Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and debt programmes of Kalpataru Power Transmission Limited (KPTL).

 

Operating income (on a consolidated basis) declined 2% year-on-year in fiscal 2021, primarily due to the impact of the prolonged nationwide lockdown following Covid-19 and supply chain disruptions during the first-half of the fiscal. Earnings before interest, tax, depreciation and amortisation (EBIDTA) margin declined to 11.1% in fiscal 2021 from 11.6% in the previous fiscal due to higher prices of raw materials, primarily steel. The EBIDTA margin may remain muted in fiscal 2022 due to continued pressure on input costs.

 

Nevertheless, business risk profile should remain strong on the back of the established market positon of KPTL in the transmission and distribution (T&D) segment, its growing non-T&D business, and the strong order book. The company had outstanding orders of Rs 27,900 crore as on March 31, 2021, at consolidated level. Moreover, liquidity remains strong, supported by unencumbered cash and equivalent of over Rs 600 crore and undrawn bank limit of over Rs 400 crore as on March 31, 2021.

 

The ratings also factor in the divestment of stake by KPTL in its two power transmission assets - Jhajjar KT Transco Pvt Ltd (JKTPL) and Alipurduar Transmission Ltd (ATL) - during fiscal 2021. The proceeds from the stake sale were primarily utilised to meet working capital requirement. Furthermore, KPTL already has stake sale agreement in place for Kohima Mariani Transmission Ltd (KMTL), and the sale is expected to be completed in fiscal 2022.

 

The ratings continue to reflect KPTL’s established track record in the transmission line tower (TLT) business, diversified revenue, and healthy financial risk profile. These strengths are partially offset by large working capital requirement and high exposure to group companies.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of KPTL and its subsidiaries - JMC Projects (India) Ltd (JMC), Shree Shubham Logistics Ltd (SSL), Amber Real Estate Ltd (Amber), and Energy Link (India) Ltd (EnergyLink) - collectively referred to as the Kalpataru group. CRISIL Ratings has moderately integrated the business and financial risk profiles of the special-purpose vehicles (SPVs) of KPTL and JMC as the projects have been funded through debt without recourse to KPTL and JMC. However, CRISIL Ratings has factored in KPTL’s commitment to the SPVs in the form of equity, cost overruns and guarantees.

 

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

• Established market position: The group has a track record of over four decades in the TLT business. In India, KPTL is one of the leading players in this space, with reputed customers such as Power Grid Corporation of India Ltd (‘CRISIL AAA/FAAA/Stable/CRISIL A1+’) and various state transmission utilities. Order book of Rs 27,900 crore at consolidated level (Rs 13,890 crore for KPTL and Rs 14,009 crore for JMC) as on March 31, 2021, provides strong revenue visibility over the medium term. Favourable prospects for the international T&D and domestic non-T&D space should continue to support the business.

 

• Diversified revenue: While the flagship company, KPTL, contributes 67% to total revenue; 32% comes from JMC, which executes projects in the infrastructure, industrial and commercial building, railway, and road segments. The balance 1% of consolidated revenue primarily comes from SSL, which provides warehousing and logistics services. About 27% of the total unexecuted orders are from the international market. Exports are primarily to countries in Asia, Africa, Central and Latin America, the Middle East, Commonwealth of Independent States, Australia, and Europe. Diversified revenue streams help reduce susceptibility to downturns in any one business.

 

In fiscal 2021, operating income of KPTL (on standalone basis) and JMC declined 3% and 1% year-on-year, respectively. While KPTL’s margin was stable at 11.3%, that of JMC fell to 9.8% from 11.6% in the previous fiscal. Nevertheless, established market position with diversified revenue profile and sizeable unexecuted orders should help the group maintain a stable operating performance over the medium term.

 

• Healthy financial risk profile: The financial risk profile remains healthy backed by robust tangible networth, leading to a comfortable gearing at 0.53 times as on March 31, 2021. Interest coverage ratio improved to 4.18 times in fiscal 2021, from 3.66 times the previous fiscal. Total outside liabilities to tangible networth (TOLTNW) ratio, however, remains moderate at 2.07 times as on March 31, 2021, though improved from 2.22 times a year earlier. Sustained growth in cash accrual and reduction in debt, leading to stronger debt protection metrics, will remain key monitorables.

 

Weaknesses

• Working capital-intensive operations: Working capital requirement is large because of the inherent nature of the EPC (engineering, procurement and construction) business and project execution cycle of 2-3 years, which result in high reliance on short-term debt. Receivables are high in this business due to the sizeable retention money blocked in projects till the end of the performance guarantee period. As on March 31, 2021, receivables (including net unbilled revenue) were 232 days, against 213 days a year earlier. Gross current assets remained high and increased to 309 days as on March 31, 2021, from 289 days a year earlier. Sustained improvement in working capital management remains a key monitorable as business grows.

 

• High exposure to group companies: In fiscal 2021, KPTL completed its divestment in JKTPL and ATL, as planned. However, KPTL’s exposure to subsidiaries and group entities at a standalone level remains high at Rs 1,794 crore (Rs 1,836 crore as on March 31, 2020). During the fiscal, KPTL had extended additional support to its indirect subsidiary, Saicharan Properties Ltd, which is executing the company’s Indore (Madhya Pradesh) real estate project. JMC’s four operational road projects also required net infusion of Rs 45 crore in fiscal 2021 due to weaker-than-expected operating performance. However, the investments are not expected to constrain the group's cash flow and financial risk profile, mainly due to the expected healthy performance of KPTL and JMC over the medium term, coupled with efficient working capital management. Nonetheless, incremental exposure in these entities would be closely monitored.

 

• KPTL already has stake sale agreement in place for KMTL, and the sale is expected to be completed in fiscal 2022. Proceeds from the stake sale is likely to be utilised to reduce the company’s leverage. Timely completion of stake sale will be a key monitorable.

Liquidity: Strong

Cash accrual was healthy at Rs 820 crore in fiscal 2021, while cash and equivalent stood at over Rs 600 crore as on March 31, 2021. Liquidity is also supported by unutilised bank limit of over Rs 400 crore as of March 2021. Available liquidity and expected annual cash accrual of Rs 900-1,000 crore over fiscals 2022 and 2023 should comfortably cover debt obligation and moderate capital expenditure (capex) plan.

Outlook: Stable

KPTL should continue to benefit from its established market position and healthy order book with diversified revenue profile.

Rating Sensitivity Factors

Upward Factors

• Strong revenue growth, with sustained improvement in operating margin above 12.5%, leading to higher cash accrual
• Improvement in working capital management resulting in better-than-expected debt protection metrics

 

Downward Factors

• Weak operational performance with steady decline in operating margin and stagnant revenue, leading to lower cash accrual
• Further stretch in working capital cycle constraining capital structure, with TOLTNW ratio sustaining above 2.5 times and interest coverage ratio below 3.0 times
• Weakening of financial risk profile due to continued high support extended to SPVs, or any significant debt-funded capex or acquisition

About the Company

Established in 1981 by Mr Mofatraj P Munot, KPTL is one of the leading players in the domestic T&D sector. The company undertakes turnkey contracts for setting up transmission lines and substations for extra-high-voltage power transmission. Over the years, it has diversified into civil contracts, railways and oil and gas pipeline construction.

 

JMC, established in 1986, undertakes construction contracts for infrastructure (including bridges, flyovers, highways, and captive power plants), industrial projects, buildings, residential and water projects.

 

SSL offers end-to-end logistical solutions in western India in the agricultural sector, spanning warehousing, cold storage and commodity-funding services, collateral management, and commodity exports. Amber and EnergyLink are in the real estate business. Amber recently executed an information technology park project in Thane, Maharashtra, while EnergyLink is executing a real estate project in Indore through its wholly owned subsidiary, Saicharan Properties Ltd.

Any other information: Not applicable