Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank loan facilities of Transrail Lighting Limited (Transrail) at ‘CRISIL A/Positive/CRISIL A1’.

 

The ratings continue to reflect the established position of Transrail in the engineering, procurement and construction (EPC) business catering to the power sector, strong order pipeline and improving financial risk profile. The strengths are partially offset by exposure to intense competition, operational risks, and working capital-intensive operations.

 

Revenue is estimated to be more than Rs ~4000 crore in the current fiscal (on-year growth of ~27%), driven by healthy execution of the current order book. Earnings before interest, tax, depreciation and amortization (EBITDA) is estimated at Rs 460-480 crore in fiscal 2024, compared with Rs 367 crore in fiscal 2023. The company has a sizeable order of USD 525 million (equivalent to ~Rs. 4,300 crore) towards a river crossing project in Bangladesh, where there were delays in appointment of engineering consultant and design approvals from client’s end, in the past. The project is currently working at a healthy pace. Transrail expects healthy revenue contribution from this project in fiscal 2025. The execution of this project and its contribution to scale and profitability of Transrail, will remain key monitorable and rating sensitivity. 

 

The business risk profile will also continue to remain strong driven by the strong technological capabilities of Transrail, its increasing market presence and established clientele, and the favourable prospects for the international transmission and distribution (T&D) and domestic non-T&D space.

 

Order book including L1 orders was at Rs ~17000 crore as on Dec 31, 2023. Company’s focus on international orders will also benefit the performance, as these are typically higher margin orders. Export orders constitute ~65-70% of the current order book and are expected to remain around similar levels over the medium term. Operating profitability is expected to sustain at 11-13% in the medium term, supported by easing commodity prices and increasing share of orders which have pass-through clauses.

 

The company’s financial risk profile is characterised by healthy net worth of Rs 1100-1200 crore (estimated at March 31, 2024), and moderate debt, resulting in comfortable capital structure (0.5-0.7 time). Net worth improved due to equity investment of Rs 140 crore done in the current fiscal to support the growth of Transrail and healthy accretion to reserves. Though, total outside liabilities to tangible net worth (TOLTNW) ratio stood at 3.4 times as on March 31, 2023 due to high customer advances owing to the nature of business, it is expected to move below 3 times in the medium term. Interest coverage is expected to improve from ~2 times in fiscal 2023 but remain at moderate levels of 2.5-3 times over the medium term. Improvement in TOL/TNW and interest coverage will remain key monitorables.

 

Expected annual cash accrual of Rs 250-300 crore will be sufficient to meet yearly debt repayment of Rs 50-70 crore along with routine maintenance capex, over the medium term. Liquidity remains adequate with unencumbered cash and equivalents of Rs ~90 crore as on December 31, 2023, along with undrawn drawing power based lines of Rs. 76 crores as on Feb 29, 2024.

Analytical Approach

CRISIL Ratings has evaluated the business and financial risk profile of Transrail on a standalone basis.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the EPC business: The four-decade-long experience of the management, the integrated services offered by the company, and healthy relationships with customers should continue to support the business risk profile. These factors ensure repeat orders from clients such as Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Renew Power Private Ltd and Tamil Nadu Transmission Corporation Ltd. Substation business and high-end transmission line projects enhance the range of offerings and enable the company to bid for turnkey projects in the T&D segment. Confirmed order book has grown to ~Rs 10,000 crore (as on December 2023) led by a high value T&D river crossing order in Bangladesh with Power Grid Corporation of Bangladesh (government owned entity). The project, with some delays, began physical execution towards the end of the current fiscal. Transrail is also backward integrated through its manufacturing of towers, poles and conductors, which supports stronger operating margins. Diversification into related and other segments, such as civil construction, supports the business profile. Performance and timely completion of Bangladesh river crossing project will remain a key monitorable.

 

• Growing and healthy order book providing revenue visibility: The order book of Transrail has grown significantly in the past 2-3 fiscals supporting the growth in revenue in the recent fiscals. Revenue has grown at compounded annual growth rate of 20% over last 3 fiscals ending 2023 and healthy growth of ~25-30% is expected in the fiscal 2024. The order book is geographically diversified with ~65-70% being international orders and remaining domestic; thereby providing overall stability de-risking to a large extent from any slowdown in India.

 

• Improving financial risk profile: Networth, which was negligible when operations commenced on January 1, 2016, under the new promoters, has increased to more than Rs 1000 crore as on Dec 31, 2023. Resultantly, financial risk profile has steadily improved, driven by better cash generation and prudent working capital management. Overall gearing is estimated to improve to ~0.6 time as on March 31, 2024 as compared to 1.3 times as on March 31, 2019. Despite addition of debt, net cash accruals/adjusted debt and gearing is expected to improve to 30-40% and 0.5-0.7 times respectively over the next two fiscals on the back of strengthening equity supported by healthy accruals as well as equity infusion in the current fiscal and scheduled term debt repayment. However, other key debt metrics such as TOL/TNW and interest cover are expected to remain at moderate levels of less than ~3 times and ~2.5 times respectively in fiscal 2024. Promoters have infused funds of Rs 57 crores cumulatively over fiscals 2021 and 2022 and are expected to provide need-based support. Also, there was an equity infusion of Rs 140 crore in fiscal 2024. Transrail filed Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India for an initial public offering (IPO) in March 2024. The proposed IPO consists of fresh issue (up to Rs 450 crore), this will further support the net worth and growing scale of operations. The ability to sustain improvement in revenue, and profitability, leading to growing networth and better debt protection metrics, will remain a key monitorable. Any larger than expected debt funded acquisition or capital expenditure (capex) could have an adverse impact on the financial risk profile.

 

The company has unpaid Non convertible debentures (NCDs) of Rs 32 crore (principal component). These NCDs are due to insurance companies who have not yet signed the novation agreement and recognized Transrail as borrower under the scheme of arrangement by National Company Law Tribunal (NCLT) and business transfer agreement (BTA) between Gammon India Ltd (erstwhile promoter) and Transrail.  The same, when claimed by the insurance companies, can easily be met of accruals generated by Transrail.

 

Weaknesses:

• Exposure to intense competition, other risks: Competition is intense in the power T&D business due to low entry barriers. Profitability is susceptible to any downturn in demand and structural issues and volatility in the power sector. Any large scale project deferrals or slow project execution due to macroeconomic factors could lead to cost overruns, which would impact profitability, given the limited flexibility to pass on cost increases. The company’s increasing exposure to international projects in newer geographies may pose risks as well. However, these risks are mitigated by the strong capabilities of Transrail in the power T&D EPC segment and manufacturing of towers and conductors.

 

Transrail takes comprehensive insurance as a safeguard to minimize the risk on its balance sheet, given it undertakes projects in difficult terrains and geographies. In some of the overseas geographies, part of the work, including design approval is also subject to clearance from local authorities. Besides, some of the EPC projects, such as the almost ~Rs.1000 crore Koshi river bridge in Bihar, which involve technical and mechanical expertise are prone to operational risks and execution related challenges, besides time and cost overruns, with operations being conducted in difficult terrain. While there have been no significant challenges in order execution account in the recent past barring delays in the Bangladesh project owing to design clearance issues, any material and prolonged disruption in orders under execution due to sizeable delay in approvals, serious accidents, floods or geo-political risks, will be a monitorable.

 

• Working capital-intensive operations: Operations are working capital intensive owing to the inherent nature of the EPC business and the long project execution cycle of 2-3 years, which result in high reliance on short-term debt. Gross current assets (GCA)of Transrail improved to 326 days as on March 31, 2023 from 358 days a year earlier due to improvement in debtor and inventory days supported by higher scale of operations. Debtors days improved to 250 days from 277 days a year earlier. Over the medium term as well, GCA is expected to remain around 300 days and debtors are expected to remain around 240-250 days. Receivables are typically high in the business due to the sizeable retention money blocked in completed projects till the end of the performance guarantee period and unbilled receivables. Receivable risk is also mitigated due to majority of its projects being backed by governments and multi-lateral institutions. Efficient working capital management with growing scale of operations will remain a key monitorable. Further, any adverse impact on the working capital cycle and liquidity due to project delays, cost overruns, invocation of guarantee and any cancellation of existing orders will remain key rating monitorables.

Liquidity: Adequate

Liquidity remains adequate, backed by unencumbered cash equivalent of around Rs ~90 crore as on Dec 31, 2023 and unutilised fund-based bank lines of Rs 76 crore as on Feb 29, 2024. Bank limit utilisation was 87% on an average over the last 12 months through Feb 2024. The available liquidity and expected annual cash accrual of more than Rs 250 crore over the medium term should be sufficient to meet annual debt obligation and moderate capex.

Outlook: Positive

CRISIL Ratings believes Transrail’s business risk profile is expected to strengthen further with increasing scale of operations and strong order book. Financial risk profile is expected to benefit from better cash generation and proposed equity infusion, which along with proposed increase in working capital limits, will enhance the company’s financial risk profile and liquidity.

Rating Sensitivity factors

Upward factors:

• Significant increase in scale of operations led by healthy order execution and sustenance of operating margins at ~12-13%, leading to strong annual cash generation, and
• Improvement in debt metrics (e.g. interest coverage) driven by better accruals, prudent management of working capital and modest capital spending, or equity raise.

 

Downward factors:

• Weak operational performance with steady decline in operating margin impacting cash generation
• Elongation in working capital cycle and higher than anticipated capital spending or acquisitions, impacting debt metrics (for instance interest cover below 2 times).

About the Company

Transrail is one of the Largest EPC companies providing turnkey solutions globally in areas of Transmission, Distribution, Substations and Rural Electrification, Railways, provides solutions for outdoor lighting, since more than 38years. Transrail is one of the few companies across the globe to have 4 manufacturing facilities of transmission towers (1,01,000 TPA), conductors (60,000 TPA) and poles (25,000 TPA) and a state-of-the-art integrated tower testing station, design capabilities, and a well experienced team capable of erecting and commissioning transmission lines up to 1200kV, distribution lines, substations and railway electrification. The Company has Global footprints in 50 countries across the globe and caters to customers across Africa, America, Europe, and Asia.

 

Transrail was incorporated as Transrail Engineering Company Limited in 1984 by Mr. D. C. Bagde. In October 2016, the T&D business division of Gammon India Ltd (GIL) was transferred to Transrail through a business transfer agreement (BTA). GIL transferred its 75% equity in Transrail to Ajanma Holdings Private Limited (AHPL).

Any other information: Not Applicable