Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established track record in the construction industry: GRIL has been constructing high-quality roads within stipulated cost and timeline for over two decades. Healthy execution capabilities, owned equipment fleet, sourcing tie-ups and in-house design and engineering teams have helped the company record compound annual growth rate of 6% in revenue over the five fiscals through 2024. With revenue around Rs 8,000 crore estimated in fiscal 2024, GRIL will grow cautiously over the medium term. Expected large investments by the government in the roads and infrastructure sector augurs well for the company.

GRIL has a track record of completing projects ahead of schedule and receiving early completion bonus. Under-construction HAM projects and engineering, procurement and construction (EPC) projects are will be completed within expected timelines.

Furthermore, the order book is geographically diversified across 17 states. Orders worth over Rs 19,253 crore as on December 31, 2024 (translating into order to revenue [fiscal 2024] ratio of 2.4 times), offer good medium-term revenue visibility. Around 90% of the orders are from central government agencies, thereby reducing counterparty risk, with 86% of orders from NHAI or its subsidiary as on February 29, 2024. Road projects account for around 80% of the order book.

Healthy operating efficiency: Backward integration into manufacturing and processing capacities of various inputs used in road construction and a strong fleet of owned equipment and vehicles have supported the operating efficiency of GRIL. However, due to increased competitive bidding in the roads sector, profitability will be lower over the medium term compared with historical average of 18%. Efficient working capital management, supported by strong sourcing tie-ups and healthy collection efficiency, have ensured a comfortable return on capital employed. Working capital cycle remains moderately stretched with some pressure on receivables owing to high SPV receivables for interest arbitrage. Gross current assets (GCAs) estimated at 188 days as on March 31, 2024, will remain at similar levels over the medium term.

Comfortable financial risk profile: Sustained growth in revenue has helped the company maintain lower reliance on debt. Healthy accretion to reserve along with profit from sale of the HAM SPVs resulted in estimated networth of Rs 6,800 crore as on March 31, 2024.

GRIL has large investments in its project SPVs, with 35-40% of its networth expected to be invested in them as on March 31, 2025. A large chunk of these investments is towards HAM projects, which are low-risk owing to their fixed annuities. In these SPVs, the company has equity commitment of Rs 2,500 crore over the next three years. Additionally, the company has debt obligation of Rs 200-300 crore and capex of Rs 125-150 crore per annum over the medium term. This will be funded by cash accrual of over Rs 900 crore per annum, marginal increase in debt and dividend income from InvIT units. Debt is expected to marginally increase in the medium term from around Rs 1,000 crore estimated as on March 31, 2024 (which includes interest-bearing mobilisation advances).

Debt protection metrics will remain healthy, with gearing estimated to have improved to 0.16-0.17 time as March 31, 2024, from 0.26 time a year earlier, aided by improved networth from profit booking from sales of the seven HAM assets. Gearing is expected below 0.3 time over the medium term. Interest coverage ratio marginally moderated from 12.9 times in fiscal 2023 to 10.5 times estimated for fiscal 2024 due to compression in margins but will remain healthy at 7-9 times over the medium term. Additionally, diversification into newer segments will not impact the debt metrices in the near term.

GRIL is unlikely to extend any corporate guarantee for new project SPVs but will continue to provide support to meet any shortfalls in its SPVs.

Weaknesses:

Limited but slowly improving diversity in the revenue profile: Road projects contribute to bulk of the revenue, unlike EPC players which are present in multiple segments, such as commercial, residential and industrial construction and infrastructure (railways, irrigation, dams and power). Operating performance will remain susceptible to concentration risk, thus increasing exposure to cyclicality and delay in payments. However, the company has diversified into T&D, ropeways and MMLP projects. It will continue to bid for such projects, which will lend some diversity to revenue over the medium term.

Exposure to intense competition inherent in the construction industry: Increased focus of the central government on the infrastructure sector, especially roads and highways, should augur well for GRIL over the medium term. However, as most of the projects are tender-based and the segment is intensely competitive, the company needs to bid aggressively to get contracts. Competition has intensified due to the recent relaxation in bidding norms by NHAI and MoRTH. Operating margin moderated to 13.0-13.5% in fiscal 2024, given input price escalation and rising competition, and remains a key monitorable. Also, owing to cyclicality inherent in the construction industry, the ability to maintain profitability through operating efficiency becomes critical.