Detailed Rationale

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

 

In fiscal 2024, the company's consolidated operating income grew 15% 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 6.8% (CRISIL Ratings-adjusted), showing improvement from 5.5% EBITDA margin in fiscal 2023, 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 32,715 crore as on June 30, 2024. Moreover, the financial flexibility of KEC remains healthy, supported by unencumbered cash and cash equivalent of around Rs 200 crore, fund-based bank lines of Rs 3,000 crore (utilised at 98% as on June 30, 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.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of KEC and all its subsidiaries, as the companies are engaged in a similar line of business.

 

Acceptances have been considered as debt as these are interest-bearing obligations to banks.

 

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:

• 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 51% of the unexecuted orders were in the T&D business as on June 30, 2024, KEC also has a healthy presence in EPC services for civil infrastructure (accounting for 31% of orders as on June 30, 2024), railways (10%), and other segments (8%). Furthermore, the orders are from diverse geographies. About 26% of the total unexecuted orders as on June 30, 2024, 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 (against Rs 22,378 crore in fiscal 2023), followed by Rs 7,664 crore so far in fiscal 2025. The confirmed order book of Rs 32,715 crore as on June 30, 2024, with average execution period of around 1.5-2 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 200 crore and bank limit of over Rs 3,000 crore as on June 30, 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 March 31, 2024, 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 March 31, 2024, borrowings, including acceptances, were at around Rs 5,350 crore (compared to Rs 5,308 crore as of March 31, 2023) to support the expanding order book. The debt level is expected to remain elevated during fiscal 2025, to support the execution expected to be taken up during the fiscal.

 

While interest coverage ratio improved to 1.9 times in fiscal 2024 against 1.5 times in fiscal 2023, it remains lower than 2.5 times reported over fiscals 2017-2022. 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 remained elevated at around 4 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.

 

On July 26, 2024, company’s board approved raising of funds through one or more qualified institutions placement for an aggregate amount of Rs 4,500 crore by way of equity shares. The management expects the fund raise to be taken up at an opportune time in the near term and the funds raised would be deployed towards organic and inorganic growth opportunities over the medium term. The same would be expected to enhance the capital structure for the company and also improve the debt protection metrics to an extent. Nevertheless, sustained growth in revenue and profitability, resulting in higher networth and better debt protection metrics is a key monitorable.

Liquidity: Strong

Cash accrual of Rs 500-600 crore annually, over the medium term, with minimal term loans and moderate capital expenditure (capex) should keep the liquidity position comfortable. Working capital requirement will remain high, constraining liquidity. Cash and cash equivalent stood at around Rs 200 crore as on June 30, 2024. Bank lines of Rs 3,000 crore were utilised at over 80% on average for the 12 months through June 2024.

Rating Sensitivity factors

Downward factors:

• Lower-than expected improvement in profitability, leading to operating margin below 7% for fiscal 2025
• Stretched working capital cycle, leading to weak interest coverage ratio on sustained basis
• Significant debt-funded capex or acquisition weakening the financial risk profile

 

Environment, social and governance (ESG) profile

The ESG profile of KEC supports its already strong credit risk profile.

 

The EPC and power transmission sectors have significant impact on the environment because of risks linked to operations such as energy loss during transmission and waste generation. Also, due to the nature of operations, the sector affects the local community and has various occupational health hazards associated with it. In line with this, KEC is focused on mitigating its environmental and social risks to ensure minimal impact.

 

Key ESG highlights

• KEC has installed solar plants in Jaipur, Nagpur and Dubai. It aims to reduce greenhouse gas emissions by 20% till fiscal 2026.
• KEC’s manufacturing plants have achieved the status of ‘Zero Wastewater Discharge’ and fully recycle both trade effluents and domestic wastewater. It has also taken rainwater harvesting initiatives and a total of 14 rainwater harvesting points are installed in all three of its transmission line plants in India.
• The company is committed to increasing the happiness quotient of its workforce to 85% by fiscal 2026.
• Gender diversity is an area for improvement, with only ~4% employee representation of females. The company aims to increase gender diversity by 25% by fiscal 2026.
• The governance structure is characterised by over 70% of the board comprising independent directors. The management has been effective in creating wealth for its shareholders.

About the Company

Established in 1945, KEC is the flagship company of the Harsh Goenka faction of the RPG group and a global infrastructure EPC major. It is present in the power T&D, cables, railways, civil infrastructure, solar and smart infrastructure segments. The company has six manufacturing facilities across India, Brazil, Mexico and Dubai, and is among the largest tower manufacturers globally with capacity of 422,200 tpa.

 

In September 2010, KEC acquired a 100% stake in US-based SAE Towers, the leading manufacturer of lattice transmission towers in the Americas with production capacity of around 1 lakh tpa across Mexico and Brazil.

 

For the three months ended June 30, 2024, KEC reported profit after tax (PAT) of Rs 88 crore on operating income of Rs 4,512 crore against Rs 42 crore and Rs 4,246 crore, respectively, for the corresponding period of the previous fiscal.

Key financial indicators (CRISIL Ratings-adjusted numbers)

As on / for the period ended March 31	Unit	2024* Audited	2023 Audited
Revenue	Rs crore	19,914	17,284
Profit after tax (PAT)	Rs crore	347	176
PAT margin	%	1.7	1.0
Adjusted debt/ adjusted networth	times	1.00	0.92
Adjusted interest coverage	times	1.93	1.47

*based on abridged financials reported by the company

Any other information:

CRISIL Ratings has taken note of a five-day delay in interest payment on the external commercial borrowings of the company in July 2024. However, based on the lenders’ confirmation and management’s clarification, CRISIL Ratings understands that the reported delay was purely on account of an operational issue, which was resolved within the same week. Moreover, KEC had sufficient liquidity on the due date to fully service the interest amount.

 

CRISIL Ratings understands that the delay was a one-off event on account of an operational issue and does not reflect the financial inability or unwillingness of KEC to service its debt on time. The delay is purely on account of non-credit reasons (for more details refer CRISIL Ratings' criteria 'CRISIL Ratings approach to recognising default'). Hence, CRISIL Ratings believes the incident does not indicate any change in the company’s inherent credit quality.