Detailed Rationale

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

 

Operating income (on consolidated basis) grew 5% year-on-year in fiscal 2022, led by strong order inflow and execution, primarily in the non-transmission and distribution (non-T&D) segments of the railways and civil sectors. However, earnings before interest, tax, depreciation and amortisation (EBIDTA) margin declined to 7% in fiscal 2022 from 9.4% in fiscal 2021 due to higher prices of raw materials, primarily steel, and weak performance of the subsidiary, SAE Towers (Brazil).

 

EBIDTA margin is likely to remain muted in the first half of fiscal 2023 due to continued pressure on input costs and expected provisioning in SAE Towers (Brazil). However, with expected catching up of indexation for input prices as well as turnaround in the subsidiary, the operating performance should improve in the second half of the current fiscal. The improvement in operating margin will be a key monitorable.

 

Nevertheless, the business risk profile will remain strong supported by the established market position of KEC in the T&D segment, its growing non-T&D business and strong order book. The company had outstanding orders of over Rs 23,000 crore as on March 31, 2022. Moreover, the financial flexibility of KEC remains healthy, supported by unencumbered cash and cash equivalent of Rs 200 crore 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 similar line of business.

 

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. Order intake was strong at over Rs 17,000 crore in fiscal 2022. The order book was Rs 23,716 crore as on March 31, 2022, which provides strong revenue visibility over the medium term. Leadership in TLT segment, as well as healthy growth in the non-T&D space, should continue to support the business.

 

• Diversified revenue: While 50% of the unexecuted orders were in the T&D business as on March 31, 2022, KEC also has a healthy presence in engineering, procurement and construction (EPC) services for railways (accounting for 16% of orders in fiscal 2022), civil infrastructure (29%) and other segments (5%). Furthermore, the orders are from diverse geographies. About 37% of the total unexecuted orders as on March 31, 2022, were from overseas markets. Exports are primarily to countries in 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. Diversified revenue streams help reduce susceptibility to downturn in any one segment.

 

• Healthy financial flexibility: As the flagship company 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 2,400 crore as on March 31, 2022, which has been enhanced to Rs 3,000 crore in fiscal 2023.

 

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. As on March 31, 2022, receivables (including net unbilled revenue) were high at 315 days, against 283 days as on March 31, 2021. Payables are also high at over 340 days, with back-to-back payment clauses in most contracts allowing for passing on of any delay in realisations in receivables. The company plans to smoothen the billing cycle to reduce working capital requirement, particularly in the railways business. Improvement in the working capital cycle remains a key monitorable as the business grows.

 

• Modest debt protection metrics: Weak debt protection metrics deteriorated in fiscal 2022 because of lower profitability and higher reliance on working capital borrowings. Interest coverage ratio declined to 2.5 times in fiscal 2022, from 3.5 times in the previous fiscal. The total outside liabilities to tangible networth (TOLTNW) ratio remains high at 3.7 times as on March 31, 2022, against 3.4 times a year earlier. With improving profitability in fiscal 2023 and completion of legacy projects in Brazil, 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.

Liquidity: Strong

Cash accrual of Rs 500-800 crore annually over the medium term will sufficiently cover debt obligation of Rs 60-100 crore annually and moderate capital expenditure (capex). Working capital requirement, though expected to be lower than fiscal 2022 level, will remain high, constraining liquidity. Cash and cash equivalent stood at around Rs 200 crore as on March 31, 2022. Bank lines of Rs 2,400 crore were moderately utilised at 87% on average in fiscal 2022.

Rating Sensitivity factors

Downward factors

• Weak operational performance with steady decline in operating margin to below 7% and stagnant revenue, leading to lower cash accrual and continued stretch on credit metrics
• Stretched working capital cycle constraining the capital structure
• Significant debt-funded capex or acquisition, thereby 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 five 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.

Key Financial Indicators (CRISIL Ratings-adjusted numbers)

As on / for the period ended March 31	Unit	2022	2021
Revenue	Rs crore	13,742	13,114
Profit after tax (PAT)	Rs crore	332	553
PAT margin	%	2.4	4.2
Adjusted debt/adjusted networth	times	0.86	0.63
Adjusted interest coverage	times	2.48	3.51

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Commercial Paper	NA	NA	7-365 days	1000	Simple	CRISIL A1+

 

Annexure – List of entities consolidated

Name of entity	Extent of consolidation	Rationale of consolidation
RPG Transmission Nigeria Ltd	Full	Subsidiary
KEC Global FZ – LLC, Ras UL Khaimah	Full	Subsidiary
KEC Towers LLC	Full	Subsidiary
KEC Investment Holdings	Full	Subsidiary
KEC Global Mauritius	Full	Subsidiary
KEC International (Malaysia) SDN BHD	Full	Subsidiary
KEC Power India Pvt Ltd	Full	Subsidiary
SAE Towers Holdings LLC	Full	Subsidiary
SAE Towers Brazil Subsidiary Company LLC	Full	Subsidiary
SAE Towers Mexico Subsidiary Holding Company LLC	Full	Subsidiary
SAE Towers Mexico S de RL de CV	Full	Subsidiary
SAE Towers Brazil Torres de Transmission Ltda	Full	Subsidiary
SAE Prestadora de Servicios Mexico, S de RL de CV	Full	Subsidiary
SAE Towers Ltd	Full	Subsidiary
SAE Engenharia E Construcao Ltda	Full	Subsidiary
KEC Engineering & Construction Services, S de RL de CV	Full	Subsidiary
KEC EPC LLC	Full	Subsidiary
KEC Spur Infrastructure Pvt. Ltd.	Full	Subsidiary