Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of South West Pinnacle Exploration Ltd (SWPEL) at ‘CRISIL BBB/Stable/CRISIL A3+’.

 

The reaffirmation in ratings reflect the continued sound operating performance of the company as reflected in a revenue growth of 8% in FY24 to Rs. 133 crore as compared to 124 crore in FY23. Growth over the medium term will be supported by a healthy order book, acquisition of new clients and entry into new business domains. The operating margins improved to 18.6% in FY24 from 16.7% in FY23. This improvement was driven mainly by the execution of higher priced contracts. Adjusted for the coal business, operating margins were healthy at above 25% in FY24 as compared to ~21% in FY23. Order book of around Rs 221 crore as on June 30, 2024, provides adequate revenue visibility over the next 1-2 years. Furthermore, SWPEL has participated in bids valuing around Rs 300 crore.

 

That said, operations remain working capital intensive given the nature of business yet there has been some improvement in receivables levels during the year. Receivables and inventory stood at 154 days and 146 days, respectively, as on March 31, 2024, compared with 161 days and 147 days respectively, a year earlier. Receivables include retention money too, which is realized after 12-18 months as per the terms of contracts and contributes to the increase in overall receivable numbers. Timely realization of receivables and moderation in inventory leading to reduction in the working capital cycle will be key monitorables.

 

SWPEL was awarded a partially explored coal block in Jharkhand for commercial coal mining. Mine development activities have started, and the company plans to start coal production by the end of FY27. The company is likely to undertake capital expenditure (capex) of around Rs 240 crore till the commencement of coal production, that is, till FY27, mainly towards payment to government agencies, equipment, land acquisition and other infrastructure development. Funding for the capex has not yet been finalized and the company is considering various options including debt, preferential equity issue, qualified institutional placement (QIP), internal accrual, receipts against offtake agreements and/or any other mode of funding as per the market scenario at the time of fund raising. The process of obtaining approvals from various authorities at district and state levels including that of prospecting license cum mining lease is going on and SWEPL expects that geological report would be submitted in next 6-9 months after getting clearance from Government of Jharkhand to be followed by finalization of the mining plan etc. The capex requirement for FY25 is estimated at Rs 15-20 crore. Prudent funding of the capex and its impact on the capital structure will be key monitorables.

 

The company has two operational rigs in Oman for undertaking regular exploration and drilling operations. Additionally, the company had formed a JV named as Alara Resources LLC a 100% subsidiary of Alara, Australia (35% share) Southwest Pinnacle Exploration Ltd (35% share) and Al Tasnim of Oman (30% share). The JV was awarded an 11-year copper mining contract valued at $125 million. The project has been outsourced to Al Tasnim by a reasonable margin. CRISIL Ratings understands that there is no further equity commitment other than the existing investment of Rs 1.12 crore and any debt servicing liability at SWEPL level for the JV operations. No significant cash outflow is envisaged, yet major cash outflow, if any, impacting SWEPL’s financial risk profile would remain monitorable.

 

The ratings continue to reflect the company’s strong technical expertise in drilling and exploration, its’ presence in most of the domains of exploration services and its diversified and elite customer base. These strengths are partially offset by the large working capital requirement and the risks inherent in the tender-based business.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of SWPEL.

Key Rating Drivers & Detailed Description

Strengths:

• Strong technical expertise in drilling and exploration, and diversified customer profile: The company has experience of over 17 years in drilling and exploration of coal, minerals, coal-bed methane, oil and gas, and aquifer mapping. It expanded into the seismic services domain in fiscal 2020, winning a contract worth Rs 73 crore from Oil India ltd. Reinforcing its position in the domain, the company became the first of its kind by bagging integrated orders from Central Mine Planning & Design Institute Ltd (CMPDI) for drilling as well as 2D seismic data acquisition and processing. Apart, some time back, the company successfully completed 172 wells CBM production contract of Reliance Industries Ltd (RIL).

 

It has 35 operational rigs with capacity to drill between 300 and 2,500 meters. The client base is diversified across segments and geographies and included both public and private sector players, such as Oil India Ltd, CMPDI, Central Ground Water Board (CGWB), Directorate of Geology Dept. of Mines, SAIL, NMDC Ltd., Odisha Lift Irrigation Corporation Ltd (OLIC), Odisha Mineral Corporation, Mineral Exploration Corporation Ltd (MECL), Geological Survey of India, Hindustan Zinc Ltd, JSW Steel Ltd., Arcelor Mittal India Pvt Ltd., Vedanta Ltd (Vedanta), RIL and Hindalco Industries Ltd. This minimizes the risk of exposure to any one particular industry or client. Furthermore, the company has the ability to operate in multiple segments/domains using the same resources and without requiring major additional capex. In FY24, SWPEL received orders from new clients such as Vedanta, Hindalco, JK Cements, CGWB, etc. and repeat orders from RIL for CBM production valuing over Rs 84 crore with a potential to go up to Rs 270 crore in future. Presently, company is running 12 operations on pan India.              

 

• Healthy financial risk profile: In FY24, the company’s total debt increased to Rs. 91 crore, up from Rs. 62 crore a year ago. This debt was primarily in the form of long-term debt undertaken to fund the acquisition of equipment to execute RIL CBM production order. With this, the gearing of the company increased to 0.8 times in FY24 as compared to 0.6 times in FY23 while interest coverage moderated to 3 times in FY24 as compared to 4 times in FY23. Despite the incremental debt, the financial profile of the company remains adequate with a healthy net worth of Rs. 124 crore as of March 2024 as compared to Rs. 117 crore in March 2023. The funding pattern for the coal mining project has not been finalized. Prudent funding of the required capex and its impact on the capital structure will be key monitorables.

 

Weaknesses:

• Working capital-intensive operations: Operations remain working capital intensive due to sizeable receivables and inventory. Receivables remained over 150 days in the past three years on account of a large chunk of retention money and unbilled revenue. Inventories remained over 130 days in the past three years. The bulk of the ancillary equipment that is part of rigs as well as spares, consumables, drilling pipes etc. has to be kept as inventory at all times on site, on account of the nature of operations, including attachments, which enhances the total inventory value. Also, the company has operations across India, mostly in remote areas, and has to maintain adequate inventory at all sites to ensure smooth operations. CRISIL Ratings will continue to monitor the working capital cycle of SWPEL and any stretch in receivables will remain a key monitorable.

 

• Risks inherent in tender-based business: The company must bid for tenders floated by public sector entities while contracts from private sector entities are mostly by invitation. Delay in awarding contracts, insufficient number of bidders, long lead times, or lack of private sector contracts can adversely affect order inflow and revenue growth.  However, to mitigate some of these risks, SWPEL has entered new domains such as seismic services, aquifer mapping and underground drilling which has helped improve the order pipeline. SWPEL has also bagged many new orders from Private sector clients recently like Vedanta, Hindalco, JK Cements and RIL etc. Timely execution of order book of Rs 221 crore as on June 30, 2024, as well as build-up of further orders will remain key monitorables.

Liquidity: Adequate

The company had cash and cash equivalent of Rs 13 crore as on March 31, 2024. The bank limit of Rs 42 crore was utilized 92% on average for the 12 months through July 2024. Long-term debt is estimated at Rs 46 crore as on March 31, 2023, of which Rs 21 crore is payable in FY25. The cash accrual at Rs 15 crore in FY24 along with the cash balance, should be sufficient to cover debt obligation and incremental working capital requirement over the medium term.

Outlook: Stable

CRISIL Ratings believes SWPEL will sustain its credit risk profile supported by a healthy order book providing revenue visibility over the medium term.

Rating sensitivity factors

Upward factors

• Substantial build-up of orders and healthy revenue growth of more than 20% along with sustained operating margin
• Significant reduction in receivables and inventory leading to rationalisation of working capital cycle

 

Downward factors

• If revenue growth is muted and operating margins goes below 20% excluding coal business.
• Further rise in inventory or receivables adversely impacting the working capital cycle
• In case of significant debt-funded capex is done in future, it will be constraining the financial risk profile

About the Company

Incorporated in November 2006 by Mr. Vikas Jain and his co-promoter, Mr. Piyush Jain, SWPEL undertakes drilling and exploration of coal, minerals and coal-bed methane. The company has expanded into aquifer (water) mapping programs for state and central government agencies besides 3D and 2D seismic data acquisition and processing for renowned oil and gas companies in India. It also provides consultancy for geological field services, mobile field services, and other allied services. The company has 35 operational rigs with capacity to drill between 300 and 2,500 meters. The company was listed on the SME platform of NSE ‘Emerge’ on February 19, 2018, and migrated to the main board of NSE within a span of one year on April 18, 2019. It has been regularly paying divined since its’ listing in 2018. The company is listed on BSE.

 

After winning mining services contract in Oman thru its’s JV and acquisition of coal block in the state of Jharkhand, SWPE has become a full-fledged exploration cum mining company.

Any other information: Not Applicable