Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme of KEC International Limited (KEC).

In the first nine months of fiscal 2024, the company's consolidated operating income grew 17% on-year, led by strong order inflow and execution, primarily in the transmission and distribution (T&D) and civil sectors. During this period, earnings before interest, tax, depreciation, and amortization (EBIDTA) margin stood at 6.7% (CRISIL Ratings-adjusted), showing improvement from 5.5% EBITDA margin in fiscal 2024, yet remaining below 9-11% achieved over fiscals 2016 to 2021. The profitability improved on-year due to turnaround in the subsidiary, SAE Towers (Brazil), and the completion of most of the legacy orders that were incurring EBITDA losses. However, the railways segment underperformed, which is expected to continue over the medium term, with the company planning to restrict any substantial order intake in this segment. Going forward, fresh order book won at double-digit margins, steady contribution from the international business, and prudent risk management measures taken by the company such as, hedging of foreign currency exposure and base metals (except for steel due to the absence of an active liquid market, as articulated by the company), should drive profitability. The trajectory of margin improvement will remain a rating sensitivity factor

Furthermore, substantial revenue growth in fiscal 2024 and high working capital intensity of the engineering, procurement, and construction (EPC) business led to an increase in working capital requirement, resulting in higher reliance on short-term borrowings. Despite gradual recovery in profitability, increased borrowings and higher interest rates resulted in lower-than-expected improvement in interest coverage ratio at 1.8-1.9 times in fiscal 2024, against 1.5 times in fiscal 2023, but still below 2.5 times in fiscal 2022. With anticipated improvement in profitability and rationalization of the working capital cycle in fiscal 2025, the ratio should exceed 2 times. Improvement in profitability and ability to reduce the working capital requirement, leading to better debt protection metrics, will be a key rating sensitivity factor.

Nevertheless, the business risk profile should remain strong, supported by the established market position of KEC in the T&D segment, its growing non-T&D business, particularly the civil segment, and strong order book. The company had outstanding orders of Rs 30,161 crore as on December 31, 2023 (Rs 30,553 crore as on March 31, 2023). Moreover, the financial flexibility of KEC remains healthy, supported by unencumbered cash and cash equivalent of around Rs 250 crore, fund-based bank lines of Rs 3,000 crore (utilized at 60% as on January 31, 2024) and its ability to raise funds at competitive rates.

The rating continues to reflect the company’s leading market position in the transmission line tower (TLT) business, diversified orders in terms of geography and business segment, and healthy financial flexibility, being part of the RPG group. These strengths are partially offset by large working capital requirement and modest debt protection metrics.

Key Rating Drivers & Detailed Description

Strengths

• Leading market position in the TLT business

KEC has been in the TLT business for over five decades and is among the largest manufacturers in the world, with capacity of 422,200 tonne per annum (tpa). In India, KEC is a leading player with reputed customers such as Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and various state transmission utilities. Leadership in the T&D segment, as well as healthy growth in the non-T&D space, should continue to support the business.

• Diversified revenue across businesses and geographies

While around 50% of the unexecuted orders were in the T&D business as on December 31, 2023, KEC also has a healthy presence in EPC services for civil infrastructure (accounting for 33% of orders in the first nine months of fiscal 2024), railways (12%), and other segments (6%). Furthermore, the orders are from diverse geographies. About 31% of the total unexecuted orders as on December 31, 2023, were from overseas markets. Exports are primarily to countries in South Asian Association for Regional Cooperation (SAARC), Africa, the Middle East, East Asia Pacific, and the Commonwealth of Independent States. The wholly owned subsidiary, SAE Towers, USA, has a combined production capacity of around 1 lakh tpa in Brazil and Mexico, and mainly caters to the Americas.

Order intake was steady at around Rs 18,100 crore in fiscal 2024 (Rs 22,378 crore in fiscal 2023). The confirmed order book of Rs 30,161 crore as on December 31, 2023, with average execution period of 2.2 years, provides strong revenue visibility over the medium term. Moreover, diversified revenue streams will help reduce susceptibility to downturn in any one segment.

• Healthy financial flexibility

As the flagship entity of the RPG group, KEC benefits from the group’s financial flexibility, strong reputation and longstanding relationships with key stakeholders. The group has presence in diverse businesses such as tyres, pharmaceuticals, information technology and construction. KEC’s financial flexibility is also supported by cash and cash equivalent of around Rs 250 crore and bank limit of over Rs 3,000 crore as on March 31, 2024.

Weaknesses

• Large working capital requirement

Operations are working capital intensive on account of the inherent nature of the EPC business and long project execution cycle of 2-3 years, which has resulted in high reliance on short-term debt. Receivables are high in this business due to sizeable retention money blocked in projects till the end of the performance guarantee period as well as milestone billing in EPC projects of railways and civil businesses.

While receivables (including net unbilled revenue) remained high at 270-280 days as on September 30, 2023, there was improvement compared to 290 days in fiscal 2023, with recovery of receivables stuck in Afghanistan, and healthy collections from other clients such as Tamil Nadu Transmission Corporation Limited. However, milestone-driven payments in non-T&D segments continue to impact the working capital cycle. Furthermore, lower-than-expected collections and higher working capital requirement in the railways business have further exacerbated the working capital position, and the company plans to significantly pare down the exposure to this segment. Improvement in the working capital cycle remains a key monitorable as the business grows.

• Modest debt protection metrics

Weakness in debt protection metrics persisted in fiscal 2024, although showing improvement compared to the preceding fiscals of 2023 and 2022, due to gradual improvement in profitability and higher reliance on working capital borrowings. As on December 31, 2023, borrowings, including acceptances, rose to approximately Rs 6,300 crore (compared to Rs 5,308 crore as of March 31, 2023) to support the expanding order book. However, the debt level is expected to moderate in the last quarter of fiscal 2024, with accelerated collections as seen historically and recovery of stuck receivables.

While interest coverage ratio is expected to improve to 1.8-1.9 times in fiscal 2024 against 1.5 times in fiscal 2023, it remains lower than 2.5 times reported over fiscals 2017-22. With improvement in profitability and expectation of rationalisation of working capital in fiscal 2025, the interest coverage ratio should improve to over 2 times. However, the total outside liabilities to tangible networth (TOLTNW) ratio is estimated to remain elevated at 4.2 times as on March 31, 2024, similar to fiscal 2023 levels. With improving profitability in fiscal 2025, the financial metrics are expected to improve from current levels. Sustained growth in revenue and profitability, resulting in higher networth and better debt protection metrics is a key monitorable.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

Annexure - List of Entities Consolidated

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