Rating Rationale

Rating Rationale

December 30, 2024 | Mumbai

Kapston Services Limited

Rating outlook revised to 'Stable'; Ratings Reaffirmed

Rating Action

Total Bank Loan Facilities Rated	Rs.140 Crore
Long Term Rating	CRISIL BBB/Stable (Outlook revised from 'Negative'; Rating Reaffirmed)
Short Term Rating	CRISIL A3+ (Reaffirmed)

Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.

1 crore = 10 million

Refer to Annexure for Details of Instruments & Bank Facilities

Detailed rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Kapston Services Ltd (KSL) to ‘Stable’ from ‘Negative’ and reaffirmed the rating at ‘CRISIL BBB’ and has reaffirmed its ‘CRISIL A3+’ rating on the short-term bank facility.

The outlook revision factors in the improvement in the business performance of the company with significant scale-up of operations and recovery in operating margin improving the debt protection metrics. The revenue growth is likely to sustain and the margin is expected to remain at around 4.5% over the medium term with consistent scaling up improving the coverage in fixed overheads. While the capital structure remains moderately leveraged with the working capital-intensive nature of the operations, the ability of the company to improve the same and maintenance of satisfactory debt protection metrics with interest coverage of above 2 times will be monitorable.

The ratings continue to reflect the experience of the management of KSL in the facilities management and security services industry, the company’s established track record of operations and increasing scale of operations. These strengths are partially offset by modest operating margin, average financial risk profile and large working capital requirement.

Analytical approach

CRISIL Ratings has combined the business and financial risk profiles of the company with its two newly formed wholly owned subsidiaries; Kapston Manpower Services Pvt Ltd and Kapston Security Services Private Limited, while arriving at the ratings. The subsidiaries were formed during fiscal 2025, and currently do not have any major operations. The subsidiaries are expected to scale up in the medium term and the parent will continue to support the operations in the subsidiaries.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key rating drivers and detailed description

Strengths:

Experienced management: The promoter, Mr Kodali Srikanth, has experience of over a decade in the facilities management and security services business. Mr Chereddi Ramachandra Naidu, Chairman, takes care of the human resource management, industrial relations, strategy and project management. They are supported by the other directors, Mr Naveen Nandigam and Ms Doddapaneni Kranti Kiran.

Established track record of operations: KSL is a proven brand in providing integrated facility management (IFM) and security services to diversified clients. The company started providing contract staffing solutions to general and information technology (IT) companies in fiscal 2020. The staffing segment witnessed significant growth in the first four years, with revenue of the segment increasing to Rs 199 crore in fiscal 2024 from Rs 7 crore in fiscal 2021, which helped the company achieve a revenue of Rs 520 crore in fiscal 2024. The company has been able to keep adding customers and revenue from the staffing segment is expected to be more than Rs 300 crore in the ongoing fiscal. The revenue growth momentum is likely to be maintained in the medium term.

Improving scale of operations: The scale of operations improved significantly, as reflected in the revenue of Rs 520 crore in fiscal 2024, owing to significantly improved contribution from the staffing business and the healthy growth rate in the IFM vertical. The company continues to add customers in the staffing business, and the contract staffing segment is expected to contribute revenue of above Rs 300 crore from fiscal 2025. Management has already set up the infrastructure and requisite teams across the country in the past 2-3 years and has been able to bag contracts from large scale reputed customers across the country. IFM and security services segment is estimated to grow at 15-20% and contract staffing is expected to grow at around 25% over the medium term.

Weaknesses:

Modest operating margin: The operating margin remained modest at 4.4% in fiscal 2024. The margin is lower for the staffing solutions segment, whose contribution improved over the last 2-3 years, and the contribution will continue to grow over the medium term. Considering the business mix, the margin is expected to remain modest at 4.5-5.0% over the medium term.

Average financial risk profile: The financial risk profile has been constrained by high reliance on the working capital limits due to the nature of the business. The capital structure is expected to remain moderate with gearing of 1.90-1.95 times expected as on March 31, 2025, with debt expected to be taken for the capex towards the office. The debt is expected to have a moratorium of 2 years and is expected to be completed by the end of fiscal 2027. The debt protection metrics has remained at satisfactory levels with estimated interest coverage ratio maintained at above 2 times.

Large working capital requirement: The operations will remain working capital intensive, especially in projects where the company has to allow credit to its customers. Consequently, receivables will remain high resulting in high reliance on working capital borrowings. The significant scale up has resulted in larger working capital requirements; however, the working capital cycle has improved in the past 2-3 years and is likely to continue.

Liquidity: Adequate

Bank limit utilisation was moderate at 63% on average for the 17 months through October 2024. Annual cash accrual is expected over Rs 15 crore against yearly term debt obligation of Rs 4 crore over the medium term, and will cushion liquidity. The current ratio was healthy at 1.40 times as on March 31, 2024.

Outlook: Stable

CRISIL Ratings believes the established presence and growth trajectory will likely support the business performance of the company over the medium term.

Rating sensitivity factors

Upward factors

Sustained growth in revenue, while maintaining margin, resulting in net cash accrual of above Rs 25 crore
Improvement in the financial risk profile, with interest coverage ratio above 3.5 times

Downward factors

Weakening of the debt protection metrics, with interest coverage ratio less than 2 times
Delay in collection of receivables or any large dividend payment impacting the liquidity or capital structure

About the group

Incorporated in 2009, KSL (formerly, Kapston Facilities Management Ltd) is ISO 9001 and OHSAS 18001:2007 certified company for providing IFM services for security, housekeeping, M&E (electro-mechanical) and allied services. The company ventured into staffing solutions in fiscal 2021. It is listed on the National Stock Exchange. Mr Kodali Srikanth is the promoter of the company.

Incorporated in 2024, Kapston Manpower Services Pvt Ltd, a wholly owned subsidiary of KSL, is dedicated entirely to providing comprehensive manpower solutions.

Incorporated in 2024, Kapston Security Services Pvt Ltd is a wholly owned subsidiary of KSL and specialises exclusively in security services.

Key financial indicators

As on/for the period ended March 31		2024	2023
Operating income	Rs crore	520.12	399.07
Reported profit after tax (PAT)	Rs crore	12.57	5.07
PAT margin	%	2.42	1.27
Adjusted debt/adjusted networth	Times	1.40	1.54
Interest coverage	Times	2.16	1.52

Status of non-cooperation with previous CRA

KSL has not cooperated with Acute Ratings and Research Ltd, which has classified the company as non-cooperative through a rationale dated April 22, 2021, on account of non-furnishing of information for monitoring of ratings.

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN	Name Of Instrument	Date Of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Crore)	Complexity Levels	Rating Outstanding with Outlook
NA	Bank Guarantee	NA	NA	NA	5.00	NA	CRISIL A3+
NA	Cash Credit	NA	NA	NA	126.23	NA	CRISIL BBB/Stable
NA	Working Capital Demand Loan	NA	NA	NA	5.00	NA	CRISIL BBB/Stable
NA	Long Term Loan	NA	NA	31-Mar-25	2.33	NA	CRISIL BBB/Stable
NA	Long Term Loan	NA	NA	31-Mar-25	1.44	NA	CRISIL BBB/Stable

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Kapston Services Ltd	Full	Parent company
Kapston Manpower Services Pvt Ltd	Full	Wholly owned subsidiary and same business
Kapston Security Services Pvt Ltd	Full	Wholly owned subsidiary and same business

Annexure - Rating History for last 3 Years

	Current			2024 (History)		2023		2022		2021		Start of 2021
Instrument	Type	Outstanding Amount	Rating	Date	Rating	Date	Rating	Date	Rating	Date	Rating	Rating
Fund Based Facilities	LT	135.0	CRISIL BBB/Stable		--	09-10-23	CRISIL BBB/Negative	31-03-22	CRISIL BBB/Stable	12-01-21	CRISIL BBB/Stable	--
			--		--	08-03-23	CRISIL A3+ / CRISIL BBB/Negative		--		--	--
Non-Fund Based Facilities	ST	5.0	CRISIL A3+		--	09-10-23	CRISIL A3+	31-03-22	CRISIL A3+	12-01-21	CRISIL A3+	--
			--		--	08-03-23	CRISIL A3+		--		--	--

All amounts are in Rs.Cr.

Annexure - Details of Bank Lenders & Facilities

Facility	Amount (Rs.Crore)	Name of Lender	Rating
Bank Guarantee	5	HDFC Bank Limited	CRISIL A3+
Cash Credit	28	HDFC Bank Limited	CRISIL BBB/Stable
Cash Credit	25.23	IndusInd Bank Limited	CRISIL BBB/Stable
Cash Credit	10	Bandhan Bank Limited	CRISIL BBB/Stable
Cash Credit	35	ICICI Bank Limited	CRISIL BBB/Stable
Cash Credit	28	Axis Bank Limited	CRISIL BBB/Stable
Long Term Loan	2.33	Axis Bank Limited	CRISIL BBB/Stable
Long Term Loan	1.44	HDFC Bank Limited	CRISIL BBB/Stable
Working Capital Demand Loan	5	HDFC Bank Limited	CRISIL BBB/Stable

Criteria Details

Links to related criteria

CRISILs Approach to Financial Ratios

Rating criteria for manufaturing and service sector companies

CRISILs Bank Loan Ratings - process, scale and default recognition

CRISILs Criteria for rating short term debt

CRISILs Criteria for Consolidation

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