Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Ceigall India Ltd (CIL) to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL A+'. CRISIL Ratings has also reaffirmed its ‘CRISIL A1’ rating on the short-term facilities and Rs 100 crore commercial paper programme of the company.

 

The outlook revision reflects the expectation of continued improvement in the company's business risk profile while sustaining its strong financial risk profile. Operating income posted a compound annual growth rate (CAGR) of 47% over the three fiscals through 2024 to Rs 2,955 crore. The growth momentum has sustained in the current fiscal too - CIL reported 17% growth for the first half of fiscal 2025 as compared to the corresponding period in the previous fiscal and the same is expected to continue for the full year. This will be supported by the strong order book of Rs 12,153 crore as on September 30, 2024, translating into orderbook to revenue ratio of 4.1 times (on operating income of fiscal 2024), which provides healthy revenue visibility over the medium term. The company has also started diversifying into other segments including railways and metro, with dependence on the road sector expected to come down gradually. Additionally, the orderbook is also more geographically diversified across eight states with Punjab contributing 20% (earlier Punjab contributed more than 50%). Concentration risk has also been reduced with multiple orders under execution reducing the dependence on a few large orders. The company will continue to benefit from its strong execution capability resulting in timely or even before time completion of orders as well as improving technical capabilities with the company being eligible to bid for higher value projects. The operating margin is also expected to remain healthy at 14-15% over the near-to-medium term. 

 

Repayment of debt of Rs 413 crore from the proceeds of initial public offer (IPO) of Rs 684 crore has resulted in an improvement in the financial risk profile. Gearing and total outside liabilities to tangible networth (TOL/TNW) ratios reduced to 0.21 time and 0.69 time as on September 30, 2024 as against 0.58 time and 1.23 times as on March 31, 2024, respectively. Liquidity position is healthy, as reflected in unencumbered cash of Rs 340 crore as on August 31, 2024, healthy cash accrual expected over the medium term and moderate utilisation of fund-based limits (~60%) for the 12 months through August 2024.

 

As on date, CIL has eight hybrid annuity model (HAM) projects, of which one is operational and has received two annuities. Out of the seven under-construction HAM projects, two are nearing completion and are expected to be completed in the second half of fiscal 2025 and the first quarter of fiscal 2026. However, five HAM projects (order value of ~Rs 5,800 crore) are yet to receive appointed date (AD) and commence execution (four projects are expected to receive AD by the fourth quarter of fiscal 2025). The company is expected to have an equity funding requirement of around Rs 1,100 crore for existing projects over the next two to three fiscals. While part of these commitments is expected to be met through surplus funds available from IPO proceeds, the remaining will largely be funded through internal accruals. The timely execution of these projects will remain a key monitorable.

 

The ratings continue to reflect a healthy business risk profile, backed by a strong track record of execution, experience of the promoters in the construction industry and robust orderbook position providing revenue visibility. The financial risk profile is also comfortable, as reflected in the strong capital structure and coverage indicators. These strengths are partially offset by exposure to risks related to segmental concentration, susceptibility to intense competition and inherent cyclicality in the construction industry.

Analytical Approach

CRISIL Ratings has moderately consolidated the business and financial risk profiles of CIL and its special purpose vehicles (SPVs) 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 receives the first two annuities.

 

Interest-bearing mobilisation advances 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, operating income posted a CAGR of 47% over the three fiscals through 2024 to Rs 2,955 crore. The growth momentum has sustained in the current fiscal too - CIL reported 17% growth for H1 fiscal 2025 as compared to the corresponding period in the previous fiscal and the same is expected to continue for the full fiscal as well. The promoters' industry experience of over three decades and 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 orderbook provides revenue visibility over the medium term: The company has strong order book of Rs 12,153 crore as on September 30, 2024, translating to orderbook to revenue ratio of 4.1 times (on operating income of fiscal 2024), which provides healthy revenue visibility over the medium term. Of this, ~78% of orders are from NHAI. HAM and EPC (engineering, procurement and construction) orders account for around 49% and 50%, respectively, in the current orderbook. The company has also started diversifying into other segments including railways and metro, with dependence on the road sector expected to come down gradually. Additionally, the orderbook is also more geographically diversified across eight states with Punjab contributing 20% (earlier Punjab contributed more than 50%). Concentration risk has also reduced with multiple orders under execution lowering the dependence on a few large orders.

 

The company has seven under-construction HAM projects, out of which, two are nearing completion and are expected to be completed in the second half of fiscal 2025 and the first quarter of fiscal 2026. However, five HAM projects (order value of ~Rs. 5800 crore) are yet to receive AD and commence execution (four projects are expected to receive AD by the fourth quarter of fiscal 2025). In addition to these projects, the company also has some large EPC orders and a few of these are yet to commence or are in nascent stages of execution. Timely completion of these projects within the budgeted cost remains key monitorable.

 

• Comfortable financial risk profile: Repayment of debt of Rs 413 crore from the proceeds of IPO of Rs 684 crore has resulted in an improvement in the financial risk profile. Gearing and TOL/TNW ratios reduced to 0.21 time and 0.69 time as on September 30, 2024 as against 0.58 time and 1.23 times as on March 31, 2024, respectively. Low leverage and healthy profitability margin will keep coverage ratios comfortable as well. Liquidity position is healthy, as reflected in unencumbered cash of Rs 340 crore as on August 31, 2024, sizeable cash accrual expected over the medium term and moderate utilisation of fund-based limits (~60%) for the 12 months through August 2024.

 

The company is expected to have an equity funding requirement of around Rs 1,100 crore for existing projects over the next two to three fiscals. While part of these commitments is expected to be met through surplus funds available from IPO proceeds, the remaining will largely be funded through internal accruals. 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, unlike EPC players with presence in multiple segments such as commercial, residential, and industrial construction and infrastructure (railways, irrigation, dams, and power). Although the company has gradually started diversifying into other sectors such as railways, metro, bus terminals and airport runways; roads continue to constitute over 85% of the outstanding orders. Nevertheless, increasing geographical diversity and plans to expand into other segments would mitigate concentration risk over the medium term.

 

The operating performance remains susceptible to concentration arising from focus on road projects; awarding in the road sector slowed in the last and current fiscals. While the company has started taking higher value orders, such as construction of tunnels and bridges, as well as diversifying to new geographies, the company’s ability to enter new regions and segments while maintaining profitability remains to be seen. In the past, focus on Punjab and nearby regions had resulted in strong operating efficiency due to established supplier relationships and promoter’s established position in the region.

 

• Exposure to intense competition and cyclicality in the construction industry: Most of the company’s projects are tender-based and face intense competition, thus requiring the company to bid competitively to get contracts, which restricts the operating margin. Competition intensified further post relaxation in bidding norms by MoRTH and NHAI in fiscal 2021. However, amidst high competition, operating margin continues to be healthy at 14-15% supported by economies of scale, higher execution of structure-based projects and receipt of early completion bonus. Amidst cyclicality inherent in the construction industry, ability to maintain profitability margin through operating efficiency becomes critical.

Liquidity: Strong

Liquidity is supported by healthy cash accrual, unutilised bank lines, and Rs 340 crore unencumbered cash and equivalent as on August 31, 2024. Net cash accrual is expected to remain at Rs 350-500 crore per annum and should be sufficient to service scheduled debt obligation of around Rs 100 crore annually, incremental equity commitments and working capital requirement. Fund-based bank limit utilisation was moderate at ~60% on average for the 12 months through August 2024.

Outlook: Positive

The company will benefit from its improving market position in the construction industry and comfortable financial risk profile.

Rating sensitivity factors

Upward factors

• Significant and sustained revenue growth over 15-20% while maintaining operating margin
• Track record of geographical and sectoral diversification in the orderbook
• Sustenance of financial risk profile through prudent management of working capital and public-private partnership (PPP) projects 

 

Downward factors

• Significant decline in operating income or weakening of operating margin below 12-13% on a sustained basis
• Significant stretch in the working capital cycle
• Large capital expenditure or sizeable investments in existing or new PPP projects, necessitating sizeable equity investment thereby weakening the financial risk profile

About the Company

Incorporated in 2002, by Ludhiana-based Sehgal family, CIL is an EPC player focusing on infrastructure projects such as roads, highways, expressways, flyovers, bridges, tunnels, airport runways and elevated viaduct and stations work for metro stations. Currently, Mr. Ramneek Sehgal manages the daily operations. 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. As on March 31, 2024, the company has constructed over 1,740 lane kilometre of roads and highways, which also includes specialised structures such as elevated roads, flyovers, bridges, railway over bridges, tunnels, highways, expressways and runways. It has completed 34 projects including 1 HAM project.

Key Financial Indicators*

Particulars	Unit	2024	2023
Revenue from operations	Rs crore	2,955	2,067
Profit after tax (PAT)	Rs crore	277	185
PAT margin	%	9.4	9.0
Adjusted gearing	Times	0.58	0.76
Adjusted Interest coverage	Times	7.74	9.76

*CRISIL Ratings-adjusted numbers

Any other information: Not Applicable

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 Malout Abohar Sadhuwali Highways Pvt Ltd	Moderate
Ceigall Jalbhera Shahbad Greenfield Highway Pvt. Ltd	Moderate
Ceigall Ludhiana Bathinda Greenfield Highway Pvt. Ltd
Ceigall VRK 11 Pvt. Ltd	Moderate
Ceigall VRK 12 Pvt. Ltd	Moderate

Details as of September 30, 2024