Detailed Rationale

Crisil Ratings has assigned its ‘Crisil A1+’ rating to the commercial paper of Welspun Enterprises Ltd (WEL) and has reaffirmed its ‘Crisil AA-/Stable/Crisil A1+’ ratings on the company’s bank facilities.

 

The ratings reflect the healthy business risk profile, driven by strong and diversified order book providing revenue visibility and established track record of executing engineering, procurement and construction (EPC) contracts. The ratings also factor in the strong financial risk profile. These strengths are partially offset by high dependence on sub-contractors, working capital-intensive operations and intense competition in the construction industry.

 

Revenue for fiscal 2025 is expected to be Rs 3,400–3,600 crore (Rs 2,863 crore in fiscal 2024) and is expected to grow over the medium term with strong order book of Rs 15,200 crore as on September 30, 2024, including Rs 4,400 crore for operations and maintenance (O&M) and asset replacement for its Dharavi and Bhandup water projects. The order book to revenue ratio stood at ~4.5 times as on September 30, 2024 (considering fiscal 2025 revenue estimates). Earnings before interest, taxes, depreciation and amortisation (Ebitda) margin is expected to remain at 12-13% in fiscal 2025 and over the medium term (15% during fiscal 2024) on the back of asset light model of the company and higher margin projects being executed by its subsidiary— Welspun Michigan Engineers Ltd (WMEL).

 

The financial risk profile is strong with low leverage and strong liquidity. Annual net cash accrual is expected to remain healthy at Rs 300–400 crore over the medium term. Total outside liabilities to tangible networth (TOL/TNW) ratio is expected to remain below 0.7 time during fiscals 2025 and 2026 (0.60 time as on March 31, 2024) with no major capital expenditure (capex) plans, and with healthy cash generation and efficient working capital management. The company is expected to bid for build, operate and transfer (BOT) projects worth Rs 4,000–5,000 crore in the near term, leading to an increase in the requirement for equity investment. However, the company intends to keep cash and equivalents of at least Rs 500 crore (Rs 866 crore as on September 30, 2024) at all points of time. Utilisation of the fund-based limit (Rs 300 crore) was nil and the non-fund-based limit (Rs 2,300 crore) was utilised 62% on average in the 12 months through November 2024. Furthermore, the company intends to use commercial paper (in addition to bank lines) for the working capital requirement, which will further add to its liquidity.

Analytical Approach

To arrive at the ratings, Crisil Ratings has fully consolidated the financials of WMEL with WEL due to its strategic importance, operational and financial linkages, as well as the support philosophy in terms of providing ongoing and distress support to the entity. WEL increased its shareholding in WMEL to 60.09% in fiscal 2025 (from 50.1% as of March 2024). Furthermore, Crisil Ratings has moderately consolidated other special purpose vehicles (SPVs) to the extent of equity requirement, expected cost overrun and support needed in the medium term. Also, Crisil Ratings has fully consolidated the debt of Dewas Waterproject Works Pvt Ltd and Welspun EDAC JV Pvt Ltd, which has received corporate guarantee (unconditional and irrevocable) from WEL.

 

Crisil Ratings has also treated the interest-bearing loans and advances 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:

• Established track record of executing EPC contracts: The Welspun group ventured into the infrastructure space in 2010 through Welspun Infratech Pvt Ltd by acquiring a majority stake in MSK Projects (India) Ltd (later renamed as Welspun Projects Ltd and now, Welspun Enterprises Ltd). Over the years, WEL has grown in scale and has undertaken public private partnership (PPP) projects related to roads, water and urban infrastructure. In the highway sector alone, the company has successfully completed six BOT (toll) road projects, covering a total length of over 500 km. Additionally, WEL was awarded India’s first hybrid annuity model (HAM) project, the Delhi-Meerut Expressway, where it received provisional commercial operations date (PCOD) 11 months before the scheduled completion date. WEL acquired 50.1% stake in WMEL in fiscal 2024 and purchased an additional 9.99% stake thus bringing its total shareholding to 60.09%. WMEL operates in the tunnelling and water infrastructure segment and its expertise will support WEL in expanding its operations in the segment.

 

Post divestment of five operational HAM projects and one operational BOT toll project, WEL has two under-construction HAM road assets, one EPC road project, two water connectivity projects and two wastewater treatment facility projects under the EPC segment. Most projects are sub-contracted to established, regional, mid-sized EPC companies with the Ghatkopar tunnelling project sub-contracted to WMEL. The longstanding presence of WEL has helped ensure that projects are completed in a timely manner, though the execution of a few projects could be impacted by external factors. However, delay in execution as seen in two projects in recent fiscals, could impact the revenue performance, and hence, remains a key sensitivity factor.

 

• Healthy business risk profile, driven by strong and diversified order book providing revenue visibility: Strong orderbook of Rs 15,200 crore (including O&M bid) as on September 30, 2024, with an order book to revenue ratio estimated at 4.5 times (based on fiscal 2025 estimates) and more than 3 times adjusted for O&M, offers revenue visibility for the medium term. WEL is currently executing three large projects of contract value of around Rs 9,200 crore in wastewater segment (Dharavi STP and UP Jal Jewan Mission under execution), with Bhandup WTP, and recently won Ghatkopar to Dharavi tunnelling project which has been sub-contracted to WMEL. The strong order book is expected to aid healthy revenue growth of 10-15% over the medium term.

 

Additionally, the business risk profile has strengthened over the years. The water segment (including tunnelling) forms 76% of the current orders while the roads segment constitutes the balance 24%. In contrast, HAM projects accounted for 100% of the orders in 2019. The company operates across five states, with nearly 85% of orders from Uttar Pradesh and Maharashtra.

 

• Strong financial risk profile: The financial risk profile is strong driven by low leverage and high cash surplus post asset monetisation of its operational assets to Actis Highway Infra Ltd. The networth and TOL/TNW ratio are expected to be around Rs 2,800 crore and around 0.65 times, respectively, as on March 31, 2025, and are expected to increase to Rs 3,200-3,600 crore and 0.65-0.7 times, respectively, over the medium term (Rs 2,503 crore and 0.60 time, respectively, as on March 31, 2024). Networth was slightly impacted in fiscal 2024 due to the buyback of shares worth Rs 235 crore.

 

WEL is also likely to receive around Rs 100 crore for divestment of the balance 51% stake in the Mukarba Chowk BOT asset in the near term. Annual net cash accrual of Rs 300-400 crore (excluding dividend) over the medium term should be adequate to meet the incremental working capital requirement and will support the financial metrics.

 

With limited existing road assets for execution, the company plans to bid for new BOT projects in the near to medium term and the total annual equity commitment will be Rs 400 – 500 crore over the medium term. Significant increase in debt on account of large capex plans or acquisitions, high-cost overruns in existing projects, or substantial exposure to new ones, necessitating sizeable equity investment, are key rating sensitivity factors.

 

Weaknesses:

• High dependence on sub-contracting model, along with working capital-intensive operations: WEL bids and outsources majority of the construction work to its subcontractors. The high dependency on subcontractors increases execution risk, related to timely completion and quality of work, and limits the operating margin. However, WEL also benefits from its asset light model, lower capex requirement and its ability to select regional sub-contractors for projects across India. Additionally, the company has a long and successful track record in completing large infrastructure projects and provides equipment to enable the subcontractors to execute projects in a timebound and cost-effective manner.

 

As an EPC player with robust orders, WEL has sizeable working capital requirement, as reflected in gross current assets (GCAs) of 282 days as on March 31, 2024 and is expected to remain at 250-300 days over the medium term. The working capital cycle may remain stretched due to dependence on counterparties, which include state governments and the central government. As raising of bills and approvals take 2-3 months, receivables are likely to remain along similar lines. Receivables are likely to be 80-90 days over the medium term and inventory (including contract assets) are projected to be 90-95 days in the medium term owing to high inventory requirements for WMEL. Any change in strategy to asset heavy structure or significant stretch in the working capital requirement will be monitorable.

 

• Exposure to intense competition in the construction industry: Increased focus of the central government on the infrastructure sector, especially roads and highways, should augur well for WEL. However, as most of the projects are tender based, the company is exposed to intense competition, which necessitates aggressive bidding and restricts the operating margin. Furthermore, in order to leverage from multiple options, WEL has also diversified its focus from road to water supply infrastructure and wastewater treatment segments. Also, given the cyclicality inherent in the construction industry, ability to maintain profitability through operating efficiency becomes critical.

Liquidity: Strong

Cash and equivalents stood at Rs 866 crore as of September 2024. Utilisation of the fund-based limit (Rs 300 crore) was nil, and the non-fund-based limit (Rs 2,300 crore) stood at 62% on average for the 12 months through November 2024. Existing cash and equivalents, annual net cash accrual of Rs 300-400 crore and unutilised bank lines should be adequate for meeting the equity commitments and incremental working capital requirement over the medium term in absence of any debt obligation or any major capex plans. Moreover, the company intends to use commercial paper (in addition to bank lines) for the working capital requirement, which will further add to its liquidity.

Outlook: Stable

Crisil Ratings believes the business risk profile of WEL will remain healthy over the medium term, driven by strong order book. The financial risk profile should also remain comfortable, aided by a healthy capital structure and debt protection metrics.

Rating sensitivity factors

Upward factors:

• Substantial growth in revenue and operating margin, supported by diversity in order book, leading to net cash accrual of Rs 400-500 crore on a sustained basis
• Sustenance of the strong financial risk profile

 

Downward factors:

• Substantial fall in revenue and/or profitability leading to cash accrual of Rs 150-200 crore on a sustained basis
• Significant stretch in the working capital cycle, leading to liquidity crunch
• Large capex, sizeable investments in existing or new projects or acquisitions, necessitating sizeable equity investment and leading to weakening of the financial risk profile and liquidity

About the Company

WEL, formerly known as Welspun Projects Ltd, is a part of the Welspun group. Established in 1994, the company operates primarily in the infrastructure space, with investments in oil and gas segments as well. Under infrastructure, WEL develops and operates PPP projects in various sectors such as roads, water and urban infrastructure. WEL is also engaged in exploration and production of oil and natural gas, through Adani Welspun Enterprise Ltd, a joint venture with the Adani Group. It has four oil and gas blocks– three at the discovery/development stage and one block in the exploratory stage. WMEL is a prominent EPC company in India, with specialisation in the niche business of tunnelling and pipeline rehabilitation in the water and wastewater segments. It is a pioneer and leader in the niche segment of trenchless technology in India, with projects in Mumbai, Delhi, Kolkata, Gujarat and Odisha.

 

Over the six months ended September 30, 2024, WEL reported standalone revenue from operations of Rs 1,409 crore and profit after tax (PAT) of Rs 154 crore, compared with Rs 1,223 crore and Rs 143 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)*

As on/for the period ended March 31	Unit	2024	2023
Operating income	Rs.Crore	2,875	2,758
PAT	Rs.Crore	319	726
PAT margin	%	11.1	26.3
Adjusted debt/adjusted networth	Times	0.32	0.33
Adjusted interest coverage	Times	5.23	3.05

    *Crisil Ratings-adjusted numbers

Any other information: Not Applicable