Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A/Negative’ rating to Rs 100 crore non-convertible debentures (NCDs) of Dilip Buildcon Ltd (DBL) and reaffirmed its 'CRISIL A/Negative/CRISIL A1+' ratings on the bank facilities and existing debt instruments of the company.

 

Also, CRISIL Ratings has withdrawn its rating on NCDs of Rs 150 crore (see annexure - details of rating withdrawn) on confirmation from the debenture trustee that these have been fully redeemed.

 

The ratings continue to reflect the company’s healthy business risk profile backed by established market position and strong project execution capability of a diverse orderbook and its moderate financial risk profile supported by ability to monetise assets.  These strengths are partially offset by large working capital requirement, capital expenditure (capex) intensive business model and susceptibility to cyclicality in the construction industry and volatility in raw material prices.

 

The continuation of negative outlook is because earnings before interest, tax, depreciation and amortisation (Ebitda) margins in fiscal 2023, even though improved, recouped lower than earlier expectations. This coupled with high finance cost on account of elevated working capital debt (due to higher inventory levels than peers) has resulted in constraining the improvement of adjusted interest coverage ratio to 2.5 times estimated for fiscal 2023 compared to CRISIL’s earlier expectation of 3 times.

 

DBL is estimated to have clocked a revenue of Rs 10,000 crore in fiscal 2023 and Ebitda margin of 10-11% as compared to 8.5% in fiscal 2022. The operating margin, though on a recovery trend vis-à-vis fiscal 2022, is still lower than pre-pandemic levels owing to part execution of low margin 2018/2019 hybrid annuity model (HAM) projects in H1 of last fiscal and lack of early completion bonus.

 

As a result of improvement in operating margin in fiscal 2023, adjusted interest coverage and net cash accrual to adjusted debt ratios improved to an estimated 2.5 times and 21%, respectively, from 1.4 times and 19%, respectively, in fiscal 2022.

 

The operating margin is expected at new normalised level of 12-13% in fiscal 2024 along with 8-10% revenue growth, backed by strong and diversified order book of Rs 26,539 crore as on December 31, 2022. This operating margin level, however, will be lower that pre-Covid level primarily owing to increased competitive intensity in the road construction sector.

 

In fiscal 2024, monetisation of remaining assets to the Shrem group will result in inflow of Rs 500-600 crore in DBL, which will strengthen adjusted interest coverage and NCAAD ratios to 3 times and 25%, respectively. Delay in improvement in operating profitability or realisation of cash flow from monetisation of assets will be key rating sensitivity factors.

 

The company continues on its deleveraging plans, with total adjusted debt having fallen by Rs ~1,000 crore in past two years. Networth was strong, estimated at ~Rs 4,600 crore as on March 31, 2023, and total outside liabilities to adjusted networth (TOLANW) ratio, which was as high as 2.43 times as on March 31, 2019, improved to 1.5 times as on March 31, 2023, and is expected to improve further over the medium term, despite large equity commitment of Rs. 500-600 crore p.a. in under-construction HAM and MDO projects in the medium term.

 

DBL will maintain adequate liquidity backed by expected annual net cash accrual of Rs 700-800 crore and inflow of Rs 500-600 crore from the sale of the remaining assets to the Shrem group in fiscal 2024. This will be sufficient to meet debt obligation of ~Rs 350 crore per annum over the medium term and equity commitment of Rs. 500-600 crore p.a. over the medium term. Also, the company has the flexibility to draw down additional Rs 293 crore through DIAPL. It can also sell/raise money against the InvIT units worth Rs ~900 crore. As on December 31, 2023, cash and equivalent stood at ~Rs 300 crore, out of which ~Rs 30 crore was free cash. Bank limit utilisation was moderate at 87% on average for the 12 months through January 2023.

 

Further, there is no major development around the ongoing Central Bureau of Investigation (CBI) case. CRISIL Ratings will continue to monitor developments around the case and its impact on the credit risk profile of DBL.

Analytical Approach

CRISIL Ratings has considered the standalone financials of DBL and has consolidated the special-purpose vehicles (SPVs), wherein DBL had outstanding corporate guarantees (CGs) as on March 31, 2023, or is expected to give corporate guarantees for the entire tenure of the debt. Further, CRISIL Ratings has moderately consolidated other SPVs to the extent of support required over the medium term.

 

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

Established market position backed by strong project execution capability

The company has established relationships with state government departments, National Highways Authority of India (NHAI; 'CRISIL AAA/Stable') and the Ministry of Road Transport and Highways (MoRTH) owing to its track record of executing projects on or before time. This is because of a large equipment fleet and geographical clustering of projects. Furthermore, strong in-house technology and manpower enable completion of projects within the timelines and without any cost overrun. However, during the Covid-19 pandemic, profitability was impacted owing to higher fixed overheads on account of the asset-heavy model of the company. Therefore, the company has now taken up projects with low capital requirement (water supply projects). Continued focus on due diligence while bidding for projects should sustain profitability.

 

Robust orders providing revenue visibility along with increased diversification

The company had orders of Rs 26,539 crore as on December 31, 2022, with order book to revenue ratio of 2.6 times (revenue in fiscal 2023), providing medium-term visibility. It has diversified into mining, irrigation and urban infrastructure to reduce revenue concentration in the roads segment. Roads, which accounted for around 87% of the order book as on March 31, 2018, accounted for only 40% of the order book as on December 31, 2022. The orders are spread across 15 states and hence geographically diversified.

 

The company has secured two mine development and operator (MDO) projects on public-private-partnership basis. Since 2016, it has been executing small mining projects (with total contract value of Rs 6,000 crore) and hence has reasonable exposure to this sector. Moreover, it has a dedicated team of professionals with vast experience in the mining sector. It does not intent to bid for additional MDO projects till it gains a strong foothold in the existing projects. While project implementation risk is mitigated by the strong execution capabilities of DBL, CRISIL Ratings will nevertheless closely monitor their progress.

 

Moderate financial risk profile supported by ability to monetise assets

The TOLANW ratio improved to an estimated 1.5 times as on March 31, 2023, from 1.6 times as on March 31, 2022, driven by funds raised by the company and divestment of road assets, reducing reliance on debt. Net cash accrual, estimated at Rs 600 crore in fiscal 2023, is expected to increase to Rs 750-850 crore over the medium term. As a result, despite large equity commitment in under-construction HAM and MDO projects, the TOLANW ratio will improve to less than 1.5 times in the absence of large capex (expected Rs 100-150 crore per annum) and inflows projected from monetisation of assets.

 

Debt reduced to an estimated Rs 3,000 crore (includes interest-bearing mobilisation advances of Rs ~250 crore) as on March 31, 2023, from Rs 3,200 crore (including interest-bearing mobilisaiton advances of Rs 128 crore) as on March 31, 2022, on account of inflows from stake sale deals, healthy cash accrual and realisation of receivables. However, adjusted interest coverage ratio moderated to 2.5 times in fiscal 2023 on account of adequate profitability. With improvement in revenue and profitability and debt of Rs 3,500 crore, the debt protection metrics are expected to improve with adjusted interest coverage expected to remain over 2.5 times over the medium term.

 

DBL, post sale of assets, has a portfolio of 15 under-construction HAM projects and two MDO projects that have balance equity requirement of around Rs 1,500 crore as of March 2023. Investment in these projects will be supported by monetisation of assets (over and above cash accrual). DBL has exhibited strong track record in this area with a total of 37 assets already transferred or to be transferred by fiscal 2024.

 

DBL has received Rs 650 crore through NCD issuance in its wholly owned subsidiary, DIAPL, for partial transfer of its stake in 10 HAM assets to DIAPL. Seven of these assets were part of the Shrem deal and will be flipped with other projects. While DBL has extended corporate guarantees to these NCDs, the guarantee will exist only till the projects become operational. Moreover, interest payment on the NCDs will commence in November 2023 and principal repayment from November 2024; by then all assets kept as security will be operational and hence DBL will have no obligation towards the debt servicing of the NCDs. This transaction gives DBL flexibility to raise funds of Rs 995 crore (Rs 293 crore yet to be drawn) to meet its funding requirement in HAM assets. The NCDs will be retired through funds realised from monetisation of the assets.

 

Weaknesses

Large working capital requirement and capex-intensive business model

As an engineering, procurement and construction (EPC) player with robust orders, DBL has sizeable working capital requirement, as reflected in gross current assets estimated at 235 days as on March 31, 2023. Inventory remains large as nearly 40% of total project inventory is stocked upfront for faster execution and for earning early completion bonus. Inventory (excluding unbilled revenue) was large at 145 days as on March 31, 2023 However, the management has indicated a strategy change to reduce inventory.

 

Also, DBL follows a capex-intensive model, wherein it owns a large fleet of equipment and has sizeable workforce to keep the dependence on third parties minimal and complete the projects on time. This model impacted the performance of the company during the pandemic, leading to loss in fiscal 2022 because of high fixed cost, depreciation and interest. However, DBL has now taken up projects which are less capital intensive (water supply projects), which will reduce the company’s need to expand its machinery base.

 

Exposure to intense competition and cyclicality inherent in the construction industry

Revenue remains susceptible to economic cycles that impact the construction industry. The company mainly caters to government agencies, expenditure of which is directly linked to the economy. Competition in the roads segment has intensified owing to relaxation in bidding norms by NHAI and MoRTH, which led to decline in number of HAM projects received by the company to 4 in fiscal 2023 from 12 in fiscals 2018 and 2019. The increased competitiveness could impact the operating margin. However, this risk is mitigated by DBL’s increased diversification which will allow it to bid selectively for projects. Though the company has a strong track record of efficient operations in roads, efficiency for new segments such as irrigation and construction of dams will be a key monitorable.

 

Susceptibility to volatility in raw material prices

The price of the key raw materials is volatile. Operating profitability is constrained by the limited ability to pass on increase in raw material cost to customers. The EPC business is tender based, limiting the scope to pass on sizeable cost changes, unless specifically covered in contracts. Further, for HAM projects, 60% of the increase is received with annuities. The operating margin is expected at 12-13% in fiscal 2024, compared with 16-17% earlier.

Liquidity: Adequate

DBL will maintain adequate liquidity backed by expected annual net cash accrual of Rs 700-800 crore and inflow of Rs 500-600 crore from the sale of the remaining assets to the Shrem group in fiscal 2024. This will be sufficient to meet debt obligation of ~Rs 350 crore per annum over the medium term and equity commitment of Rs. 500-600 crore p.a. over the medium term. Also, the company has the flexibility to draw down additional Rs 300 crore through DIAPL. It can also sell/raise money against the InvIT units worth Rs ~900 crore. As on December 31, 2023, cash and equivalent stood at ~Rs 300 crore, out of which ~Rs 30 crore was free cash. Bank limit utilisation was moderate at 87% on average for the 12 months through January 2023 (utilised to the extent of Rs 350-400 crore).

Outlook: Negative

The outlook on DBL reflects modest operating margin, stress on interest coverage ratio and large working capital requirement. However, the credit risk profile is supported by the established market position of the company, its robust order book, superior execution capabilities and ability to monetise assets.

Rating Sensitivity factors

Upward factors

• Improvement in operating performance resulting in adjusted interest coverage ratio increasing to above 2.7-2.8 times
• Strengthening of the financial risk profile with controlled debt supported by timely realisation of cash inflows from proposed monetization of assets, leading to sustenance of TOLTNW ratio below 2 times
• Sustenance of liquidity (cushion in working capital limit) supported by efficient working capital management

 

Downward factors

• Interest coverage ratio declining to below 2.3-2.4 times on sustained basis
• Deterioration in liquidity, reducing cushion in the fund-based limit
• Large capex or sizeable investments in existing or new projects without adequate equity back-up or delay in monetisation of assets, weakening the financial risk profile, with TOL TNW ratio of 2.8-3 times

About the Company

DBL was set up as a proprietorship firm (Dilip Builders) in fiscal 1989. The firm was reconstituted as a private limited company in 2006 and as a public limited company in fiscal 2017. The Bhopal-based company, promoted by Mr Dilip Suryavanshi and Mr Devendra Jain, undertakes EPC work for urban development and mining, and road development on build-operate-transfer (BOT) basis and MDO work in mining.

 

The company has been increasing its sectoral diversification over the years, with focus on taking up projects with low capex requirement. Roads will, however, continue to be the largest contributor. Around 40% of the projects in the orderbook are from the roads sector, 17% from mining and remaining from irrigation and urban development.

 

In August 2016, DBL successfully completed an initial public offering of Rs 654 crore, which included fresh equity of Rs 430 crore and the balance came through sale of partial stake by the promoters and investor, Banyan Tree Growth Capital LLC. The company also did a qualified institutional placement (QIP) of Rs 501 crore in fiscal 2022.

 

DBL posted revenue of Rs 7,262 crore for the first nine of fiscal 2023 on profit of Rs 164 crore, compared with revenue of Rs 6,500 crore on loss of Rs 89 crore for the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2022	2021
Revenue	Rs crore	9004	9,207
PAT	Rs crore	-86	319
PAT margin	%	(1.0)	3.5
Adjusted debt / adjusted networth*	Times	0.74	0.99
Adjusted interest coverage	Times	1.44	2.56

*Interest bearing mobilisation advances have been treated as debt

Any other information: Not applicable