operating margin, driven by careful selection of projects and ability to execute orders on time.

 

• Healthy financial flexibility: The financial flexibility is supported by cash and equivalent of around Rs 760 crore as of September 2024 and fund-based working capital limits with average utilisation of 75% over the past 12 months. The company has been keeping at least 25% of the bank limit free at all times, providing additional cushion of around Rs 630 crore. The financial flexibility is also aided by available lines of interest-free mobilisation advances of Rs 500 crore not yet tapped by the company.

 

Weaknesses:

• Large working capital requirement: Operations are working capital intensive due to the inherent nature of the EPC business and average project execution cycle of 3-4 years. Receivables are high in this business due to sizeable retention money blocked in projects till the end of the performance guarantee period as well as certain changes in scope variations which are required to be negotiated with the counterparties for approvals.

 

The company has high working capital intensity with gross current assets (GCAs) of around 360 days as on September 30, 2024, up from 293 days as on March 31, 2024 (253 days as on March 31, 2023) on account of delays in certification of bills from various government organisations in the run-up to the general elections. However, the same was managed through back-to-back arrangements with creditors with overall payables increasing to around 260 days as on September 30, 2024, from 229 days as on March 31, 2024 (205 days a year earlier).

 

However, the working capital intensity is expected to moderate with realisation of receivables and certification of bills in the second half of fiscal 2025, including repayment of creditors, supported by internal accrual and cash proceeds from the IPO.

 

• Sizeable receivables under arbitration and non-current contract assets: The company had receivables of Rs 1,065 crore under arbitration as of March 2024. Of the above receivables, the company has received around Rs 560 crore against submission of bank guarantees pending final legal outcome. Any negative verdict against the company and subsequent cash outflow can impact its liquidity, which will remain monitorable. During fiscal 2025, the company received around Rs 240 crore pertaining to settlement in one of the projects.

 

Similarly, Afcons had non-current contract assets of Rs 1,271 crore as of March 2024 pertaining to a few legacy projects, where certification of change in scope is pending approval and is under negotiations with the counterparties.

 

The funding required for arbitration receivables and contract assets resulted in a high TOL/TNW ratio in previous years.

 

• Moderate coverage indicators and high, though improving, leverage indicators: The company historically had higher leverage, with a five-year average TOL/TNW ratio of around 4 times. However, the same will improve to in fiscal 2025 (around 3.5 times in fiscal 2024) on account of IPO proceeds of Rs 1,250 crore and repayment to creditors and reduction in working capital loans.

 

The company had total debt of Rs 2,451 crore as of March 2024. While the working capital debt has been reduced through IPO proceeds during fiscal 2025, the company is undertaking sizeable capital expenditure (including import of three tunnel boring machines) of around Rs 1,000 crore in fiscal 2025, followed by around Rs 600-800 crore from fiscals 2026 to 2028. The capital expenditure will be funded through debt and internal accrual, which is likely to keep the overall indebtedness high.

 

Adjusted interest coverage ratio is expected to moderate from 3.1 times in fiscal 2024 to 2.7 times in fiscal 2025 on account of increased capital expenditure intensity. The same is expected to remain moderate at around 3 times over the medium term.

Liquidity: Strong

Cash and cash equivalent of around Rs 760 crore as of September 2024 and annual cash accrual of Rs 800-1,000 crore in fiscals 2026 and 2027 against annual debt obligation of around Rs 300-450 crore should keep the liquidity position healthy. The company has been maintaining a minimum unencumbered cash balance of over Rs 600 crore, supporting liquidity. Besides, it has access to fund-based bank limits with average utilisation of around 75% over the past 12 months. The financial flexibility is also aided by available lines of interest-free mobilisation advances of around Rs 500 crore not yet tapped by the company.

Outlook: Stable

Crisil Ratings believes Afcons will maintain its strong market position in the complex EPC segment and is positioned to benefit from the urban infrastructure spending in India over the medium term. The company’s profitability is expected to remain steady, backed by the healthy margin profile of the orders being bid for.

Rating sensitivity factors

Upward factors

• Healthy revenue growth over the medium term while sustaining double-digit operating margin and revenue visibility of 3-4 years
• Timely realisation of non-current contract assets and disputed receivables resulting in a marked improvement in the working capital intensity
• Improvement in interest coverage to above 4 to 4.5 times on a sustained basis

 

Downward factors

• Moderation in operating margin to below 9% or marked increase in working capital intensity on a sustained basis
• Extension of financial support to Shapoorji Pallonji Group entities in the form of sizeable dividends, or loans/ advances/equity/quasi-equity to group companies, materially impacting the liquidity and financial profile
• Weakening of the company’s ability to raise additional funds or working capital as a result of any restrictive/limiting measures imposed by lenders

About the Company

Afcons was incorporated in 1959 as Rodio Hazarat & Co and was acquired by Shapoorji Pallonji Group in 2000. It is an Indian construction and engineering company involved in infrastructure projects across elevated and underground metro, bridges, roads, tunnels, ports and marine works, and oil and gas.

 

Shapoorji Pallonji Group holds 50.17% in Afcons, with Goswami Infratech Pvt Ltd holding 25.03%, SPCPL holding 15.41% and the remaining held by other promoter entities. Afcons concluded its IPO raising Rs 1,250 crore from primary issuance of shares. The company got listed on Indian stock exchanges on November 4, 2024.

 

For the first half of fiscal 2025, the company reported revenue of Rs 6,114 crore and profit after tax of Rs 227 crore against Rs 6,505 crore and Rs 195 crore, respectively, for the corresponding period of last fiscal.

Any other information: Not Applicable