| Dilip Buildcon Limited | ||||||
| Rating outlook revised to 'Negative'; CP Withdrawn | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long term bank facilities and non convertible debentures of Dilip Buildcon Limited (DBL) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A’. The short-term rating has been reaffirmed at ‘CRISIL A1’.
CRISIL Ratings has also withdrawn its rating on non-convertible debentures (NCDs) of Rs 90 crore on confirmation from the debenture trustee as it is fully redeemed. The rating on the commercial paper programme has also been withdrawn on company’s request as there is no outstanding commercial paper and no requirement of future issuance in near term. This is in line with CRISIL’s withdrawal policy.
The rating action reflects moderation in DBL’s operating performance estimated for fiscal 2022 and over the medium term, marked by lower than anticipated profitability due to raw material cost inflation and stagnated revenue growth. Revenue in fiscal 2022 is estimated to have declined by 3-5% (yoy) while decline in operating profitability is estimated to be significant in range of 600-800 bps, leading to EBIDTA margin at 7-8%, vis-à-vis CRISIL earlier expectation of 13-15%. Deterioration of profitability is a result of high operating leverage and bunching up of execution of projects suffering from Covid induced delays. DBL owns major part of its equipment and has invested in diversification over last 2-3 years, this has resulted in increased fixed cost during the year when pace of execution was impacted because of Covid and extended monsoon. Further, due to Covid extended deadlines, company lost on the early completion bonus in fiscal 2022, which constituted 1-1.5% of revenue over last few fiscals. This was coupled with the current raw material inflation witnessed in the industry. About 50% of DBL’s revenue in fiscal 2022 is estimated to come from Hybrid Annuity Model (HAM) projects, which were won by the company in 2018 and 2019. The built-in cost escalations in these projects are comparatively lower and 60% of the increase is deferred to later period with annuities. All these reasons along with losses in old HAM projects resulted in moderation in operating profit of DBL sharply in third quarter of fiscal 2022. With ramp up in execution in fourth quarter onwards, operating performance is expected to gradually recover. CRISIL Ratings expects operating margin for fiscal 2023 to recover to 11-12% but will remain lower than pre-pandemic levels.
As a result of lower than expected performance in fiscal 2022, interest cover and NCATD is expected to moderate sharply to below 2 times and ~10% respectively from levels of 2.56 and 18% in the previous fiscal. However, with recovery in performance expected from H2 of fiscal 2023 onwards and controlled debt levels, debt metrics should improve over the medium term. DBL is in process of monetizing a bunch of its assets to Cube Highways and Shrem group and has received total cash flow of Rs 740 crore during fiscal 2022 and expect Rs 288 crore in cash and Rs 1732 crore in marketable securities during fiscal 2023.
During fiscal 2022, the impact of deterioration in operating performance on credit profile was partially offset by the deleveraging efforts of the company. DBL completed Qualified Institutional Placement (QIP) of Rs 510 crore. Further, DBL has recently closed two deals for monetizing 13 of its HAM assets. DBL has entered into -agreements with the Cube Highways (Cube) for 3 HAM assets and Shrem group (Shrem) for 10 HAM assets. Under the aforementioned deal with Cube, DBL is expected to receive Rs 430 crore (at valuation of 1.42 times of equity), out of this Rs 291 crore has already been received by the company in fiscal 2022. In the Shrem deal, for transfer of 10 HAM assets, company is going to receive ~Rs 2350 crore. Out of this, Rs 616 crore (Rs 450 already received in March 2022) will be in the form of cash for the loans and advances given in these assets and Rs 1732 crore in form of InVIT units for the transfer of equity. As a result, despite lower profitability, DBL is estimated to have reduced overall debt levels to ~Rs 3300 crore by end of fiscal 2022 vis-à-vis Rs 3966 crore in fiscal 2021.
DBL has healthy order book of about Rs 24000 crore outstanding as on 31st December 2021 which provides good revenue visibility in coming years. In fiscal 2023, DBL is expected to post revenue growth of 10-15% with margin remaining in the range of 11-12%. Any delay in improvement in operating profitability or realization of cash flow from monetization of assets will remain key rating sensitivity factors.
With recovery in operating performance, the debt metrics is expected to improve gradually over medium term. Interest is expected to remain above 3 times over the medium term. Net cash accruals to total debt is also expected in the range of 20-30% while total outside liabilities to tangible networth (TOL/TNW) to remain below 1.3 times. DBL is expected to maintain adequate liquidity with annual net cash accruals expected at Rs 850-950 crore. This would be sufficient for the repayment obligations of ~Rs 680 crore in fiscal 2023 and ~Rs 360 crore in fiscal 2024. Also, company has flexibility to draw down additional Rs 293 crore through the DBL Infra Asset Pvt Ltd (DIAPL). Further, company can also sell/ raise money against the InvIT units worth Rs 1732 crore receivable from the Shrem deal. As on December 31, 2021, company has cash and cash equivalents of Rs 415 crore, out of which Rs 33 crore is free cash. Bank limit utilization remains moderate at 85% for last 6 months ending February 2022 (utilized to the extent of Rs 350-400 crore). The utilization in March 2022 reduced utilization because of inflow received from the stake sale deals and unutlised cushion remained around Rs 450 crore.
Further, there is no major development around the recently initiated 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.
The ratings continue to reflect the established market position of DBL, backed by its strong project execution capability, robust orders providing revenue visibility over the medium term, and a moderate financial risk profile supported by its ability to monetise assets. These strengths are partially offset by large working capital requirement, capex intensive business model and exposure to cyclicality in the construction industry and volatility in raw material prices. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has considered the standalone financials of DBL, and has consolidated the special-purpose vehicles (SPVs), where DBL has outstanding corporate guarantees (CGs) for the entire tenure of the debt, as on March 31, 2022. Further, CRISIL has moderately consolidated other SPVs to the extent of support required over the medium term. |
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 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. Acquiring own equipment, against leasing equipment and minimal subcontracting of jobs enabled the company to earn early completion bonus, resulting in healthy operating margin of about 17%. However, the margin came under pressure in fiscal 2022 ( estimated at 7-8%) due to the Covid-19 pandemic, extended monsoon and raw material cost inflation, which impacted execution and hence the company could not earn early completion bonus in the fiscal. Recovery in performance is expected and operating margin is expected to remain stable at around 12-14% over the medium term. Continued focus on detailed due diligence while bidding for projects should sustain profitability.
Robust orders providing revenue visibility with increased diversification The company had orders of around Rs 24000 crore as on December 31, 2021, with order book to revenue ratio of 2.7 times (revenue in fiscal 2022) providing visibility over the medium term. The company has increased its diversification into mining and urban infrastructure to reduce its 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, 2021. Order book spread across 15 states is hence also geographically well diversified.
The company has been bidding for power transmission and mine development and operator (MDO) projects on public-private-partnership basis. DBL has secured two MDO projects that should commence in the next 1-2 years. While these would be DBL’s first MDO projects, the company since 2016 has been executing smaller mining projects (mining projects with total contract value of Rs 6,000 crore have been completed or are under execution) and hence has reasonable exposure to this sector. Moreover, the company has hired a dedicated team of professionals with vast experience in the mining sector who would be handling these projects. The company does not intent to bid for more MDO projects till it gains a strong foothold in the existing projects. While project-implementation risk is partially mitigated by DBL’s strong execution capabilities, CRISIL Ratings will nevertheless closely monitor their progress.
Moderate financial risk profile supported by ability to monetise assets TOL/TNW is estimated to improve to 1.42 times as on March 31, 2022, from 1.9 times as on March 31, 2021, despite the losses. This is driven by funds raised by the company and divestment of road assets reducing reliance on debt. Net cash accruals, which are estimated at Rs 350 crore in fiscal 2022 are expected to improve to Rs 850-950 crore over coming years. As a result, despite large equity commitment in upcoming under-construction HAM and MDO projects, the ratio of TOL/TNL is expected to improve further in the absence of any large capital expenditure (capex) plan (expected Rs 100-150 crore p.a.) and inflows projected from monetisation of assets. The ratio is expected to reman below 1.3 times over the coming years.
Debt is estimated at around Rs 3300crore (includes interest-bearing mobilisation advances of Rs 200 crore) as on March 31, 2022; reduced from Rs 3966 crore as on March 31, 2021 on account of inflows from the NCD issuance at DIAPL, QIP and inflows from stake sale deals. However, interest coverage ratio is estimated to be moderated to below 2 times in fiscal 2022, on account of decline in profitability. With improvement in revenue and profitability over the medium term and expected debt of Rs 3500 crore, debt protection metrics are expected to gradually improve and interest coverage is expected to remain over 3 times.
DBL currently has a portfolio of 23 under-construction HAM projects and two MDO projects that have balance equity requirement of around Rs 1500 crore as of March 2022 (Rs 930 crore to be infused over fiscal 2023 and 2024). Investment in these projects will be supported by monetisation of assets (over and above its cash accrual). DBL has exhibited strong track record in this area with a total of 37 assets (with inflows of over Rs 2,100 crore) already transferred or transfer to complete by fiscal 2023. 24 assets were sold to the Shrem from which DBL has already realised entire consideration of about Rs 1,500 crore; a share purchase agreement has been signed with Cube Highways for three under-construction projects for Rs 430 crore and another 10 HAM assets to be transferred to Shrem for Rs 2350 crore. Partial inflows (Rs 740 crore) from new deals from Cube and Shrem have been received in fiscal 2022 and the balance will be received in fiscal 2023.
DBL has also received Rs 650 crore via NCD issuance in its wholly owned subsidiary, DIAPL for partial transfer of its stake in 10 HAM assets to DIAPL. 7 of these assets are now part of the Shrem deal and will be flipped with other projects. While DBL has extended CG to these NCDs, the CG will exist only till projects become operational. Moreover, interest payment on the NCDs will commence only in November 2023 and principal repayment from November 2024 by when all assets kept as security are expected to 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 expected from fiscal 2023 onwards.
Weaknesses Large working capital requirement and capex intensive business model As an EPC player with robust orders, DBL has sizeable working capital requirement, with gross current assets of 225 days as on March 31, 2022. Inventory remains large, as nearly 40% of total project inventory is stocked upfront for faster execution and to earn early completion bonus. Inventory (excluding unbilled revenue) increased further to over 115 days as on March 31, 2021, from 105 days as on March 31, 2020 due to sharp rise in raw material prices and the same is expected for fiscal 2022 as well with some correction expected thereafter. Nevertheless, the company’s operations are expected to remain working capital intensive.
DBL also follows a capex intensive model wherein it owns large fleet of equipment and large workforce to keep the dependence on third parties minimal and complete the projects well advance in time. This model has impacted the performance of the company during the pandemic leading to loss for the company in fiscal 2022 because of high fixed cost, high depreciation, and interest. Hence impact of weak cycle was higher on DBL.
Susceptibility to intense competition and cyclicality inherent in the construction industry Revenue remains susceptible to economic cycles that impact the construction industry. Furthermore, the company mainly caters to government agencies, expenditure of which is directly linked to the economy. Competition in roads has intensified further due to the recent relaxation in bidding norms by NHAI and MoRTH. The numerous players in the construction segment led to intense competition as reflected in number of HAM projects received by the company which remained at 3 in fiscal 2022 compared to 12 in 2018 and 2019. The increased competitiveness could impact the operating margin. However, this risk is partially mitigated by DBL’s increased diversification into varied sectors which will allow it to bid selectively for projects. Though, company has strong track record of efficient operations in roads, however, for new segments such as irrigation, construction of dams etc, will remain monitorable.
Susceptibility to volatility in raw material prices The price of the key raw materials is volatile. Operating profitability is also constrained by the limited ability to pass on any increase in raw material cost to customers. The EPC business is largely 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 in later period along with annuities. The impact on profitability for DBL in the last few quarters shows its susceptibility to changes in raw material prices. The operating margin is estimated at 7-8% in fiscal 2022 compared to 16-17% level earlier. |
Liquidity: Adequate The company has large upcoming debt obligation of ~Rs 680 crore in fiscal 2023. The maturing debt will be met out of cash accrual projected at over Rs 800 crore in fiscal 2023. While the company has large equity commitment of over Rs 1,500 crore over the next 2 fiscals (till fiscal 2024), inflow of over Rs 1,000 crore mobilisation advances from HAM projects, Rs 995 crore through NCD issuance in DIAPL (of which Rs 702.7 crore has already been drawn down) and over Rs 900 crore, in the form of cash, from sale agreement with Cube and Shrem will help DBL meet its equity commitment, thereby limiting debt. Further, the InVIT units from the deal of Shrem will add to the financial flexibility of the company.
Fund-based lines of Rs 2,471 crore have been moderately utilised to an extent of 85% for the six months through February 2022. The utilization decreased in March 2022 post receipt of inflow from asset sale deals. Unencumbered cash was moderate at Rs 33 crore as of December 31, 2021. DBL also has Rs 293 crore available through the credit line in DIAPL. |
Outlook: Negative The outlook reflects moderation in operating performance of DBL owing to raw material cost inflation and negative operating leverage. DBL’s credit profile is supported by its established market position, robust order book, superior execution capabilities and its ability to monetise assets. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company DBL was set up as a proprietorship firm (Dilip Builders) in fiscal 1989, 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 road construction on an EPC basis, and road development on a build-operate-transfer (BOT) basis. During August 2016, DBL successfully completed an initial public offering of Rs 654 crore, which included fresh equity of Rs 430 crore, and the balance through sale of partial stake by the promoters and investor, Banyan Tree Growth Capital LLC.
DBL posted revenue of Rs 6500 crore for the first nine of fiscal 2022 on a loss of Rs 89 crore, as compared to Rs 6284 crore revenue on PAT of Rs 503 crore for the corresponding period of the previous fiscal. |
Key Financial Indicators
*Interest bearing mobilisation advances have been treated as debt |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Covid Loan |
Annexure – List of Entities Consolidated
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Criteria Details
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