Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of R.V.R. Projects Private Limited (RVR) to 'CRISIL A/Stable/CRISIL A1' from 'CRISIL A-/Positive/CRISIL A2+’.

 

The ratings upgrade factor in the improvement in the business risk profile of RVR backed by the scaling up of operations in fiscal 2022 given the healthy order book of around Rs 13,739 crore as of April 2022. The order book has increased significantly due to the addition of an engineering, procurement and construction (EPC) order of Rs 5162 crore in the irrigation segment which will contribute significantly to topline over next few years. Revenue in fiscal 2023 is expected to increase sharply over Rs 1500 crore due to healthy orderbook. Operating margin is further expected to remain in the range of 19-20% going forward. As a result, net cash accruals are expected to increase to 200-220 crore per annum in fiscal 2023 and 2024 against Rs 153 crore in fiscal 2022.

 

Financial risk profile remained comfortable with no external debt as on March 31, 2022, while having healthy unencumbered reserves in the form of cash and its equivalents. This is expected to remain healthy with debt protection metrics such as interest coverage ratios improving to 13.52 times in fiscal 2023 as against 13.29 times during fiscal 2022. The gearing is expected to remain below 0.15 times in the medium term. Working capital cycle is expected to remain stable with GCA days in the range of 200-210 days. 

 

The ratings continue to reflect the company’s established track record in executing engineering-procurement, construction (EPC) contracts, healthy order pipeline providing revenue visibility for the medium term, and strong financial risk profile. These strengths are partially offset by segmental and customer concentration in revenue, susceptibility to volatility in working capital cycle, and exposure to intense competition and cyclicality in the construction industry.

Analytical Approach

For arriving at the ratings, unsecured loans from promoters of Rs 42.62 crore as on March 31, 2022 (Rs 28.78 crore as on March 31, 2021) have been treated as debt. These loans are interest-free and repayable on demand. There is a track record of withdrawal of these loans from the business in the past. The existing funds may also be withdrawn in case of higher than expected surplus generation. Interest bearing mobilisation advances have also been treated as debt (Rs 86.74 crore as on March 31, 2022 against Rs 47.02 crore in previous fiscal).

Key Rating Drivers & Detailed Description

Strengths:

• Established track record in executing EPC contracts

RVR benefits from its established track record of more than two decades in the EPC business across various segments, including defence, building construction, ports, irrigation, and roads. Over the years, the company has developed strong relationships with several state government departments, Defense Research and Development Organisation (DRDO), and other public sector undertakings by virtue of implementing projects under stringent timelines and security arrangements, while maintaining high quality standards. The company is rated as a Class 1 contractor and is one of the few players on DRDO's panel of contractors that implements works across civil, electrical, and mechanical segments.

 

Over the last decade, the company has also diversified into ports, irrigation, water supply and roads segments. The company is now majorly focusing on water supply and irrigation projects which comprise around 75-80% of the order book.

 

• Healthy order pipeline providing revenue visibility over the medium term

Of the order pipeline of around Rs 13,739 crore as of April 2022, executable orders account for Rs 12,596 crore. Around 75-80% of the executable orders are from the irrigation and water supply segment and the remaining correspond to roads, defence, and building construction segments. Executable order book to revenue (fiscal 2022) ratio is high at 9.9 times, with most orders to be executed over a period of 36 to 42 months, thereby providing healthy revenue visibility over the medium term. The company will continue to focus on bidding for irrigation, water supply and conveyor belt projects going forward.

 

• Strong financial risk profile

RVR has low dependence on external borrowing, leading to moderate debt of Rs 131 crore (pertaining only to interest-bearing mobilisation advances and unsecured loans from promoters) as on March 31, 2022. With healthy net worth of Rs 1067 crore as on March 31, 2022, gearing and total outside liabilities to tangible net worth ratios were healthy at 0.12 times and 0.28 times, respectively. Low debt and healthy profitability has also resulted in strong debt protection metrics with interest coverage and net cash accrual to adjusted debt ratios of 12.57 and 1.17 for fiscal 2022. This is further expected to improve with debt protection metrics such as interest coverage ratios improving to 13.52 times in fiscal 2023 and gearing expected to remain below 0.15 times in the medium term.

 

Weaknesses:

• Segmental and geographical concentration in revenue

Orders from the irrigation and water supply segment comprised around 75-80% of total executable orders as of March 2022. Furthermore, around 40% of orders are funded by the state governments of Andhra Pradesh and Telangana, albeit this reliance has come down from 61% during the previous fiscal.

 

Orders from the defence segment, which constituted majority of the orders till fiscal 2015, have slowed down in the past 2-3 fiscals, resulting in order book concentration towards irrigation. While orders from defense segment are expected to remain moderate in the future, the company is focusing on diversification of the order book with entry into segments like water supply and roads.

 

• Susceptibility to volatility in working capital cycle

Although RVR maintains a healthy working capital cycle with GCA (net off cash) below 100 days, it is susceptible to volatility in the working capital cycle given high dependence on timely certification and receipt of payments from customers, and moderate inventory requirement in its operating segments. Furthermore, inventory is subject to approvals by, and payments from, clients, which if not timely, can result in large work-in-progress inventory.

 

As on March 31, 2022, receivables position (inclusive of retention money) rose to around Rs 339 crore due to high revenue booking at the end of the year. However, the debtor position reduced to Rs. 284 crore as on August 2022. Given that order execution is largely for state government projects, there could be delay in payment realization which was faced in the recent past. Ability to sustain working capital cycle at current level will, hence, remain a key rating sensitivity factor.

 

• Exposure to intense competition and cyclicality in the construction industry

The construction industry is fragmented, leading to intense competition at the bidding stage. Operating margin is restricted on account of thin margins while bidding for projects. Moreover, growth of players is susceptible to changes in government regulations and economic conditions.  Intense competition and cyclicality will continue to affect RVR’s growth and profitability.

Liquidity: Strong

Liquidity is supported by steady cash accrual and low bank limit utilization. Cash accrual is expected at Rs 215- 230 crore in fiscal 2023 and fiscal 2024 as against nil repayment obligation. On average, fund-based limit was utilized 0% and non-fund based limit was utilized 50% in the 12 months through July 2022. As of March 2022, though having healthy unencumbered reserves in the form of cash and equivalents, the Company is further having unutilized cash credit limit of Rs 162 crore as cushion towards liquidity.

Outlook: Stable

CRISIL Ratings believes RVR will continue to benefit from its strong financial risk profile backed by low dependence on external borrowing, adequate working capital cycle and healthy liquidity level to tide over exigencies, if any. The business risk profile should also be supported by established market position and execution capabilities and strong order pipeline.

Rating Sensitivity factors

Upward factors

• Improvement in net cash accruals to over Rs 230 crore on a sustained basis backed by diversification across segments in order book
• Sustenance of financial risk profile mainly capital structure, gearing and liquidity
• Sustenance of working capital cycle

 

Downward factors

• Deterioration in GCAs (net off cash) beyond 180 days
• Significant delays in ongoing projects adversely impacting operating performance
• Significant increase in debt levels caused by large, debt-funded capex

About the Company

Incorporated in 1999 and promoted by Mr Rayala Venkateswara Rao, RVR executes projects as an EPC contractor in the industrial, institutional, technical, piling, marine, dredging, and residential segments. Over the past decade, it has diversified into EPC works in the ports, irrigation, water supply, and roads segments.

Key Financial Indicators

Financials as on / for the period ended March 31		2022	2021
Revenue	Rs crore	1272	836
Profit after tax (PAT)	Rs crore	140	147
PAT margin	%	11.0%	17.6%
Adjusted debt/adjusted networth	Times	0.12	0.08
Interest coverage	Times	13.29	18.73

 

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	Bank Guarantee	NA	NA	NA	967.0	NA	CRISIL A1
NA	Cash Credit	NA	NA	NA	162.0	NA	CRISIL A/Stable