Detailed Rationale

CRISIL Ratings has removed the ratings on the bank facilities of SEPC Limited (SEPC) from ‘Rating Watch with Developing Implications’. The ratings have been reaffirmed at ‘CRISIL BBB-/CRISIL A3’ and a ‘Negative’ outlook has been assigned to the long-term bank facilities of the company.

 

Earlier, CRISIL Ratings had placed the ratings on ‘watch developing’ in October 2023, following the interim order passed by the Madras High Court in relation to the legal proceedings involving Twarit Consultancy Services Pvt Ltd (TCPL), GPE (INDIA) Ltd, GPE JV Ltd, Gaja Trustee Company Pvt Ltd (collectively called Gaja), restraining SEPC from withdrawing amounts from certain bank accounts mentioned in the order (totalling Rs 33.07 crore), except those which are subject to lien. The ratings were placed on watch to monitor developments of the proceedings and assess its impact, if any, on the company’s operations.

 

CRISIL Ratings has, basis discussions with the management and lenders of SEPC, noted that the operations of the company continue as normal and that there has not been any material impact of the restraint order on the company’s liquidity, finances, and operation.

 

A negative outlook has however been assigned to the long-term bank facilities of the company due to the subdued operating performance seen in fiscal 2024 against expectations. Pick-up in order executions that were expected since the first half of fiscal 2024 has not materialised, partly due to the ongoing supply challenges faced in procuring the key raw material i.e. 100-150 MM Ductile Iron pipes that has led to execution delays as well as in sourcing new orders. Further, revenues mainly accrued from executing the older projects that were won at lower rates, causing the operating margins to remain subdued at ~4.8% in the first nine months of fiscal 2024.

 

SEPC’s operations remain highly working capital intensive wherein the sanctioned fund-based bank limit of Rs 157.1 crore was utilised extensively at 90% on average over the six months through February 2024 while the non-fund-based limit of Rs 709.3 crore was utilised 66% on average during the same period.

 

The company has applied for project extensions while also applying for consideration of alternate materials to resolve the current raw material shortage issue faced, which would be subject to revised approvals from various stakeholders, including the state governments. These approvals are likely to come in fiscal 2025 and hence the projects are expected to be undertaken then, albeit with delays.  Improvement in operating performance in the subsequent quarters backed by ramp up of operations, improvement in GCA days will remain key monitorables.

 

The company continues to receive strong financial support from its promoters, chiefly Mark AB, which had infused Rs 350 crore in equity, then used to repay debt. The promoters have also committed to meet any additional funding requirements as needed. As of March 2024, they have infused Rs 49 crore as quasi equity bearing 0.01% interest, which is payable via a single bullet repayment in fiscal 2035. The company has also successfully completed Rs 100 crore rights issue in fiscal 2024 with further plans to raise additional Rs 200 crore through rights issue this fiscal.

 

The ratings continue to reflect the moderate business risk profile of SEPC, given its established position in mid-sized engineering, procurement, and construction (EPC) across water, process, and metallurgy (P&M) segments, its healthy order book and long-track record of operations. The ratings are, however, constrained by subdued operating performance and large working capital requirement and intense competition in the EPC industry.

Analytical Approach

• CCD’s Rs 175 crore have been treated as equity as they will be compulsorily converted to equity and will remain in the company for long (with redemption only in fiscal 2035), carrying effective yield of 4%. NCDs of Rs 175 crore held by the lenders as per the resolution plan has been treated as debt.
• The cash flows from subsidiaries are not incorporated in the projections as there are no committed or financial obligations or inflows related to these subsidiaries. Additionally, these subsidiaries do not have any fund-based and non-fund-based debt.
• Unsecured loan of Rs 49 crore from the promoter has been treated as quasi equity as they have been availed at an interest rate of 0.01% which is significantly below the market rates. Further, the repayment of these loans is in the form of a bullet repayment in fiscal 2035.

Key Rating Drivers & Detailed Description

Strengths:

Established market position with a long track record in the mid-sized EPC business:

SEPC (standalone) has an established market position among mid-sized EPC contractors, backed by execution track record of more than two decades and established relationships with clients in both, the water, and P&M segments, in India and abroad. In the water segment, the company primarily executes projects in the water and waste-water distribution and water treatment areas, where it has executed large contracts for Indian clients, including various state water supply and urban infrastructure departments as well as several overseas clients. In the P&M segment, it has executed several large and marquee projects, including a cement and limestone handling system plant for Sree Jayajothi Cements Ltd, a coal chemical plant for SAIL (Rourkela), and a new turnkey circular shaft with complete winding installation project for Hutti gold mines in Raichur district of Karnataka.

 

Modest business risk profile reflected in the order book position:

SEPC had an order book of Rs 1166 crore as on February 29, 2024, as against Rs 920 crore as on September 30, 2023. Several orders are in advanced stage of execution and are expected to be completed in fiscal 2025, which will support revenue growth. The company has also bid for orders of over Rs 4,590 crore which includes order wins of ~Rs 2900 crore via its wholly owned subsidiary SEPC EPC FZE. Ability to sustain healthy growth will depend on timely project execution, billing and collection of the recievables across segments and will remain a key monitorable.

 

Experienced and capable new management, in Mark AB, who is the single largest shareholder in the company:

Though Mark AB is new to the Indian markets, it has considerable experience in investing and managing EPC businesses around the world, including in Russia, Algeria and Kuwait. Its experience in the EPC business in the Middle East will help bring in globally accepted best practices to SEPC for timely project execution. Mark AB has taken over the operational and management control of SEPC.

 

The promoters have also committed to meet any additional funding requirements as needed. As of March 2024, they have infused Rs 49 crore as quasi equity bearing 0.01% interest, which is payable via a single bullet repayment in fiscal 2035. The company has also successfully completed Rs 100 crore rights issue in fiscal 2024 with further plans to raise additional Rs 200 crore through rights issue this fiscal.

 

Mark AB has access to a network of partners, both construction and technology, which will enable SEPC to increase business volume by bidding for projects that it would otherwise not qualify for. This is already reflected with order wins of AED 20.05 million to set up an Experience Centre in Dubai announced in March 2024 and a bid pipeline of Rs 2900 core in place for new orders.

 

Weaknesses:

Working capital-intensive operations

Given SEPC’s presence in the EPC business with focus on water and P&M segments, its operations have remained working capital intensive. The GCAs surged to 1090 days as on March 31, 2023, from 888 days as on March 31, 2021, as unbilled revenue shot up to 663 days from about 553 days, with receivables increasing to 409 days.  Working capital support from promoters and steady execution of older projects should lead to improvement in the working capital cycle, though it will remain large and a key monitorable.

 

Modest financial risk profile

The total outstanding debt at SEPC (standalone) was Rs 330 crore (including Rs 175 crore NCDs) as on September 30, 2023, at the same level as on March 31, 2023, having reduced from Rs 891 crore as on March 31, 2022. Networth rose to ~Rs 1,140 crore as on September 30, 2023, from Rs 746 crore as on March 31, 2022, post the restructuring, equity funding from Mark AB and rights issues. Consequently, gearing improved to ~0.29 time as on September 30, 2023, from 1.2 times as on March 31, 2022. SEPC is likely to undertake only moderate capital expenditure (capex) of up to Rs 4-5 crore annually over the medium term at the standalone level, which is expected to be funded through internal accrual. With steady ramp-up in project execution and cash accrual, there should be steady accretion to networth resulting in gradual improvement in credit metrics.

 

Susceptibility to volatility in raw material prices

Profitability is susceptible to fluctuations in the prices of polyethylene, polyvinyl chloride, polymer resin (for water segment) pipes, which are among the key components used in the water segment projects. These products are commodities, and their prices are determined by the demand-supply scenario and the price of petroleum. While SEPC can partially pass on the price volatility to customers for a large portion of its sales, its profitability remains susceptible to volatility in raw material prices for fixed price contracts.

Liquidity: Adequate

SEPC has met all its debt obligations till March 2024. The company has sanctioned fund-based bank limit of Rs 157.1 crore, which was utilised extensively at 90%, on average, over the six months through February 2024 while the non-fund-based limit of Rs 709.3 crore was utilised 66%, on average, over the six months through February 2024. The company had moderate liquid surplus of Rs 55 crore as of February 2024. The utilisation is expected to improve once additional Rs 200 crore rights issue announced on January 29, 2023, is completed. The company has also planned to use certain portion of the proceeds of the rights issue to reduce its fund based working capital limits.

 

CRISIL Ratings also notes that there is an agency for specialised monitoring (ASM) appointed by the lenders since fiscal 2014, as part of the corporate debt restructuring (CDR) plan, to provide for funds for timely debt servicing. A trust and retention account (TRA) is being maintained by the lenders, wherein cash flow from operations is parked in advance for forthcoming debt obligations and the balance is permitted to be utilised by the company. Continuation of the ASM led monitoring of the TRA along with one quarter of debt obligation as debt service reserve account (DSRA) will support timely debt servicing.

 

SEPC is likely to generate cash accrual of around Rs 23 crore in fiscal 2024 and around Rs 40-60 crore in fiscal 2025, which will be sufficient to cover the debt obligation of ~Rs 2.6 crore in fiscal 2024 and Rs 4.2 crore in fiscal 2025 as well as capex. Besides, SEPC has received Rs 49 crore from Mark AB, raised Rs ~100 crore through rights issue in fiscal 2024 (Rs ~50 crore each in April and December 2023) and is expected to raise additional fund via planned rights issue of Rs 200 crore in fiscal 2025, which will aid its working capital needs.

Outlook: Negative

CRISIL Ratings believes a sustained slowdown in business operations combined with continued dependence on external sources to fund higher working capital requirement could weaken the overall business and financial risk profiles of the company and hence, will be a key monitorable.

Rating Sensitivity Factors

Upward Factors:

• Substantial improvement in revenue while generating consistent operating profit of 7-8%
• Sharp improvement in the working capital cycle resulting in improved liquidity cushion.
• Strong improvement in leverage led by additional equity infusion or better operational performance.

 

Downward Factors:

• Less-than-expected growth in revenue with operating margin remaining below 3% impairing net cash accrual
• Sustained stretch in the working capital cycle impacting liquidity.
• Weakening in credit metrics or liquidity owing to non-provisioned claims, liabilities or payments arising from legal disputes
• Any change in the support stance from the promoter, Mark AB

About the Company

SEPC (Shriram EPC Ltd till February 2021) was incorporated in June 2000. The company became majority owned by Mark AB since September 2022 post infusion of Rs 350 crore. SEPC specialises in executing EPC contracts, providing integrated solutions encompassing design, engineering, procurement, construction and project management services in water, process and process and metallurgy, and infrastructure segments.

 

Mark AB is the largest stakeholder in SEPC, with 29.6% stake as on March 31, 2023.

 

For the first 9 months of fiscal 2024, SEPC had a net profit of Rs 16 crore and operating income of Rs 413 crore compared with Rs 8 crore and Rs 237 crore, respectively, during the corresponding period of the previous fiscal.

Key Financial Indicators (CRISIL Ratings-adjusted figures)

As on/for the period ended March 31	Unit	2023	2022
Operating income	Rs.Crore	379	305
Profit after tax (PAT)	Rs.Crore	(11)	(249)
PAT margin	%	-2.99	-81.5
Adjusted debt/adjusted networth	Times	0.30	1.20
Interest coverage	Times	NM	NM

NM – Not meaningful

Status of noncooperation with previous CRA

SEPC has not cooperated with India Ratings And Research Private Limited (Ind-Ra), which has classified the company as non-cooperative through a release dated September 08, 2017. The reason provided by Ind-Ra is non-furnishing of information for monitoring of the ratings.

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	Cash Credit	NA	NA	NA	157.05	NA	CRISIL BBB-/Negative
NA	Term Loan	NA	9%	Mar-2027	15.8	NA	CRISIL BBB-/Negative
NA	Term Loan	NA	9%	Mar-2029	6.6	NA	CRISIL BBB-/Negative
NA	Term Loan	NA	0%	Mar-2027	1.4	NA	CRISIL BBB-/Negative
NA	Letter of Credit	NA	NA	NA	233.26	NA	CRISIL A3
NA	Bank Guarantee	NA	NA	NA	476.04	NA	CRISIL A3