Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities and debt instruments of Dilip Buildcon Limited (DBL)

 

CRISIL Ratings has also withdrawn its rating on NCDs of Rs 180 crore (see ‘annexure- details of rating withdrawn' for details) on confirmation from the debenture trustee as it is fully redeemed. The withdrawal is in line with CRISIL Ratings’ policy.

 

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 and exposure to cyclicality in the construction industry.

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 debt, as on March 31, 2021. 13 SPVs -- where CGs from DBL continue (for the entire tenure of the debt) despite controlling stake being transferred to the Shrem group -- are being transferred to an infrastructure investment trust (InvIT) post which debt at the SPV level will be refinanced with debt at the InvIT level. These CGs are hence expected to fall off in the near term and are no longer consolidated with DBL. Further, CRISIL Ratings has moderately consolidated other SPVs to the extent of support required over the medium term.

 

Interest-bearing mobilisation advances (Rs 548 crore as on March 31, 2021) have been treated 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

* 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 2021 (16.1%) due to the Covid-19 pandemic, which impacted execution and hence the company could not earn early completion bonus in the fiscal. Margin was also impacted by the steep rise in raw material prices in the second half of the fiscal; this trend may also continue in fiscal 2022. However, operating margin is expected to remain stable at around 17% over the medium term once raw material prices stabilise. Continued focus on detailed due diligence while bidding for projects should sustain profitability.

 

Despite the pandemic, revenue grew by 3% to over Rs 9,200 crore in fiscal 2021. Due to the second wave of the pandemic, construction activities witnessed a slowdown in April and May 2021. However, impact of the second wave was lesser as witnessed in the previous year as processes and facilities were already in place to deal with the outbreak. Thus, operations completely normalised from the first week of June 2021 with no shortage of labour or raw material. In the absence of any further disruption (like a third wave), revenue growth for fiscal 2022 is expected to be healthy at 10-15%.

 

* Robust orders providing revenue visibility with increased diversification

The company had orders of around Rs 27,000 crore as on March 31, 2021, with order book to revenue ratio of 3 times (revenue in fiscal 2021) 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 52% of the order book as on March 31, 2021. Order book spread across 15 states is hence also geographically well diversified.

 

Increased diversification can however increase project-implementation risk. The company has been bidding for power transmission and mine development and operator (MDO) projects on public-private-partnership basis. While no projects have been secured in power transmission as yet, the same will only be executed with an upfront agreement to sell DBL’s stake immediately upon completion (for projects bidded so far, DBL had entered into an arrangement with India Grid Trust to sells its stake upon completion). Hence, DBL will largely be only an engineering, procurement, and construction (EPC) contractor in such projects.

 

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

Adjusted total outside liabilities to tangible networth (TOL/TNW) improved to 1.87 times as on March 31, 2021, from 3.89 times as on March 31, 2016, driven by strong cash accrual, growing networth and divestment of road assets reducing reliance on debt. Despite large equity commitment in upcoming under-construction hybrid annuity model (HAM) and MDO projects, the ratio is expected to improve further in the absence of any large capital expenditure (capex) plan and inflows projected from monetisation of assets.

 

DBL currently has a portfolio of 22 under-construction HAM projects and two MDO projects that has balance equity requirement of around Rs 1,600 crore as of March 2021 (Rs 1,400 crore to be infused over the next three years). 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 29 assets (with inflows of over Rs 2,100 crore) already transferred or expected to be transferred by fiscal 2023. 24 assets were sold to the Shrem group 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 five under-construction projects. Partial inflows from Cube Highways is expected in fiscal 2022 and the balance in fiscal 2023. The company is in process of monetising another seven HAM assets (one operational and balance are in advanced stages of completion). Monetisation of the seven assets is expected either through the InvIT route or through a bilateral sale agreement. Based on the company’s past track record, CRISIL Ratings believes that monetisation of the balance seven assets is also likely. However, given the large equity investment over the medium term, realisations of proceeds from Cube Highways and future divestment are key monitorables.

 

Debt has largely remained stable at around Rs 3,939 crore (includes interest-bearing mobilisation advances of Rs 548 crore) as on March 31, 2021. However, interest coverage ratio moderated to 2.56 times in fiscal 2021, from over 3 times in fiscal 2019 on account of decline in profitability and higher interest costs arising from letter of credit discounting. With improvement in revenue and profitability over the medium term, debt protection metrics are expected to gradually improve.

 

Weaknesses

* Large working capital requirement

As an EPC player with robust orders, DBL has sizeable working capital requirement, with gross current assets of 230 days as on March 31, 2021. 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 143 days as on  March 31, 2021, from 130 days as on March 31, 2020 due to sharp rise in raw material prices and the same is expected for the ongoing fiscal as well with some correction expected thereafter. Nevertheless, the company’s operations are expected to remain working capital intensive. 

 

* 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. The numerous players in the construction segment led to intense competition, which could impact the operating margin. Competition in roads has intensified further due to the recent relaxation in bidding norms by NHAI and MoRTH. However, this risk is partially mitigated by DBL’s increased diversification into varied sectors which will allow it to bid selectively for projects.

Liquidity: Adequate

The company has large upcoming debt obligation of Rs 650 crore in fiscal 2022 due to repayment of over Rs 160 crore of Covid-19 bank lines that was availed of in fiscal 2021. The maturing debt will be met out of cash accrual projected at over Rs 800 crore in fiscal 2022. While the company has large equity commitment of over Rs 1,400 crore over the next three fiscals (till fiscal 2024), inflow of over Rs 1,000 crore mobilisation advances from HAM projects and over Rs 600 crore from sale agreement with Cube Highways will help DBL meet its equity commitment, thereby limiting debt.

 

Fund-based lines of Rs 2,471 crore have been moderately utilised to an extent of 87% for the six months through June 2021. Unencumbered cash was moderate at Rs 50 crore as of June 2021.

Outlook: Stable

DBL will continue to benefit from its established market position, robust orders and superior execution capabilities.

Rating Sensitivity Factors

Upward Factors

• Interest coverage ratio increasing to 3.5 times
• Enhancement in liquidity profile from improvement in the working capital cycle, resulting in increased cushion in the fund-based limit
• Steady revenue growth while maintaining profitability

 

Downward Factors

• Interest coverage ratio declining to 2.35 times
• Deterioration in liquidity, thereby reducing cushion in the fund-based limit
• Large capex or sizeable investments in existing or new projects without adequate equity back up, thereby weakening the financial risk profile

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’s road portfolio comprises 47 BOT-based road projects through SPVs, including 25 operational projects.

• DBL had announced sale of its 100% stake in its 24 road project portfolio in 2017 (all 24 are currently operational) to the Shrem group. DBL has realised entire consideration of Rs 1,500 crore from this deal
• Of the 12 HAM projects secured from NHAI in fiscal 2018, one is operational and the other 11 are expected to be completed in fiscal 2022. The company has entered into a sale agreement with Cube Highways for sale of five projects (all under construction)
• DBL has won another 11 HAM projects from NHAI between March 2020 and March 2021; four projects have received appointed date while another six projects are in advanced stages of financial closure. Letter of agreement of the eleventh project is yet to be signed as it is awaiting environmental clearance

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	9207	8958
Profit After Tax (PAT)	Rs crore	319	425
PAT Margins	%	3.5	4.7
Adjusted debt/adjusted networth*	Times	1.01	1.08
Interest coverage	Times	2.56	2.62

*Interest bearing mobilisation advances have been treated as debt

Any other information: Not applicable