Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of Vascon Engineers Limited (VEL) from ‘Rating Watch with Developing Implications’. The ratings has been upgraded to ‘CRISIL A-/CRISIL A2+’ from ‘CRISIL BBB+/CRISIL A2’ and has been assigned a ‘Stable’ outlook to the long term rating.

 

The rating action follows the announcement of 100% divestment by VEL of its 85% stake in the subsidiary, GMP Technical Solutions Pvt Ltd (GMP). This was announced in the board meeting held on July 17, 2024. The transaction involves divesting 12,869 equity shares of GMP to Shinryo Corporation for an aggregate consideration of Rs 157 crore and gross equity value of Rs 185 crore. The transaction has been completed on October 10, 2024

 

The ratings upgrade reflects sustenance in the operational and financial risk profiles, driven by healthy execution in the engineering, procurement and construction (EPC) segment. However, in GMP, the operating margin was lower than expected at 3% in fiscal 2024 (against 9% in fiscal 2023) due to a rise in raw material cost which the company was unable to pass on to customers. Along with the shift in its unit from Himachal Pradesh to Punjab, this escalated other expenses.

 

Operating margin is likely to remain stable at 9-10%, on account of the cash-generating EPC business, supported by healthy order book of Rs 2,838 crore as on March 31, 2024, which is estimated at 3.7 times of its fiscal 2024 operating income, providing adequate revenue visibility over the medium term. Consolidated revenue (including EPC and real estate businesses) may increase 20-25%, aided by revenue from the EPC segment that is expected to reach ~Rs 820 crore in fiscal 2025. The rest will be contributed by the real estate segment aided by delivery from various projects in this fiscal. Healthy cash flow is expected from the real estate segment in fiscal 2025 with strong launch pipeline of saleable area of 0.10-0.14 million square feet (msqft).

 

In the real estate segment, the company is expected to have collections in the range of Rs. 170-420 crores over the medium term and has expected sales value of Rs. 1800 crores from new launches. The company received cash inflow of Rs 127 crore in fiscal 2024, slightly lower than previous estimates, due to some delay in project launches, which are expected to be launched in the current fiscal. In the EPC segment the operating income is expected to increase by 15-20% driven by a healthy expected order book in the range of Rs. 2500-3000 crores over the medium term. The operating margins in the EPC segment are expected to be steady in the 9-10% range over the medium term.

 

The financial risk profile remained stable, with gearing of 0.19 time and total outside liabilities to tangible networth (TOLTNW) ratio of 0.88 time as on March 31, 2024 (0.19 time and 0.79 time, respectively, as on March 31, 2023). The interest coverage ratio was 7 times for fiscal 2024 (5.01 times in fiscal 2023). Over the medium term, gearing and TOLTNW ratio are projected to be under 0.2 time and 0.8 time, and interest coverage ratio over 7 times. The expected inflow is likely to strengthen the financial risk profile and debt will be lower than expected.

 

The ratings take comfort from the adequate buffer in both fund-based and non-fund-based facilities, after enhancement in the working capital limit. The ratings also factor in the extensive experience of the promoters, its healthy execution track record in the civil construction business and reputed clientele comprising primarily public sector and government entities, resulting in moderate counterparty risk. Unencumbered cash and equivalent stood at Rs 24 crore as on March 31, 2024. VEL is likely to maintain cushion of 10% of the working capital limit.

 

These strengths are partially offset by large working capital requirement, which is deployed in the real estate segment for joint development agreement (JDA) commitments, slow-moving inventory in some projects, some units kept as collateral and unbilled revenue and retention money in the EPC segment. The company is also exposed to intense competition and cyclicality in the EPC segment.

Analytical Approach

CRISIL Ratings has considered the consolidated financial and business risk profiles of VEL, along with its subsidiaries. The consolidation is on account of the common management and business synergies among group companies.

 

Subsidiaries of the company include Marvel Housing Pvt Ltd, Vascon Value Homes Pvt Ltd, Almet Corporation Ltd, Marathawada Realtors Pvt Ltd and Vascon EPC Ltd. Associates and joint ventures of VEL include Phoenix Ventures, Cosmos Premises Pvt Ltd, Vascon Saga Construction LLP, Vascon Qatar WLL, Mumbai Estates Pvt Ltd, Ajanta Enterprises and Vascon Developers LLP.

 

Interest-bearing mobilisation advances have been treated as debt.

 

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:

Sustained financial risk profile marked by stable debt indicators  

Operating income increased by 4% to Rs 1,061 crore in fiscal 2024 (including GMP division) (from Rs 1,021 crore in fiscal 2023), driven by the company’s execution track record in the EPC segment. However, in the GMP business, the operating margin was lower-than-expected, at 3% in fiscal 2024 (against 9% in fiscal 2023) due to rise in input cost which the company was unable to pass on to customers along with shift in the unit from Himachal Pradesh to Punjab. In the real estate segment, cash flow of Rs 127 crore was lower than projected due to the lower-than-expected launch in fiscal 2024. Operating margin, however, reduced to 8.8% in fiscal 2024 from 12.9% in fiscal 2023. This is because higher project deliveries happened in the real estate segment during fiscal 2023, having margin of 17-22% as compared to fiscal 2024. In fiscal 2024, lower deliveries led to a decline in real estate revenue to Rs 54 crore from Rs 113 crore, resulting in lower contribution in margin from the real estate segment. This is supported by the EPC segment’s steady execution, stable profitability and healthy accretion of reserve. Further, the presence of price-escalation clauses in most outstanding contracts in the order book partially reduces the exposure to raw material price volatility. With healthy accretion to reserve, VEL’s networth increased to Rs 978 crore as on March 31, 2024, from Rs 908 crore as on March 31, 2023.

 

With divestment of GMP segment the operating revenue will include EPC and real estate segment only and the operating income is expected to ~Rs 950 cr this fiscal. The debt protection metrics are expected to remain healthy with TOL/TNW ratio of 0.8 time and interest coverage ratio of more than 7 times over the medium term. Furthermore, the company plans to raise Rs 125 crore through the qualified institutional placement (QIP)/rights issue/ preferential allotment route in this fiscal, which will further improve the financial risk profile and be a key credit monitorable.

 

Established position in the EPC (buildings) segment, supported by healthy order book and counterparty profile

VEL benefits from the established track record of the management in executing construction contracts for the infrastructure, real estate and manufacturing segments on EPC basis. The company also has strong technical capabilities and domain expertise in the construction and execution of complex projects.

 

The company had external orders worth Rs 2,838 crore as on March 31, 2024, and plans to continue focusing on government projects. Furthermore, almost 80% of the orders are derived from government projects, which lends visibility to uninterrupted cash flow, thereby providing assurance of stable operating performance over the medium term and supporting the business risk profile.

 

Weaknesses:

Large working capital requirement

The company’s operations are working capital intensive, on account inventory in its real estate business, which has to be kept as collateral and due to unbilled revenue in the EPC segment. Inventory remained stretched over the past two years because of the strong backlog as a result of unsold real estate units, which stood at Rs 235 crore (excluding Rs 227 crore as land and development potential) as on March 31, 2024.

 

Further, the working capital requirement was high due to unbilled revenue which comprises ~10% of the order book and retention money which is 29% of overall debtors in the EPC segment. Receivables in the EPC segment, however, have been improving since the government bodies became the main counterparty for the EPC business. In EPC segment, receivables increased to 71 days in fiscal 2024, from 63 days in fiscal 2023 due to an increase in retention money. With a proportion of revenue from the EPC business expected to be stable over the medium term, receivables are likely to remain at 70-80 days in the segment. However, liquidation of inventory in the real estate segment will remain monitorable.

 

Exposure to risks related to saleability of real estate projects

Saleability and implementation risks in the real estate sector persist, as reflected by sharp fluctuations in real estate income, sales and collections over the past few fiscals. Considering the weak demand scenario in the past, certain projects have demonstrated limited progress such as Vascon Goodlife in Pune. Additionally, launches in fiscal 2024 were lower than expected such as the Santa Cruz project, which was expected to get launched in fiscal 2024, and is now likely to get launched in fiscal 2025. Going forward, the timely launch of real estate projects will be a key monitorable. The ability to liquidate real estate inventory of ~Rs 235 crore (excluding Rs 227 crore of land) as on March 31, 2024, delay in completion or launch of real estate projects, and any additional debt taken to support real estate cash flow mismatch, will remain monitorable.

Liquidity: Adequate

Given the healthy profit margin and comfortable leverage, cash flow should be sufficient to meet the debt obligation and regular capex. Cash accrual, expected at over Rs 100-125 crore per annum, along with cash generation from the real estate business, will sufficiently cover yearly debt obligation of Rs 50-55 crore over the medium term.

 

Unencumbered cash and equivalents stood at Rs 24 crore as on March 31, 2024. Fund-based bank lines of Rs 63 crore were utilised at 41% on average during the 12 months ended March 31, 2024. VEL continues to focus on liquidity management by monetising the non-core assets. Furthermore, the company has plans of raising Rs 125 crore in this fiscal through the QIP/rights issue/ preferential allotment route; this will further improve the financial risk profile and be a key credit monitorable.

Outlook: Stable
The credit risk profile of VEL will continue to benefit from its healthy order book, improving operating performance, healthy capital structure and adequate liquidity.

Rating sensitivity factors

Upward factors

• Substantial scale up in both EPC and real estate segment, while maintaining the operating margins above 9.5-10% in EPC segment on a sustained basis
• Improvement in working capital cycle and liquidity

 

Downward factors

• Operating performance further deteriorates owing to lower-than-expected collections in the real estate business (below Rs 60 crore)
• Substantial delay in execution of orders or increase in real estate inventory, which may to increase in debt

About the Company

VEL, based in Pune, is engaged in the EPC, real estate construction and development businesses. The company was incorporated in January 1986 by Mr Vasudevan and commenced operations through construction of Cipla’s Patalganga factory in Maharashtra in November 1986. Until 1998, the company was a real estate player, executing third-party contracts.

 

The real estate business of VEL comprises construction of residential and office complexes along with information technology parks, industrial units, shopping malls, multiplexes, educational institutions and hotels. Under the EPC segment, VEL has executed construction contracts. It primarily caters to government departments and authorities. The company, which has been engaged in the EPC and real estate businesses for over three decades, has delivered over 200 projects with an area of around 50 m sq ft.

Any other information: Not Applicable