Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and debt programmes of Kalpataru Projects International Limited (KPIL). Also, CRISIL Ratings has withdrawn its rating on non-convertible debentures (NCDs) of Rs 150 crore upon redemption and on receipt of repayment confirmation from the debenture trustee (see ‘Annexure - Details of rating withdrawn'). The withdrawal is in line with CRISIL Ratings’ policy on withdrawal of ratings.

 

CRISIL Ratings has noted that on October 9, 2024, KPIL announced that it has entered into definitive agreement(s) for sale of its entire 100% stake in Vindhyachal Expressways Pvt Ltd, its wholly owned subsidiary, to Actis Atlantic Holdings Ltd, subject to requisite approvals and compliances of conditions precedent. The sale will be at an estimated enterprise value of Rs 775 crore, which includes bank loans of around Rs 280 crore and is expected to be completed within 15 months from the above date. The proceeds from the sale are expected to aid the company to reduce the debt on its books over the medium term, thereby improving its financial risk profile. KPIL plans to divest some of its other non-core assets including road projects, real estate project in Indore (Madhya Pradesh) and logistics business as well, over the near to medium term.

 

The ratings continue to be driven by the strong business risk profile of KPIL on the back of its established market position in the Transmission and Distribution (T&D) segment, diversification into other engineering, procurement and construction (EPC) segments and strong growth in order book. Outstanding consolidated orders worth Rs 57,195 crore as on June 30, 2024 provide a strong medium-term revenue visibility. Operating income improved 17% year-on-year to Rs 16,760 crore for fiscal 2024 owing to better execution levels in the T&D, building and factories, water and urban infrastructure segments. CRISIL Ratings-adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) margin also improved to 9.2% in fiscal 2024 from 9.1% in fiscal 2023, owing to steady execution of the company’s order book.

 

In the first quarter of fiscal 2025, standalone revenues saw a modest growth of 3% on-year owing to slower execution activity, while the reported standalone operating margins moderated from 8.7% to 8.4%, owing to variation in project mix executed during the quarter and some additional one-off provisions towards project warranty. Further growth in operating level during the rest of fiscal 2025 and synergy benefits being realised from the amalgamation of JMC Projects (India) Ltd (JMC Projects) should help improve the operating margin over the medium term.

 

The financial risk profile is characterised by a rise in gross debt in fiscal 2024 to fund the large capital expenditure (capex) and increasing working capital requirement, while gearing (CRISIL Ratings -adjusted) improved slightly from 0.55 times as on March 31, 2023 to 0.53 times as on March 31, 2024. While gross debt temporarily increased further during the first quarter of fiscal 2025 amid lower collections and delay in budgetary approvals due to the General Elections, steady leverage levels, along with improved profitability and cash accrual, should improve debt protection metrics over the medium term. Also, liquidity remains robust, supported by unencumbered cash and equivalent of more than Rs 800 crore and undrawn bank limits of around Rs 300 crore as on September 30, 2024.

 

The ratings continue to reflect the strong track record of KPIL in the transmission line tower (TLT) business, diversified revenue streams and a healthy financial risk profile. These strengths are partially offset by large working capital requirement owing to the inherent nature of the EPC business, and exposure to subsidiaries and road SPVs (special-purpose vehicles).

Analytical Approach

To arrive at its ratings, CRISIL Ratings has combined the business and financial risk profiles of KPIL (including erstwhile JMC Projects) and its subsidiaries, Shree Shubham Logistics Ltd (SSL), 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 road SPVs as the projects have been funded through debt without recourse to KPIL. However, CRISIL Ratings has factored in the commitment made 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 in the TLT business: The Kalpataru group has a track record of over four decades in the T&D EPC business. KPIL is one of the leading players in the domestic market with reputed customers such as Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and various state transmission utilities. Consolidated order book worth Rs 57,195 crore as on June 30, 2024, provides a strong medium-term revenue visibility. Favourable prospects for the international and domestic T&D, building and factories, water and urban infrastructure space should continue to support the business going forward.

 

• Diversified revenue streams: The order book is fairly diversified with the T&D segment contributing ~36% of the order book as on June 30, 2024, followed by buildings and factories (20%), water projects (17%), oil and gas (15%), railways (7%) and urban infrastructure projects (5%). Furthermore, 46% of the order book is made up of orders from the international markets. The company also has a vast presence overseas, as it exports to Asia, Africa, Central and Latin America, the Middle East, Commonwealth of Independent States, Australia and Europe. Diversified revenue streams both in terms of segments and markets, reduce susceptibility to downturns in any one business or geography.

 

• Healthy financial risk profile: Capital structure is marked by a comfortable gearing of 0.53 time and moderate total outside liabilities to tangible net worth (TOL/TNW) ratio of 2.42 times as on March 31, 2024, as against 0.55 time and 2.32 times, respectively, as on the end of previous fiscal.  The weakening in TOL/TNW ratio was due to increase in customer advances amidst higher order inflow and payables resulting from stretched working capital requirement. The working capital cycle got stretched on account of increase in unbilled revenue owing to certain large projects billing linked to completion of projects. The TOL/TNW ratio is expected to gradually improve over the medium term, supported by optimised working capital management and steady cash accrual. Interest coverage ratio was healthy at 3.2 times in fiscal 2024.

 

Gross debt for KPIL’s standalone books rose to around Rs 3,536 crore as on June 30, 2024, from Rs 2,925 crore as on March 31, 2024 on account of higher capex and working capital requirement amid lower execution/collection during the first quarter of current fiscal. The debt levels are expected to moderate during the remaining quarters of fiscal 2025, aided by steady cashflows from strong execution. Sustained growth in cash accrual and reduction in leverage, leading to stronger debt protection metrics, will be key monitorable.

 

Weaknesses

• Working capital-intensive operations: The EPC business inherently involves large working capital requirement, and the project execution cycle of 2.0-2.5 years leads to higher reliance on short-term debt. Sizeable retention money remains blocked in projects till the end of the performance guarantee period. Receivables (including net unbilled revenue) remained high around 255 days as on March 31, 2024, against 257 days as on March 31, 2023. Improvement in working capital management remains a monitorable in line with the expected growth in business operations of KPIL.

 

• High exposure to group companies: Standalone exposure to subsidiaries and SPVs was high at around Rs 1,983 crore as on March 31, 2024, excluding assets held for sale (up from around Rs 1,734 crore as on March 31, 2023), as support to overseas projects increased to fund the working capital requirements towards the planned execution of the order book. Road projects also required net infusion of Rs 71 crore in fiscal 2023 and another Rs 100 crore in fiscal 2024, largely due to skewed debt profile leading to mismatch in cash flow. However, the investments are unlikely to constrain the cash flow and financial risk profile of the group, which will be cushioned by the healthy performance of KPIL’s EPC segments and efficient working capital management. Nonetheless, any additional exposure in these entities would be closely monitored.

Liquidity: Strong

Cash and equivalents were more than Rs 800 crore as on September 30, 2024. Bank limit of around Rs 300 crore remained unutilised as on September 30, 2024. The available liquidity and expected annual cash accrual of Rs 900-1,000 crore should comfortably cover debt obligation of around Rs 300-350 crore and capex of around Rs 400-450 crore planned for fiscal 2025.

 

Environment, social and governance (ESG) profile

The ESG profile of KPIL 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, KPIL is focused on mitigating its environmental and social risks to ensure minimal impact.

 

Key ESG highlights

• KPIL plans to achieve carbon neutrality by 2040 and water neutrality by 2032. Also, the company achieved carbon neutrality for its international T&D electrical business in fiscal 2024.
• KPIL’s share of renewable energy increased to ~29% in fiscal 2024 (from 23% in the previous fiscal). This was aided by the commissioning 1.8-megawatt peak (MWp) of solar power generation capacity.
• KPIL had reported a lost time injury frequency rate (LTIFR) of 0.08 time compared with 0.16 time the previous fiscal. The employee attrition rate stood at ~22% for fiscal 2024.
• The governance structure is characterised by 50% of independent directors, with one woman board director and extensive financial disclosures.

 

There is growing importance of ESG among investors and lenders. The commitment of KPIL to ESG principles will play a key role in enhancing stakeholder confidence, given the high share of market borrowing in its overall debt and access to both domestic and foreign capital markets.

Outlook: Stable

KPIL should continue to benefit from its established market position in the TLT industry and its healthy order book with a diversified revenue profile.

 

Rating Sensitivity Factors

Upward factors

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

      Downward factors

• Weak operational performance marked by steady decline in operating margin and stagnant revenue, leading to lower cash accrual
• Further stretch in the working capital cycle constraining the capital structure, with the TOL/TNW ratio sustaining above 2.5 times
• Continued high support extended to SPVs, or any significant debt-funded capex or acquisition, weakening the financial risk profile

About the Company

Incorporated in 1981 by Mr Mofatraj P Munot, KPIL is a leading player 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, water, oil and gas and urban infrastructure projects.

 

JMC Projects, incorporated in 1986, undertakes construction contracts for infrastructure projects (including bridges, flyovers, highways and captive power plants), industrial projects, buildings, residential and water projects. It was merged with KPIL with effect from January 4, 2023 with an appointed date of April 1, 2022.

 

SSL offers end-to-end logistical solutions in west India in the agricultural sector, spanning warehousing, cold storage and commodity-funding services, collateral management and commodity exports.

 

EnergyLink is in the real estate business and is executing a real estate project in Indore through its wholly owned subsidiary, Saicharan Properties Ltd.

Any other information: Not Applicable