Detailed Rationale

Crisil Ratings has upgraded its rating on the corporate credit rating of Effwa Infra & Research Limited (Effwa; Formerly known as Effwa Infra & Research Private Limited) ‘Crisil BBB/Stable’ from ‘Crisil BBB-/Stable’.

 

The upgrade in the rating reflects the improvement in the overall credit risk profile of Effwa backed by increasing scale of operations and healthy operating profitability. While revenues are expected to increase by over 25% in fiscal 2025 with the first half revenues of Rs 61 crores till September 2024, operating margins are expected to sustain at healthy levels over the medium term. Operating margins of the company have also improved on account of execution of projects with better margins as reflected in the operating profitability of 14% in fiscal 2024 as compared to 7.7 % in fiscal 2023. The operating margins of the company have improved by 200 basis points in H1 of fiscal 2025 compared to 9% in H1 of fiscal 2024. With H2 being typically heavy in execution, the operating profitability is expected to sustain at around 14% over the medium term. Furthermore, a healthy orderbook to revenue ratio of over 2 times provide adequate revenue visibility and should support the company sustain its scale of operations.  Financial risk profile continues to remain strong backed by healthy capital structure and adequate liquidity driven by limited dependence on external borrowings as well as recent equity infusion through IPO proceeds.

 

The ratings reflect Effwa’s extensive experience of the promoters in the wastewater treatment industry, healthy unexecuted order book and operational efficiency, and comfortable financial risk profile. These rating strengths are partially offset by working capital intensive operations, moderate scale of operations and susceptibility to tender-based operations

Analytical Approach

While arriving at the ratings Crisil Ratings has evaluated standalone business and financial risk profile of Effwa.

 

Unsecured loans from promoters of Rs 0.2 crores as on March 31, 2024 has been treated as debt as these loans are expected to be paid out over the medium term.

Key Rating Drivers & Detailed Description

Strengths:

• Extensive industry experience of the promoters and establish market position: The promoters of the company have more than 3 decades of experience in the water treatment industry which has enabled a deep understanding of industry and its dynamics. With steady execution of orders in hand the company has registered CAGR growth of 28% for the last four years ended FY 2024. It has further achieved revenues of Rs 61 crores in H1 of FY 2024 and the revenues are expected to sustain on the back of healthy orders in hand which provides revenue visibility over the medium term. The company has established its position as a reliable turnkey contractor for installation of water treatment and waste management plants leading to repeated order flow from the reputed clientele.

 

• Healthy unexecuted order book and operational efficiency: The company has been able to maintain a healthy order book to revenue ratio of above 2x with general project completion timelines of 12 to 18 months. Healthy unexecuted orderbook provides revenue visibility over the medium term. With the steady execution of projects coupled with improvement in the operating profitability the ROCE has been healthy as reflected in 44% ROCE for fiscal 2024 (26% in fiscal 2023). With steady growth in the scale of operations and healthy profitability the same is expected to remain above 30% over the medium term.

 

• Comfortable financial risk profile: The financial risk profile of the company is comfortable with a net worth of Rs 79.5 crores as on Sept 2024 (Rs 37 crores as on March 31, 2023) largely on account of equity infusion through IPO proceeds. The capital structure of the company is healthy due to the limited reliance on the outside borrowings as highlighted by expected gearing and total outside liability to adjusted net worth ratio (TOLANW) ratio of below 0.25 times and below 1 time respectively for fiscal 2025 (0.69 times and 1.17 times, a year ago). The debt protection metrics are also robust backed by healthy profitability with interest coverage and net cash accruals to adjusted debt ratio estimated above 10 times and above 1 times respectively for fiscal 2024 (estimated to be in the similar range for fiscal 2025). In the absence of any major debt funded capital expenditure the overall financial risk profile of the company is expected to remain comfortable over the medium term.

 

Weaknesses:

• Working capital intensive operations: The operations of the company are working capital intensive as highlighted by the gross current assets of 188 days for as on March 31, 2024, estimated to be around 180 to 200 days as on March 31, 2025. This is mainly driven by high debtors of 160-170 days, due to moderate credit period with milestone-based billing and retention money. Moreover, the company is required to maintain additional deposits as per business requirements. Inventory levels are low and is expected to remain around 10 days which majorly includes the Work in progress or Unbilled portion of the work. Overall working capital operations are expected to remain large and a key rating sensitivity factor.

 

• Moderate scale of operations and susceptibility to tender-based operations: Although revenues have increased to Rs 145 crores in fiscal 2024 from Rs 48 crores in fiscal 2020, overall scale of operations remain moderate. In addition, revenues and profitability entirely depend on the ability to win tenders. Intense competition also requires that players bid aggressively to get contracts and thus restrict the operating margin, while the operating margins has improved in fiscal 2024 and in H1 of fiscal 2025, the sustenance of the same will be monitorable. The scale is expected to improve to around Rs 180 to 200 crores in fiscal 2025, however remains at moderate levels.

Liquidity: Adequate

Cash accruals are expected of Rs 15 crores in fiscal 2025 and 2026 which will be sufficient against the negligible repayment obligation. The utilization of the fund-based bank limits averaged at 70% for the last 12 months ended November 2024. Current ratio stood at 1.89 times with cash and bank balance of Rs 27 crores as on Sept 2024 which includes encumbered and unencumbered balance. Crisil expects internal accruals, cash & cash equivalents and unutilized bank lines will be sufficient to meet its repayment obligations and working capital requirements.

Outlook: Stable

Crisil Ratings believe EFFWA will continue to benefit from the extensive experience of its promoter, and established relationships with clients.

Rating sensitivity factors

Upward factors:

• Sustained improvement in scale of operations by 30% while diversifying customer base and sustenance of operating margins leading to higher than anticipated net cash accruals.
• Sustenance of healthy financial risk profile.
   

Downward factors:

• Witnesses a substantial increase in its working capital requirements thus weakening its liquidity and financial risk profile
• Decline in scale of operations or operating profitability leading to net cash accrual below Rs 7 crore per fiscal.

About the Company

Incorporated in 2014, Effwa is engaged in providing turnkey solutions and consultation projects for PSU’s, Private Sector Companies and Government Bodies related to effluent treatment and recycling, sewage treatment and recycling, solid waste management, incineration and bioremediation as well as restoration of water bodies. Located in Thane (Maharashtra), the company is promoted by Mr. Subhash Kamal and Mrs. Varsha Kamal, who also look after its day-to-day operations.

 

Effwa is listed on NSE SME platform.

Any other information: Not Applicable