| Welspun Enterprises Limited | ||||||
| 'CRISIL AA- / Stable / CRISIL A1+ ' assigned to Bank Debt | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings to the bank facilities of Welspun Enterprises Ltd (WEL).
The ratings take into account the healthy business risk profile, driven by steady growth in revenue, the large order book and improved revenue diversification. The ratings also factor in the strong capital structure and adequate liquidity.
Revenue is projected to be in the range of Rs 2,600-2,700 crore in fiscal 2023, driven by healthy order execution and the improved pipeline. Size of the order book reached at Rs 10,841 crore as on December 31, 2022, resulting in order book to sales ratio of 4 times, thus providing healthy revenue visibility in the medium term. Revenue is expected to grow at 18-20% over next two fiscals. Further, diversification into the water segment has helped reduce the share of the roads segment in the orderbook to 43% during the first nine months of fiscal 2023 from 90% in fiscal 2018.
Operating margin has been comfortable at 11-12% over the past three years, despite fluctuations in raw material prices, and should sustain at a similar level over the medium term.
Post sale of assets, the financial risk profile has strengthened substantially, and is marked by a large networth of Rs ~2,300 crore and healthy gearing of 0.11 time estimated as on March 31, 2023, driven by low debt and healthy cash surplus. Total outside liabilities to tangible networth (TOLTNW) ratio should remain healthy below one time during fiscals 2023 and 2024.
Cash surplus is expected to remain healthy over Rs 800 crore, aided by monetisation of assets in the medium term. Net cash accrual of over Rs 500 crore is expected in the current fiscal and above Rs 300 crore in the medium term, against nil debt obligation. Utilisation of the fund-based limit averaged 19% and that for non-fund-based limit averaged 79% for the 12 months ending February 28, 2023. Considering capex and investment requirement, healthy cash generation and efficient working capital management, unencumbered cash surplus is expected to remain healthy over Rs 500 crore in the medium term.
These rating strengths are partially offset by susceptibility of the operating performance to the timely execution of projects in hand, high dependence on sub-contractors and the working capital-intensive nature of operations. |
Analytical Approach CRISIL Ratings has moderately combined the business and financial risk profiles of WEL and its special-purpose vehicles (SPVs) for the projects under the hybrid annuity model (HAM). In line with the moderate consolidation approach of CRISIL Ratings, the equity requirement, expected cost overrun and support needed for underlying HAM projects have been factored into the financials of the company. CRISIL Ratings has also fully consolidated the debt of Aunta Samaria, SNRP (Sattanathapuram Nagapattinam Road Private Limited )and Welspun EDAC JV, which is guaranteed (unconditional and irrevocable) by WEL.
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 engineering, procurement and construction (EPC) contracts 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 on renamed as Welspun Projects Ltd and now Welspun Enterprises Ltd). Over the years, WEL has grown in scale and has undertaken public private partnership projects related to roads, water and urban infrastructure. In the highway sector alone, the company has successfully completed 6 BOT (toll) road projects covering a total length of over 500 km. Additionally, WEL was awarded India’s first HAM project, the Delhi-Meerut Expressway, where it received PCOD 11 months before the scheduled completion date.
The company currently portfolio of 5 operational HAM project and 1 operational BOT Toll project (these 6 projects have been sold to Actis Highway Infra Limited). Additionally, the Company also has under-construction portfolio of 2 HAM projects, 1 EPC project in road segment, 1 water connectivity project in EPC segment and 1 wastewater treatment facility project under EPC segment. Most projects are sub-contracted to established regional mid-sized EPC companies. Longstanding presence of WEL has helped ensure that projects are completed in a timely manner, though execution of few projects could be impacted by external factors.
However, delay in execution as seen in two projects in fiscal 2022, could impact revenue performance, and hence, remains a key sensitivity factor.
Healthy and diversified order book and strong revenue visibility Orders worth Rs 10,841 crore as on December 31, 2022, with an order book to sales ratio estimated at 4 times, offers revenue visibility for the medium term. The company has won two large projects with contract value of around Rs 7,200 crores in wastewater segment (Dharavi STP and UP Jal Jewan) during the first nine months of fiscal 2023. The strong order book will aid healthy revenue growth of 23-25% in fiscal 2024.
Additionally, the business risk profile has strengthened over the years. The water segment forms 54% of the current outstanding orders while the roads segment constitutes the balance 46% . Within the roads segment, HAM and EPC orders account for 17.5% and 23%, respectively. In contrast, HAM projects accounted for 96% of the orders in 2017. The company operates across five states, majorly in the north of India, with nearly 44% of orders from Uttar Pradesh, followed by 36% from Maharashtra.
Healthy financial risk profile, aided by asset monetisation Networth and gearing are projected at Rs 2,392 crore and around 0.11 time, respectively, as on March 31, 2023. Networth will be slightly impacted by the likely buyback of shares worth Rs 230-240 crore in fiscal 2024, funded via the high cash balance. Hence, networth is likely to be in the range of Rs 2390-2400 crore and gearing at 0.12-0.13 time, as on March 31, 2024.
Asset monetisation has led to sizeable cash surplus in fiscal 2023, also ensuring minimal reliance on debt. The asset monetisation was because WEL entered into a sale agreement with Actis Highway Infra Limited (AHIL) for sale of five completed HAM assets and one operating BOT – toll asset, for a consideration of Rs 5,853 crore. Towards the divestment of 100% stake in the five HAM assets and 50% divestment in the BOT-toll asset, the company received around Rs 2,200 crore in fiscal 2023. It is also likely to receive Rs 250 crore for receivables pending from the National Highway Authority of India/public works department (PWD) of Maharashtra by March 2023, and Rs 200 – 250 crore for the balance 51% stake in the BOT asset by the first quarter of fiscal 2024.
Therefore, the strong cash inflow will support financial metrices in fiscal 2024. Net cash accrual to adjusted debt (NCAAD) and adjusted interest coverage ratios are estimated at 1.83 times and 9.57 times, respectively, in fiscal 2023 and remain above 1.1 times and 15 times respectively in the medium term. NCAAD was elevated on account of profit booking from the sale of assets. The total outside liabilities to tangible networth ratio is also likely to remain below one time over the medium term (0.85 time estimated as on March 31, 2023).
With limited road assets for execution, the equity investment will range between Rs 200 crore to Rs 300 crore over the medium term, vis-à-vis the previous years, wherein it exceeded Rs 500 crore per fiscal. The equity requirement can be easily met from internal accruals and cash surplus generated from sale of the 6 SPVs in fiscal 2023. Significant increase in debt on account of large capital expenditure (capex) plans, high cost overruns in existing HAM 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 sub-contractors. The high dependency on sub-contractors increases execution risk, related to timely completion and quality of work, and also 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.
On the other hand, the working capital cycle may remain stretched, due to dependence on counterparties, which include state governments and the central government. Overall receivables are likely to range from 60 to 90 days in the medium term, as against 70 days projected as on March 31, 2023. As most of the projects executed or under completion are under the HAM route, annuities to be received will be linked to milestones. Since raising of bills and approvals take 2-3 months, receivables are likely to remain along similar lines. The working capital cycle is marked by healthy gross current assets of around 160 days (net of cash days) projected as on March 31, 2023 against 249 days as on March 31, 2022.
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. Further, in order to leverage from multiple options, WEL has also diversified its focus from road to water supply infrastructure and waste water treatment segments. Also, given the cyclicality inherent in the construction industry, ability to maintain profitability through operating efficiency becomes critical. |
Liquidity: Strong Post monetisation of assets, the company is likely to have a cash surplus of over Rs 800 crore in the medium term. Expected net cash accrual of above Rs 500 crore in the current fiscal and more than Rs 300 crore in the medium term, will provide sufficient cushion to the debt protection metrics, in the absence of any debt obligation. Utilisation of the fund-based limit averaged 19% and the non-fund-based limit averaged 79% for the 12 months ended February 28, 2023. |
Outlook Stable CRISIL Ratings believes the business risk profile of WEL will remain healthy over the medium term, driven by strong outstanding 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 steady operating margin, supported by diversity in order book, leading to net cash accrual of Rs 500-550 crore Sustenance of strong financial risk profile
Downward factors Substantial fall in revenue and/or profitability leading to cash accrual less than Rs 100 crore Significant stretch in working capital cycle leading to crunch in liquidity Large capex or sizeable investments in existing or new projects, necessitating sizeable equity investment and weakening 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 & gas segment 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 & gas blocks – three at the discovery/development stage and one block in the exploratory stage.
Over the nine months ended December 31, 2022, WEL registered revenue from operation of Rs 1,852 crore and profit after tax (PAT) of Rs 575 crore (including exceptional items of Rs 473 Crore mainly as Gain on Sale of Stake in SPVs) against Rs 840 crore and Rs 41 crore, respectively, for the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Fund Based facilities (Cash Credit) are one way interchangeable to Non Fund Based facilities |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 31-Mar-2023 in line with the lender-wise facility details as on 31-Mar-2023 received from the rated entity.
*Fund Based facilities (Cash Credit) are one way interchangeable to Non Fund Based facilities
Criteria Details
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