Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities and commercial paper of Ceigall India Limited (CIL).

 

The company reported a significant revenue growth of ~83% on-year to Rs 2,067 crore in fiscal 2023, driven by execution of high value orders during the year. Revenue is expected to grow by 25-30% to ~Rs 2600-2700 crore in fiscal 2024. However, the margins moderated to 14.5% in fiscal 2023 as against 16.6% in the previous fiscal due to higher input prices as limited reclaimed asphalt pavement (RAP) was used given the initial stage of various under-construction projects. RAP technology leads to reduction in raw material prices, as reflected in gradual improvement in margins from 10.5% in fiscal 2018 to 16.6% in fiscal 2022. Further, lower margins in fiscal 2023 was on account of booking of unbilled revenue on cost. However, the margins are expected to revert to 15-16% in the medium term.

 

While CIL’s financial risk profile continues to remain comfortable, the outstanding debt increased to Rs 467 crore as of March 31, 2023, from Rs 172 crore as on March 31, 2022. The debt was largely to fund the company’s working capital requirement given the high outstanding receivables of Rs 348 crore. Moreover, the receivables position has reduced to ~Rs 47 crore as of May 31, 2023, and the high built-up is a one-time instance due to year-end phenomenon. While the TOL/TNW ratio moderated to 1.62 times in fiscal 2023, it is expected to remain healthy at below 1.0 time over the medium term. The company has strong liquidity and financial flexibility, with moderate utilisation of fund-based bank limits and unencumbered cash balance of ~Rs 248 crore as on March 31, 2023.

 

As on date, CIL has eight hybrid annuity model (HAM) projects, of which one has received provisional commercial operation date (PCOD) on June 6, 2023. The company won four HAM projects in fiscal 2023, with cumulative order value of ~Rs 4,350 crore. Two of these projects were awarded on March 31, 2023, and the concession agreements (CA) are yet to be signed. The company has equity funding requirement of Rs 844 crore for its new HAM projects of which Rs 122 crore is to be infused in fiscal 2024. The management has articulated its plan to divest HAM assets in the medium term, which would keep the balance sheet asset light and maintain sufficient liquidity.

 

The ratings reflect healthy business risk profile backed by strong execution track record and experience of promoters in construction industry. Revenue has shown a healthy growth in the past and healthy order book position provides strong revenue visibility over the medium term. Financial risk profile of CIL is healthy as reflected in strong capital structure and coverage indicators. These strengths are partially offset by geographical concentration in the order book wherein ~51% of total orders as of May 31, 2023, were from Punjab, equity commitments in hybrid annuity mode (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) where CIL has provided a corporate guarantee (CG) to the extent of support required over the medium term. These SPVs have not been fully consolidated as the CGs are expected to fall off once the projects achieve commercial operations date (COD). 

 

Interest-bearing mobilisation advances have been considered as debt (Nil as on March 31, 2023, and Rs 17.6 crore as on March 31, 2022).

 

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 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 a healthy compound annual growth rate of 61% during the last five fiscals through 2023. 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 biding for tenders.

 

Healthy order book provides revenue visibility over the medium term

The company has an order book of Rs 10,315 crore as on May 31, 2023 (order book–to-revenue [fiscal 2023] ratio of 5.1 times), which ensures medium-term revenue visibility. Of this, more than 90% of order book value is from NHAI. HAM and EPC (engineering, procurement and construction) orders account for 56% and 44%, respectively, in the current order book. 

 

Of the given order book, one HAM project of Rs 740 crore is likely to get cancelled given the slow land acquisition (CA not signed). Two large HAM projects (~Rs 2,640 crore order value) have been recently awarded, and timely traction on these projects will be a monitorable. Further, AD for two other HAM projects has been delayed by over two years. However, these project are expected to commence construction in another 12 months, as CAs have been signed and FC in done. Accordingly, the executable order book position as of May 2023 is ~Rs 6,900 crore, translating to a comfortable order book–to-revenue of 3.4 times. In addition to eight HAM projects, the company also has three large EPC orders (includes multiple packages for certain projects) worth Rs 5,800 crore from NHAI. Few of these large ticket projects are yet to start or 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 2024. Timely completion of these projects within the budgeted cost remains a rating sensitivity factor.

 

There was a landslide on May 19, 2022, in one of under-construction tunnels (Ramban-Banihal project) executed by a joint venture between CIL and Patel Engineering Ltd (PEL) in Jammu and Kashmir (J&K), which claimed 10 lives. As per findings of the technical report, the accident was attributable to natural factors like geology, rainwater entering from cracks leading to instability of the slopes/rocks and was not attributable to any deficiency in workmanship of Ceigall-PEL JV. Accordingly, no further penalties were imposed on CIL, apart from the ban on participating in any of the bids by NHAI/MoRTH.

 

Comfortable financial risk profile; albeit moderation in fiscal 2023

While the company has scaled up to Rs 2,067 crore in fiscal 2023 from Rs 240 crore in fiscal 2019, its reliance on debt continues to be low, as the growth has been largely funded through internal accruals. However, the debt increased to Rs 467 crore as of March 31, 2023 (from Rs 172 crore as on March 31, 2022), it was largely to fund the working capital requirement given the high outstanding receivables of Rs 348 crore. Moreover, the receivables position has reduced to ~Rs 47 crore as of May 31, 2023, and the high built-up is a one-time instance due to year-end phenomenon. Continued healthy accretion to reserves has resulted in strong net worth of Rs 611 crore as of March 31, 2023. Supported by strong net worth and low debt, gearing has remained stable below 0.75 time over past three fiscals. While the TOL/TNW ratio moderated to 1.62 times in fiscal 2023, it is expected to remain healthy at below 1.0 time over the medium term. Strong growth in revenue while sustaining profitability led to sizeable accretion to reserves of Rs 178 crore in fiscal 2023.

 

While the operating margin gradually had improved from 10.5% in fiscal 2018 to 16.6% in fiscal 2022, it moderated to 14.5% in fiscal 2023 due to higher input prices (as limited RAP was used) and booking of unbilled revenue on cost. The margins are expected to revert to 15-16% over the medium term on account of higher scale of operations, geographical clustering of projects, execution of higher margin projects, receipt of early completion bonuses and use of RAP technology which leads to reduction in raw material prices. Sustainability of margins while scaling up operations will remain a key rating sensitivity factor.

 

CIL has moderate investments in its project SPVs with about 13% of its net worth invested in existing HAM SPVs. However, this is expected to increase given the company has seven other HAM projects in hand. The company has equity funding requirement of Rs 844 crore for its new HAM projects of which Rs 122 crore is to be infused in fiscal 2024. The company plans to divest its HAM assets in the medium term, which should keep the balance sheet asset light. Further, CIL has moderate capex requirement of around Rs 75 crore annually for the next three fiscals through fiscal 2026. Estimated annual accruals of Rs 300 crore over the medium term should cover these requirements, with low reliance on external debt. 

 

Any significant increase in debt on account of large debt-funded capex plans, 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 the bulk of the company’s revenue. The operating performance remains susceptible to concentration arising from focus on road projects, thus increasing exposure to cyclicality. The company has also started taking higher value adding orders like construction of tunnels and bridges and ability of the company to scale up these segments profitably remains a key monitorable. Further, the company's orders are concentrated in Punjab leading to geographical concentration risk. While CIL has diversified to geographies like Jharkhand-Bihar belt, it does not plan to diversify to other regions currently. The focus on Punjab and nearby regions has resulted in strong operating efficiencies due to established supplier relationships and promoter’s established position in the region. Company’s ability to diversify in other regions while maintaining the profitability remains to be seen.

 

Exposure to intense competition inherent in the construction industry

With increased focus of the Government of India (GoI) 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, 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 equivalents. Net cash accruals are expected to remain ~Rs 300 crore per annum through fiscal 2026, and should be sufficient to service scheduled debt repayments obligation of around Rs 35-80 crore annually. Fund-based bank limit utilisation was moderate at 62% for the 12 months through May 2023. The average utilisation of non-fund-based facilities stood at 78% during the last 12 months through May 2023. Further, unencumbered cash balance was healthy at around Rs 248 crore as on March 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. Financial risk profile will be supported by steady cash generation over the medium term.

Rating Sensitivity factors

Upward factors

• Significant increase in revenue while maintaining operating margins over 16%
• Maintaining a healthy order book-to-revenue ratio through winning new orders at adequate bid prices
• Diversification of order-book and geographical presence

 

Downward factors

• Decline in operating income or profitability resulting in accruals of below Rs 150 crore
• Stretch in working capital cycle resulting in higher debt and weakening of financial risk profile

About the Company

CIL, incorporated in 2002, by Ludhiana based Sehgal family, 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 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 FY2014. Subsequent to the accumulation of requisite performance qualifications 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.

Key Financial Indicators*

Particulars	Unit	2023	2022
Revenue from operations	Rs crore	2,067.00	1,131
Profit after tax (PAT)	Rs crore	184	127
PAT margin	%	8.9	11.2
Adjusted gearing	Times	0.76	0.4
Interest coverage	Times	9.72	19.66

*CRISIL Ratings-adjusted numbers

Any other information: Not applicable