Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A1’ rating to the Rs.100 crore commercial paper programme of Ceigall India Limited (CIL) and reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities.

 

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 order book wherein the company generates ~75% of the orders in Punjab, equity commitments in 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 (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 63% during the three fiscals through 2022. 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. 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 6,544 crore as on March 31, 2022 (translates to order–to-revenue (FY22) ratio of 6.3 times), which ensures medium-term revenue visibility. Of this, more than 90% of order book value is from NHAI. HAM, EPC and operation & maintenance (O&M) orders account for 41%, 56% and 3%, respectively in the current order book. While the order book to revenue stands at a high level, one of the HAM projects is expected to start execution in the later part of the year, translating into comfortable executable order book at present.

 

CIL had four HAM projects, of which one is under-construction and three are yet to receive appointed dates (AD). The under-construction HAM project received AD on Jan 06, 2022 and is running significantly ahead of schedule; it has already achieved 40.5% progress till April 25, 2022. One of the HAM project has received financial closure and is awaiting appointed date, while the other two have been awarded recently and are yet to achieve financial closure. The company has subsequently emerged as L1 bidder for two additional HAM projects in May 2022, and the projects are expected to be awarded to the company in June 2022. The company also has three large EPC orders (includes multiple packages for certain projects) worth Rs 3,950 crores from NHAI. All three projects are in nascent stages of execution. With execution of the ongoing HAM projects and large EPC projects in the near-to-medium term, CIL’s revenues are expected to grow well in fiscal 2023. 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 1,046 crore in fiscal 2022 from Rs 190 crore in fiscal 2018, its reliance on debt continues to be low at around Rs 184 crore as on March 31, 2022. Growth has been largely funded through internal accruals. Continued healthy accretion to reserves has resulted in strong networth of Rs 454 crore. Supported by strong networth and low debt, gearing has remained stable below 0.5 time over the past three fiscals. TOL/TNW ratio has also remained healthy below 1.0 times over this period. Strong growth in revenue while sustaining profitability led to sizeable cash accrual of Rs 145 crore in fiscal 2022.

 

Operating margin gradually improved from 10.5% in fiscal 2018 to 18.2% in fiscal 2022. This improvement was due to economies of scale on account of higher scale of operations and geographical clustering of projects, execution of higher margin projects, regular receipt of bonuses and use of reclaimed asphalt pavement (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 11% of its networth invested in existing HAM SPV which will increase since the company has three other HAM projects in hand. The company has equity funding requirement of around Rs 356 crore for its new HAM projects of which around Rs 82 crore is to be infused in fiscal 2023. The company plans to divest its HAM assets in the medium term, which would keep the balance sheet asset light.

 

CIL has moderate capex requirement of around Rs 30-70 crore annually for the next 3 fiscals through fiscal 2025. Estimated accrual of more than Rs 200 crore per annum over the medium term should cover these requirements, with minimal 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 ones 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 the company may increase presence in other geographies in North India, it does not plan to diversify in other regions. The focus on Punjab and nearby regions has resulted in strong operating efficiencies for the company due to established supplier relationships and promoters established position in the region. Ability of the company 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 central government 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 ability to maintain profitability margin through operating efficiency becomes critical.

Liquidity: Strong

Liquidity is strong, supported by healthy cash accrual, unutilised bank lines, and adequate cash and cash equivalents. Net cash accruals are expected to remain over Rs 200 crore per annum through fiscal 2025, and should be sufficient to service scheduled debt repayments obligation of around Rs 5-35 crore annually. Fund-based bank limit utilisation was moderate at 38% for the 12 months through March 2022; it has reduced to nil in April 2022 with the company repaying its working capital demand loan facilities. Non-fund-based facilities were utilised at 55% on average in the 12 months through March 2022. Further, unencumbered cash balance was healthy at around Rs 194 crore as on March 31, 2022.

Outlook: Stable

The company will benefit from its improving market position in the road EPC sector with large order book, and proven 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 17%
• Maintaining a healthy order book-to-revenue ratio through winning new orders at adequate bid prices

 

Downward factors

• Decline in operating income or profitability resulting in accruals of below Rs 100 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 FY2019. At present, the company focuses on executing road projects primarily for the NHAI.

Key Financial Indicators *

Particulars	Unit	2022#	2021
Revenue from operations	Rs crore	1046	874
Profit after tax (PAT)	Rs crore	130	112
PAT margin	%	12.4	12.8
Adjusted gearing	Times	0.41	0.10
Interest coverage	Times	18.19	26.05

*CRISIL Ratings-adjusted numbers

#based on provisional financials

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	Cash Credit	NA	NA	NA	10.0	NA	CRISIL A/Stable
NA	Cash Credit	NA	NA	NA	30.0	NA	CRISIL A/Stable
NA	Cash Credit*	NA	NA	NA	60.0	NA	CRISIL A/Stable
NA	Cash Credit	NA	NA	NA	25.0	NA	CRISIL A/Stable
NA	Cash Credit	NA	NA	NA	5.0	NA	CRISIL A/Stable
NA	Cash Credit	NA	NA	NA	10.0	NA	CRISIL A/Stable
NA	Proposed Working Capital facility	NA	NA	NA	10.0	NA	CRISIL A/Stable
NA	Bank Guarantee#	NA	NA	NA	40.0	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	50.0	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	60.0	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	75.0	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	75.0	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	50.0	NA	CRISIL A1
NA	Bank Guarantee	NA	NA	NA	85.0	NA	CRISIL A1
NA	Bank Guarantee^	NA	NA	NA	60.0	NA	CRISIL A1
NA	Proposed Bank Guarantee	NA	NA	NA	205.0	NA	CRISIL A1
NA	Commercial Paper	NA	NA	7-365 days	100	Simple	CRISIL A1

*Sublimit of Rs 30 crores for bank guarantee

#Sublimit of Rs 2 crores for CC/WCTL facility

^Sublimit of Rs 1 crore for CC/WCTL facility

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Ceigall Malout Abohar Sadhuwali Highways Pvt Ltd	Moderate	To the extent of support requirement
Ceigall Bathinda Dabwali Highways Pvt Ltd	Moderate	To the extent of support requirement