Rating Rationale
September 30, 2020 | Mumbai
Tata Projects Limited
Rating Reaffirmed 
 
Rating Action
Rs.1400 Crore Commercial Paper  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A1+' rating on the Rs 1,400 crore commercial paper issuance of Tata Projects Ltd (TPL).
 
The rating reflects the company's strong business risk profile, supported by its established market position, significant scale and diversity, increasing complexity of projects undertaken, and the robust order backlog of Rs 54,000 crore, providing adequate revenue visibility.  Strong managerial and funding support from the Tata group, further enhances TPL's financial flexibility.
 
These strengths are partially offset by the large working capital requirement and moderate financial risk profile.
 
In fiscal 2020, revenue fell by almost 20%, as execution was impacted by an extended monsoon, general elections, the National Green Tribunal ban in Delhi-NCR, and the Covid-19 pandemic towards end-March. However, the operating margin improved, aided by higher share of projects undertaken independently and better efficiencies in execution. Gross Current Assets (GCA) increased by Rs 833 crore, largely driven by delayed collection of receivables, which also resulted in borrowings increasing by 500 cr. The company has been able to better leverage its supply chain eco-system by extending financing solutions to vendors, which enabled the company to limit the increase in Net Working Capital to only Rs 194 crore.
 
After the Covid-19 pandemic adversely impacted ongoing projects in April and May 2020, the company has ramped up the pace of execution since June, once lockdown norms were eased. NWC and debt levels were largely stable in the first quarter of fiscal 2021, even amidst the pandemic. The company is also focused on improving operational efficiency by reducing fixed cost, apart from assessing contractual rights/obligations and engaging with customers to avail extensions of timelines.
 
CRISIL expects revenue and operating margin to improve in fiscal 2021. Better operational efficiency, coupled with focus on high-margin projects, should strengthen debt protection metrics. Further, increased focus on collections and limiting unbilled revenue may also lead to a sharp fall in GCAs below 400 days.
 
Going forward, potential impact of the pandemic, mainly in the form of lower economic output and weakening central and state government finances, are likely to constrain TPL's credit profile. Further pressure on debt protection metrics and working capital management may lead to a downgrade in the rating.

Analytical Approach

For arriving at the rating, CRISIL has applied its group notch-up framework to factor in the extent of support available from the Tata group. CRISIL has also combined the financials of TPL's subsidiaries to reflect the operational and financial linkages with these entities.

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established pan-India position with a strong, diversified order book
Tata Projects is a large and diversified player in the domestic engineering, procurement and construction (EPC) space, with presence across construction & engineering, and core and heavy infra segments. Strong project inflows in plant & system and urban infrastructure segments have led to a well-diversified order pipeline. Orders worth Rs 54,000 crore offer strong revenue visibility.
 
TPL has executed complex projects such as the freight corridor, metro and heavy civil projects through the joint venture (JV) route with strong partners, aiming to build execution capability in new segments. However, the company has undertaken more independent projects over the past 12-18 months, and bagged several large independent projects in the refinery and power segments in fiscal 2020. It has also revised its bidding strategy and improved its pre-bid risk management practices with a focus on cash flow management and profitability.
 
Larger share of independent projects, coupled with focus on high-margin projects, is expected to improve operating profitability over the medium term.
 
* Strong management and financial support from the Tata group, lending substantial financial flexibility
Tata Projects, a part of the Tata group's infrastructure, aerospace and defence vertical, has gained prominence due to its increasing scale of operations, execution of complex and prestigious projects, size of the addressable market in the EPC industry and ability to generate healthy returns in the medium to long term.
 
TPL is jointly held by several Tata group companies, and has senior group executives on its board of directors. Being part of the Tata group, the company derives significant financial flexibility and access to low-cost funds from banks and capital markets. Sustenance of support from the Tata group and its ownership in TPL, are key rating sensitivity factors.
 
Weaknesses
* Working capital-intensive operations
Large working capital requirement is inherent in the EPC industry. Receivables are typically around 150 days due to sizeable retention money blocked in completed projects, and the amount is released at the end of the defect liability period. However, the risk of write-offs in receivables is mitigated as over 85% of the orders are undertaken for government bodies and public sector enterprises. TPL's receivables rose to 210 days as on March 31, 2020, from 150 days a year before, due to delay in collections and fall in revenue. Gross current assets rose to 425 days as on March 31, 2020, from 319 days a year before, marking the reversal of an improving trend. Going ahead, the management intends to focus more on collection and judiciously bid for projects with lower working capital intensity. These measures should keep the overall funding requirement in check, amidst the growing scale of operations.
 
* Moderate financial risk profile
Rising working capital debt and low capitalisation have led to a high total outside liabilities to tangible networth (TOL/TNW) ratio of over 10 times and financial leverage of 2.7 times as on March 31, 2020. The TOL/TNW ratio is high, partly owing to significant mobilisation advances and retention money with customers, which typically have a long payment period, and are entered into with sub-contractors in a back-to-back arrangement. Higher debt and weakening of cash flows have led to a drop in interest cover to 1.8 times for fiscal 2020.
 
Better profitability and focus on collections should help the interest cover improve to around 2 times and financial leverage to around 2.5 times over the medium term. The parameters would yet remain moderate and constrain the company's credit profile.
Liquidity Adequate

Expected cash accrual in fiscal 2021, should be adequate to cover the maturing debt, including lease obligations of around Rs 267 crore. Liquidity is also supported by moderate utilisation of the fund-based limit (averaging 59% as of June 2020), and financial flexibility derived by being part of the Tata Group. Unencumbered cash balance was Rs 669 crore as on March 31, 2020, at a consolidated level.

Rating sensitivity factors:
Downward factors
* GCAs remaining high at over 400 days and weak interest cover
* Sustenance of TOL/TNW ratio at current levels
* Reduction in ownership by Tata Group entities to below majority

About the Company

TPL, incorporated in 1979, is one of India's leading EPC companies. It operates through four strategic business groups: industrial systems, core infra, urban infra, and services.  A brief profile of TPL's various segments of operations is as follows: 

Strategic Business Group Description
Industrial systems Environment, industrial and general construction
Power generation, oil, gas & hydrocarbons, and metal & minerals
Core infrastructure Rail infrastructure and systems and roads
Power transmission & distribution, substations & OHE
Urban infrastructure Mega infrastructure projects such as IT SEZ parks, commercial and office buildings,
high rise segment & commercial retail spaces, smart cities and airports
Underground tunneling and elevated & underground metros, highways, sea bridges,
ropeways and ports general construction
Services Quality and reliability service providers in domestic and overseas markets
Social business enterprise, creating sustainable solutions in safe drinking water.

TPL, part of the Tata group, is held by several Tata group companies. The largest shareholder is The Tata Power Company Ltd ('CRISIL AA-/Positive/CRISIL A1+'), which holds 47.78% of the subscribed equity shares of TPL. Other stakeholders include Tata Chemicals Ltd ('CRISIL A1+'; 9.56%), Tata Sons Ltd ('CRISIL AAA/FAAA/Stable/CRISIL A1+'; 6.67%), Voltas Ltd (6.67%), Tata Industries Ltd ('CRISIL AAA/Stable/CRISIL A1+'; 3.00%), Tata Capital Ltd ('CRISIL AAA/Stable/CRISIL A1+'; 2.20%), and Omega TC Holdings Pte Ltd (OTCHPL; 24.12%). OTCHPL is an investment holding company of the Tata Opportunities Fund, which is one of the private equity funds sponsored by Tata Capital Pte Ltd, Singapore.
 
Tata group is a global enterprise, headquartered in India, comprising over 100 independent operating companies. In fiscal 2020, the revenue of Tata companies, taken together, was close to Rs 6.5 lakh crore. Each Tata company or enterprise operates independently under the guidance and supervision of its own board of directors and shareholders. There are 28 publicly-listed Tata enterprises, with a combined market capitalisation of about Rs 11.79 lakh crore (as on August 31, 2020).
Key Financial Indicators
As on / for the period ended March 31   2020 2019
Revenue Rs crore 10,687 13,418
Profit after tax (PAT) Rs crore 108 244
PAT margin % 1.0 1.8
Adjusted debt/Adjusted networth Times 2.7 2.1
Interest coverage Times 1.8 2.4

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Type of instrument Date of allotment Coupon Maturity date Issue Size
(Rs crore)		 Complexity Level Rating Assigned with Outlook
NA Commercial paper NA NA 7-365 days 1,400 Simple CRISIL A1+
 
Annexure - List of entities consolidated
Name of the entity Extent of consolidation Rationale for consolidation
Artson Engineering Limited Full consolidation TPL parent entity with 75% ownership and strong financial and business linkages
TQ Services (Mauritius) Pty Limited Full consolidation TPL parent entity with 100% ownership and strong financial and business linkages
TPL-TQA Quality Services South Africa (Pty) Limited Full consolidation TPL parent entity with 60% ownership and strong financial and business linkages
TQ Services Europe GmbH Full consolidation TPL parent entity with 100% ownership and strong financial and business linkages
Ujjwal Pune Ltd Full consolidation TPL parent entity with 100% ownership and strong financial and business linkages
TQ Cert Services Pvt Ltd Full consolidation TPL parent entity with 100% ownership and strong financial and business linkages
Industrial Quality Services LLC Full consolidation TPL parent entity with 70% ownership and strong financial and business linkages
Ind Project Engineering (Shanghai) Co. Ltd Full consolidation TPL parent entity with 100% ownership and strong financial and business linkages
TPL-CIL Construction LLP Full consolidation TPL holds 65% ownership and consolidates basis control over composition of members of board of directors.
TCC Construction Pvt Ltd Full consolidation TPL holds 36.9% ownership and consolidates basis control over composition of members of board of directors.
TP Luminaire Pvt Ltd Full consolidation TPL parent entity with 100% ownership and strong financial and business linkages
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  1400.00  CRISIL A1+      30-09-19  CRISIL A1+  05-09-18  CRISIL A1+  31-10-17  CRISIL A1+  -- 
                05-06-18  CRISIL A1+       
                24-05-18  CRISIL A1+       
                05-04-18  CRISIL A1+       
Short Term Debt (Including Commercial Paper)  ST                  09-10-17  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Construction Industry
Rating Criteria for Engineering Sector
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support

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