Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Transrail Lighting Limited (Transrail) to ‘Positive’ from ‘Stable’ and reaffirmed the rating at ‘CRISIL A’. The short-term rating has been reaffirmed at ‘CRISIL A1’ 

 

The outlook revision reflects strong order book in the T&D segment, providing healthy revenue visibility over the medium term. Revenue is expected to cross Rs 4,400 crores in the current fiscal, driven by healthy execution of the current order book. The company has order of ~Rs. 4,100 crore towards a river crossing project in Bangladesh, where they have received the design approvals and the physical execution is expected shortly. Ability of the company to commence that and execute the same in a timely manner while maintaining healthy profitability 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 grew to around Rs 9,600 crore and L1 orders were Rs. 7,800 crore as on March 31, 2023, supported by healthy order inflow during fiscal 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 is expected to remain around similar levels over the medium term. In fiscal 2023, net cash accrual is expected to increase to more than Rs 250 crore while operating profitability is expected to sustain at 12-13% in the medium term, supported by easing commodity prices and increasing share of orders which have pass-through clauses.

 

Revenue grew by 35% in fiscal 2023 to Rs 3151 crore, owing to strong order book execution, especially in the international T&D space. Earnings before interest, tax, depreciation and amortisation (EBIDTA) margin was maintained at 11.6% (12.2% in fiscal 2022). The marginal decline was due to higher prices of raw materials, primarily steel, aluminium and zinc which could not be completely passed on to customers.

 

The company’s financial risk profile is characterised by healthy capital structure resulting from networth estimated at around Rs. 781 crores as on March 31, 2023. Despite expected increase in the debt to around Rs.750-800 crores, gearing is expected to marginally improve to 0.7 time in the current fiscal as compared to 0.8 times in fiscal 2023. This is due to improvement in net worth to Rs around 1100-1150 crore supported by equity investment expected in the current fiscal to support the growth of Transrail and healthy accretion to reserves. Though, total outside liabilities to tangible networth (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 ~150 crore as on March 31, 2023, along with undrawn drawing power based lines of Rs. 20-30 crores as on May 31, 2023. The financial flexibility is expected to improve with the equity infusion of Rs 140 crore (approved by the Board and expected in the current month) as well as enhancement of fund based and non-fund based bank limits currently in process. Improvement in liquidity and financial flexibility supported by enhancement in bank limits will remain a key monitorable.

 

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 and working capital-intensive operations.

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 three-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. Order book has grown to ~Rs 9,600 crore (as on March 2023) led by a high value T&D river crossing order in Bangladesh with Power Grid Corporation of Bangladesh (government owned entity). For this project, the offshore and onshore contractors have been appointed, design approvals and part mobilization advance have been received. The project is expected to begin physical execution shortly. 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 significant growth of ~40-45% is expected in the current fiscal as well. 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 Rs 781 crore as on March 31, 2023. Resultantly, financial risk profile has steadily improved, driven by better cash generation and prudent working capital management. Overall gearing has improved to ~0.8 time as on March 31, 2023 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 remain at moderate levels of more than 3.4 times and ~2 times respectively in fiscal 2023. Promoters have infused funds of Rs 57 crores cumulatively over fiscals 2021 and 2022 and are expected to provide need-based support. 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: 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.

 

• 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 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. 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.

Liquidity: Adequate

Liquidity remains adequate, backed by unencumbered cash equivalent of around Rs ~150 crore as on March 31, 2023 and unutilised fund-based bank lines of Rs 20-30 crore as on May 31, 2023. Bank limit utilisation was 83% on an average over the last 12 months through May 2023, though working capital limit utilisation was in excess of 90% since April 2023. 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. The liquidity position will be supported by equity infusion of Rs 140 crore (approved by the Board and expected in the current month). The liquidity and financial flexibility is further expected to improve with enhancement of bank limits (both fund based and non-fund-based limits - currently in discussion with banks). The same will be a monitorable.

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 ~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