Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of S P Singla Constructions Pvt Ltd (SPSCPL) from 'Rating Watch with Developing Implications' and reaffirmed the ratings at ‘CRISIL A+/CRISIL A1’ while assigning a ‘Stable’ outlook to the long-term bank facilities.

 

CRISIL Ratings had, on June 14, 2023, placed the rating on watch following the damage on an under-construction bridge project (Bridge across River Ganga between Sultanganj (Bhagalpur District) and Aguwani Ghat (Khagaria District)) in Bihar, being constructed by SPSCPL.

 

The current rating action is driven by expectation of no major impact of the bridge collapse on the business and financial risk profile of the company. This is mainly driven by the recent Lenders Independent Engineer (LIE) report (acknowledged by the lenders’ consortium) which concludes that the damage of the bridge is due to some unknown scientific phenomenon and the company had done all due diligence in adhering to the contract requirement, which was also verified by the Authority, Bihar Rajya Pul Nirman Nigam Limited (BRPNNL). The report  mentions that this is not likely to impact the future business prospects of the company. Further, the management has also provided an undertaking stating that the incident is not likely to impact its business and financial risk profile.

 

The company continues to execute the remaining part of the project (except the damaged portion) and management has started deploying resources to reconstruct the damaged part as well. Moreover, the company has a Comprehensive All Risk (CAR) policy to cover the loss for re-construction of the damaged portion of the bridge, claims for which have already been filed. The company has adequate cash accruals to meet the expenses of reconstruction of the bridge which amounts to Rs. 70-80 crore and management intends to complete the project in a timely manner.

 

In terms of payments with respect to the project, the company has been receiving timely payments from the counterparty and the bank guarantee for this project has also been extended by the authority in November 2023 for another two years.

 

However, CRISIL Ratings will continue to monitor developments in this regard and any significant damages being charged by the government, invocation of BG and/or any other business/financial implications on the company in future due to this incident will remain a key rating sensitivity factor.

 

Operating performance is expected to remain healthy during fiscal 2024 with marginal growth in operating income to Rs 3100-3200 crore (Rs 3073 crores in fiscal 2023). Operating income is expected to grow at 8-10% over the medium term backed by strong order book position of around Rs 11,746 crore as on Dec 31, 2023 (Rs. 8714 crore as on March 2023). Order book to revenue ratio of 3.7-3.8 times considering estimated revenue of fiscal 2024, provides healthy revenue visibility.

 

Earnings before interest taxes depreciation and amortization (EBITDA) margin is expected to improve to 10-11% in fiscal 2024 (9.1% during fiscal 2023) with ease in raw material prices and is expected to sustain over the medium term. As a result, the net cash accruals are expected to improve to Rs. 200-230 crore in next few fiscals as against Rs. 180-190 crore in fiscal 2024.

 

The financial risk profile is expected to remain healthy, with the total outside liabilities to adjusted networth (TOL/ANW) ratio and adjusted interest coverage expected to remain ~ 1.1 – 1.3 times and 3.4 – 3.7 times over the medium term (1.46 and 3.44 times respectively in fiscal 2023).

 

The ratings continue to factor healthy business risk profile, extensive experience of the promoter in executing river over bridge projects and healthy financial risk profile with efficient working capital management. These strengths are partially offset by exposure to cyclicality inherent in the construction industry and limited segmental diversity.

Analytical Approach

CRISIL Ratings has taken a standalone view on SPSCPL. Also, interest-bearing mobilisation advances has been considered as debt. In line with the moderate consolidation approach of CRISIL Ratings, the equity requirement, expected cost overrun and support needed for underlying hybrid annuity model (HAM) project has been factored into the financials of the company.

 

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:

• Healthy business risk profile: Business risk profile is healthy supported by healthy order book and track record of project execution. Further, a strong order book of ~Rs. 11746 crore as on Dec 31, 2023 which is 3.7-3.8 times the expected revenue in fiscal 2024 provides good revenue visibility for the medium term. Further, the company has been declared L1 in one additional order amounting to Rs 2200 crore recently which should add further to the order book. This along with strong execution capabilities should result in an increase in the revenue by 8-10% over the medium term from Rs 3100-3200 crore by fiscal 2024 (expected). However, any impact of the incidence of damage of Bhagalpur bridge on the future bidding and the order book of the company shall be a key monitorable. EBITDA margin is expected to improve to 10-11% in fiscal 2024 (9.1% during fiscal 2023) with ease in raw material prices and is expected to sustain over the medium term. Healthy order execution and higher revenue should support the operating profitability in the near to medium term.

 

• Extensive experience of promoter and established track record in executing river over bridge projects: The company is led by Mr Sat Paul Singla, who is a civil engineer and has experience of about four decades in designing, engineering and construction of bridges over rivers. The top management comprises qualified and experienced members, with average experience of more than three decades. The company has expertise in constructing various types of bridges such as girder, extra dosed, and cable stayed, and has constructed the highest number of cable-stayed bridges in the country. It has adequate technical and project management capabilities to handle multiple projects at a time. The company has completed more than 500 bridges, including flyovers and railway over bridges, across 16 states of India.

 

• Healthy financial risk profile with efficient working capital management: The financial risk profile is healthy driven by steady cash accrual and moderate debt levels. Net cash accruals are expected to remain around Rs 180-230 crore and should be adequate for meeting the annual capital expenditure (capex) plans of around Rs 50-75 crore, equity commitments towards the HAM project (~ Rs. 55 crore) and incremental working capital requirement and hence the debt levels are expected to remain steady over the medium term (Rs 454 crore as of March 2023). Overall, TOL/ANW and adjusted interest coverage ratios are expected to remain around 1.1 – 1.3 times and 3.4 – 3.7 times over the medium term compared to 1.46 and 3.44 times respectively in fiscal 2023.

 

The company does not take developmental risks and executes engineering, procurement, construction projects, which limit its requirement of equity infusion in the projects. However, it plans to take up projects offered on the HAM if they have significant structural work (more than 60% of the total work). Significant high-cost overruns in existing HAM project, or substantial exposure to new ones, necessitating sizeable equity investment and/or higher than expected debt-funded capex resulting impacting the financial risk profile will remain key rating sensitivity factors.

 

Moreover, any financial loss to the company on account of the incidence of damage of Bhagalpur bridge shall also remain a key monitorable. The company shall maintain adequate liquidity to meet any such liability arising in the near future.

 

On the working capital front, the company makes prudent selection of projects with strong counterparties to ensure timely payments. This led to healthy cash flow and moderate gross current assets of around 147 days as on March 31, 2023. The gross current assets are expected to remain at similar levels over next three fiscals.

 

Weaknesses:

• Exposure to cyclicality inherent in the construction industry: Revenue remains susceptible to economic cycles that impact the construction industry. Furthermore, the company mainly caters to government agencies, expenditure of which is directly linked to the economy. Given the cyclicality inherent in the construction industry, the ability to increase the scale while maintaining operating efficiency becomes important. Numerous players in the construction segment results in intense competition, which may continue to constrain scalability and profitability. This risk is, however, partly mitigated by the presence in construction of bridges, which requires higher technical expertise, thereby limiting the number of qualified bidders. Also, the requirement of equipment is higher in case of bridge projects, relative to roads, which impacts the operating profitability. However, the company keeps adding the required equipments /machinery from time to time and has builtup a good level of inventory to execute all type of projects on its own. Additionally, profitability remains vulnerable to sharp increase in raw material as seen in recent past. However, this is partly offset by the presence of cost escalation clause in most of the projects.

 

• Limited segmental diversity: Operations continue to be focused on bridge projects, which contribute the bulk of the revenue, unlike EPC players with presence in multiple segments such as commercial, residential, and industrial construction and infrastructure (railways, irrigation, dams, and power). Nevertheless, increasing plans to expand into other segments would mitigate concentration risk in longer run.

Liquidity: Strong

Unencumbered cash and equivalents stood at Rs 42 crore as on December 31, 2023 and the fund-based bank limit utilisation (limits were Rs. 400 crore as on December 2023) remained high at around 84% during the 12 months through December 2023. However, annual net cash accruals of around Rs. 180 – 230 crores should be adequate for meeting the annual debt obligations of Rs 40-60 crore, incremental equity commitments and working capital requirements of the medium term. The company also uses non-fund-based facilities for meeting working capital requirements. Timely and sufficient enhancement in the bank lines is critical to support growth. As per the management, the company shall maintain adequate liquidity to meet any financial loss/liability arising out in the near future on account of damage of the Bhagalpur bridge.

Outlook: Stable

SPSCPL should continue to benefit from its established market position, heathy operating efficiency, and healthy capital structure, over the medium term.

Rating Sensitivity factors

Upward factors:

• Significant increase in revenue and operating profitability leading to cash accruals above Rs 250 - 300 crore on a sustained basis
• Significant improvement in the financial risk profile with increase in adjusted interest coverage ratio to over 5 – 6 times on a sustained basis
• Significant improvement in working capital cycle and liquidity position

 

Downward factors:

• Weakening of business risk profile due to reduction in order book position and/or revenue and/or operating profitability leading to net cash accruals going below Rs 150 crore on a sustained basis
• Deterioration in financial risk profile of the company due to higher-than-expected borrowing on account of large equity requirement in any project or for capex, leading to adjusted interest coverage ratio going below 3 – 3.5 times on a sustained basis.
• Stretch in the working capital cycle weakening the liquidity.
• Any significant damages being charged by the government, invocation of BG and/or any other business/financial implications on the company due to the bridge collapse in Bihar

About the Company

SPSCPL, based in Panchkula, Haryana, and incorporated in 1996, is promoted by Mr Sat Paul Singla, a civil engineer. Activities include investigative works, and designing, engineering and constructing bridges over rivers. It also constructs roads over and under bridges at railway crossings, flyovers, underpasses, and grade-separators across cities in India. It has a subsidiary, SPS Realtors Pvt Ltd; however, currently no operations are being carried out in this entity. To increase its technical expertise and execute large projects, the company has entered into joint ventures with Gammon India Ltd and Arvind Techno Engineers Pvt Ltd and two JVs with PNC Infratech Ltd.

Key Financial Indicators*

As on/for the period ended March 31	Units	2023	2022
Operating income	Rs.Crore	3073	3159
Profit after tax (PAT)	Rs.Crore	128	129
PAT margin	%	4.2	4.1
Adjusted debt/adjusted networth	Times	0.46	0.53
Adjusted Interest coverage	Times	3.44	3.65

   *CRISIL Ratings’ adjusted numbers

Any other information: Not Applicable