Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Ceigall India Ltd (CIL) to ‘CRISIL A+/Stable’ from ‘CRISIL A/Stable’ while reaffirming its ‘CRISIL A1’ rating on the short-term bank loan facilities and Rs.100 crore commercial paper programme.

 

The rating action reflects a substantial improvement in the operating performance of the company. The operating income has increased at compound annual growth rate (CAGR) of 47% over the three fiscals through 2024 and is expected to be above Rs 2,800 crore for the current fiscal. The growth is supported by the company’s strong execution ability resulting in completion of multiple projects ahead of schedule as well as improving technical capabilities with the company being eligible to bid for higher value projects now. While the operating margin has tapered from 16-18% over the past few fiscals, it was healthy at 14.5-15% in fiscal 2024 and is expected to remain at 15-16% over the medium term. The business risk profile is strong, as indicated by order book of Rs 9,206 crore as on January 31, 2024, translating to order book to revenue ratio of ~3.4 times (on operating income of fiscal 2024), which provides strong revenue visibility. The company has also diversified its order book now with Punjab, Bihar and Jharkhand constituting more than 25% each. Earlier, Punjab contributed more than 50% to the order book. Furthermore, the company has also received Rs 800 crore worth of orders for metro projects, which also adds to order book diversification.

 

Supported by strong operating performance, CIL’s financial risk profile continues to remain comfortable, even with increasing contribution towards hybrid annuity model (HAM) projects. The debt level reduced to Rs 339 crore as on December 31, 2023, from Rs 467 crore as on March 31, 2023. The capital structure is expected to remain comfortable with gearing and total outside liabilities to tangible networth (TOLTNW) ratio of below 0.5 time and 1 time, respectively, over the medium term. Liquidity position is healthy, as reflected in cash and cash equivalent of Rs 260 crore (unencumbered cash of Rs 70 crore) as of December 2023, healthy cash accrual expected over the medium term and moderate utilisation of fund-based limits (~50%) for the 12 months through January 2024. However, equity commitments towards HAM projects and possible cost overruns over the next few fiscals may lead to moderation in liquidity, which will be monitorable.

 

As on date, CIL has five HAM projects, of which one has received provisional commercial operation date (PCOD) on June 6, 2023, while two HAM projects are expected to be completed in fiscal 2025. The remaining two projects are expected to receive appointed date (AD) by the third quarter of fiscal 2025. Consequently, the company is expected to have equity funding requirement of Rs 530-540 crore for existing projects over the next 2 fiscals. While part of these commitments are expected to be met through proceeds from the planned initial public offer (IPO) or through monetisation of the operational and under construction HAM assets, the debt protection metrics will remain comfortable even in absence of the same. CRISIL Ratings has also noted that two HAM projects were cancelled in fiscal 2024, while one more HAM project is yet to receive AD (awarded in fiscal 2022) due to unavailability of land. Timely execution of HAM projects will remain a key monitorable.

 

The ratings continue to reflect healthy business risk profile, backed by strong track record of execution, experience of the promoters in the construction industry and strong order book position providing revenue visibility. The financial risk profile is also comfortable, as reflected in strong capital structure and coverage indicators. These strengths are partially offset by equity commitments and timely execution of HAM projects, intense competition, and exposure to cyclicality inherent in the construction industry.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has moderately consolidated business and financial risk profiles of CIL and its special purpose vehicles (SPVs) for HAM projects where CIL has provided a shortfall undertaking (for one project Bhatinda-Dabwali corporate guarantee (CG) has been provided) to the extent of support required over the medium term. Bhatinda-Dabwali has not been fully consolidated as the CG is expected to fall off once the project achieves commercial operations date (COD). 

 

Interest-bearing mobilisation advances of ~Rs 10 crore as on December 31, 2023 (Rs ~78 crore as on March 31, 2023) have been considered 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:

• Strong execution track record and experience of the promoters in the construction industry: CIL has a strong track record in executing road projects at a rapid pace and before scheduled completion timelines. Consequently, revenue has increased at healthy compound annual growth rate (CAGR) of 47% during the three fiscals through 2024. The promoters' experience of over three decades in executing several projects and their strong understanding of local market dynamics and healthy relationships with suppliers and customers should continue to support the business risk profile. Since its inception, CIL has executed several projects with the Public Works Department (PWD) in Punjab, National Highways Authority of India (NHAI; ‘CRISIL AAA/Stable’), and the Ministry of Road Transport and Highways (MoRTH) by bidding for tenders.

 

• Healthy order book provides revenue visibility over the medium term: The company had an order book of Rs 9,206 crore as on January 31, 2024 (order book–to-revenue ratio of 3.4 times), which ensures medium-term revenue visibility. Of this, more than 80% of orders are from NHAI. HAM and EPC (engineering, procurement and construction) orders account for 35% and 65%, respectively, in the current order book. 

 

Two HAM projects of Rs 1,535 crore were cancelled in fiscal 2024, while one more HAM project (of Rs 862 crore) is yet to receive AD (awarded in fiscal 2022) due to unavailability of land. Nevertheless, the company won two large HAM projects (~Rs 2,650 crore order value) during the year and AD is expected by second or third quarter of fiscal 2025, and timely traction on these projects will be monitorable. Order book of Rs 9,206 crore as on January 31, 2024, translates to an order book to revenue ratio of ~3.4 times (on operating income of fiscal 2024). In addition to five HAM projects, the company also has 3-4 large EPC orders (includes multiple packages for certain projects) worth Rs 4,500 crore. Few of these large-ticket projects are yet to start or are in nascent stages of execution. With execution of ongoing HAM projects and large EPC projects in the near-to-medium term, CIL’s revenue is expected to grow significantly in fiscal 2025. Timely completion of these projects within the budgeted cost remains a rating sensitivity factor.

 

• Comfortable financial risk profile: While the company has scaled up to Rs 2,800 crore (estimated) in fiscal 2024 from Rs 874 crore in fiscal 2021, its reliance on debt continues to be low, as the growth has been largely funded through internal accrual. Continued healthy accretion to reserves has resulted in networth of Rs 792 crore as on December 31, 2023. Supported by strong networth and low debt, gearing is expected to remain below 0.5 time over the medium term. The TOLTNW ratio is expected to remain healthy at below 1.2 times over the medium term. 

 

Despite considering some increase in debt given increasing working capital requirement, cost overruns and equity commitments towards HAM projects and capex requirement, the capital structure is expected to remain strong with gearing under 0.5 time and TOLTNW ratio of less than 1.2 times over the medium term. Given healthy profitability margin, the coverage ratios are also expected to remain comfortable. However, equity commitments towards HAM projects and possible cost overruns over the next few fiscals may lead to moderation in liquidity, which will be monitorable.

 

Any significant increase in debt on account of large debt-funded capex, significant cost overruns in existing HAM projects or substantial exposure to new projects, necessitating sizeable equity investment, will remain key rating sensitivity factors.

 

Weaknesses:

• Limited diversity in revenue profile: CIL’s operations continue to be focused on road projects, which contribute to the bulk of the company’s revenue. The operating performance remains susceptible to concentration arising from focus on road projects, increasing exposure to cyclicality. The company has also started taking higher value orders, such as construction of tunnels and bridges, as well as diversifying to geographies including the Jharkhand-Bihar belt. The company’s ability to enter new regions while maintaining profitability remains to be seen. In the past, focus on Punjab and nearby regions had resulted in strong operating efficiencies due to established supplier relationships and promoter’s established position in the region.

 

• Exposure to intense competition inherent in the construction industry: With increased focus of the Government of India on the infrastructure sector, especially roads and highways, CIL is expected to reap benefits over the medium term. However, most of its projects are tender-based and face intense competition, thus requiring the company to bid competitively to get contracts, which restricts the operating margin to a moderate level. Also, given the cyclicality inherent in the construction industry, the company’s ability to maintain profitability margin through operating efficiency becomes critical.

Liquidity: Strong

Liquidity is supported by healthy cash accrual, unutilised bank lines, and adequate cash and cash equivalent. Net cash accrual is expected to remain at Rs 400-500 crore per annum and should be sufficient to service scheduled debt obligation of Rs 50-200 crore annually, incremental equity commitments and working capital requirement. Fund-based bank limit utilisation was moderate at ~50% on average for the 12 months through January 2024. Furthermore, unencumbered cash balance was healthy at around Rs 70 crore as on December 31, 2023.

Outlook: Stable

The company will benefit from its improving market position in the road EPC sector with large order book and operating efficiencies. The financial risk profile will be supported by steady cash generation over the medium term.

Rating Sensitivity factors

Upward factors

• Significant increase in revenue and operating profitability leading to accrual above Rs 500 crore on sustained basis.
• Track record of geographical and sectoral diversification in the order book.
• Significant improvement in the working capital cycle and liquidity position.

 

Downward factors

• Decline in operating income or profitability resulting in accrual below Rs 250 crore
• Deterioration in financial risk profile of the company due to large borrowing on account of higher-than-expected outflows towards BOT (Build-Operate-Transfer) projects or capex
• Stretch in the working capital cycle leading to weakening of liquidity

About the Company

Incorporated in 2002, by Ludhiana-based Sehgal family, CIL is an EPC player focusing on infrastructure projects such as roads, highways, flyovers and bridges for NHAI, MoRTH and PWD Punjab. Currently, Mr Ramneek Sehgal manages the daily operations of the company. CIL was initially operating as a sub-contractor for other private EPC players and started to bid for projects as a principal contractor from fiscal 2014. After the accumulation of requisite performance and financial qualifications, it started to bid for large-sized orders from fiscal 2019. At present, the company focuses on executing road projects primarily for the NHAI.

 

The company has achieved revenue of Rs 2,097 crore with operating margin of 14.5% in the first nine months of fiscal 2024.

Key financial indicators*

Particulars	Unit	2023	2022
Revenue from operations	Rs crore	2,067	1,131
Profit after tax (PAT)	Rs crore	184	127
PAT margin	%	8.9	11.2
Adjusted gearing	Times	0.76	0.40
Interest coverage	Times	9.72	19.66

*CRISIL Ratings-adjusted numbers

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 levels	Rating assigned with outlook
NA	Commercial Paper	NA	NA	7 to 365 Days	100	Simple	CRISIL A1
NA	Cash Credit	NA	NA	NA	152	NA	CRISIL A+/Stable
NA	Bank Guarantee&	NA	NA	NA	40	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	705	NA	CRISIL A1
NA	Bank Guarantee^	NA	NA	NA	60	NA	CRISIL A1
NA	Cash Credit%	NA	NA	NA	30	NA	CRISIL A+/Stable
NA	Cash Credit$	NA	NA	NA	80	NA	CRISIL A+/Stable

&Sublimit of Rs 2 crores for CC/WCTL facility

^Sublimit of Rs 1 crore for CC/WCTL facility

$Sublimit of Rs 30 crores for bank guarantee

% Sublimit of Rs 20 crores for bank guarantee

Annexure – List of Entities Consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Ceigall Bathinda Dabwali Highways Pvt Ltd	Moderate	To the extent of support requirement
Ceigall Jalbhera Shahbad Greenfield Highways Pvt Ltd	Moderate	To the extent of support requirement
Ceigall VRK 11 Pvt Ltd*	Moderate	To the extent of support requirement
Ceigall VRK 12 Pvt Ltd*	Moderate	To the extent of support requirement

*AD is expected by Q2/Q3 fiscal 2025