Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of thyssenkrupp Industrial Solutions (India) Private Limited (TISPL) at ‘CRISIL A+/Stable/CRISIL A1’.

 

The ratings continue to reflect TISPL’s established market position in the engineering, procurement, and construction (EPC), and EPC management (EPCM) segments in India, backed by strong business linkages with the parent, Thyssenkrupp Industrial Solutions AG (TKISAG; a subsidiary of thyssenkrupp AG; rated 'BB/Stable/B' by S&P Global Ratings).

 

The ratings continues to factor in the company’s steady business risk profile backed by healthy execution of key large projects. The company has a sizeable order book of Rs 3,398 crore as of June 31, 2023 on account of addition of projects from Refinery and Fertilizer sectors worth ~ Rs. 2400 crore during fiscal 2023 and Q1FY2024 which will contribute significantly to topline over the medium term. Revenue are expected to grow by 20-30% in fiscal 2024 and 2025, due to healthy orderbook and operating margin will remain range bound between 5-6%.  As a result, the net cash accruals are expected to increase to a level of over Rs 50 - 60 crore in fiscal 2024 and 2025.

 

Financial risk profile continues to remain comfortable with nil debt as on March 31, 2023 and unencumbered cash surplus of Rs 191 crore as on March 31, 2023 and ~Rs 245 crore as on August 31, 20203. With steady accretion to reserves, the net worth stood at Rs 430 crore in fiscal 2023, this coupled with nil debt resulted in TOL/TNW of 1.09 times in fiscal 2023 and expects to maintain around 1.25 – 1.30x in the medium term. Also, with expected improvement in operating performance, Interest coverage ratio is expected to range between 6x – 9x over next two fiscals. Working capital continues to be prudently managed with gross current assets (GCA; net of cash) remain under 130 days in fiscal 2023. Maintenance of working capital cycle at these levels, will remain a key rating sensitivity factor. 

 

These strengths are partially offset by exposure to intense competition and cyclicality in the EPC and EPCM segments, and modest operating profitability.

Key Rating Drivers & Detailed Description

Strengths:

Established position in the EPC and EPCM segments, backed by strong business linkages with the parent

TISPL’s business risk profile is expected to remain comfortable, backed by a track record of more than three decades in the EPC and EPCM segment, strong technical expertise, and healthy relationships with a diverse customer base, including public sector utilities (PSUs). The company leverages the established global business position and brand name of its parent, TKISAG, and its established track record of execution to get orders from thechemical, petrochemical, fertilizer, refinery and metallurgical segments.

 

Cost effectiveness of technically skilled manpower in India makes TISPL the preferred provider of engineering design support for the global EPC projects of its parent. Moreover, the company will remain critical to the parent’s operations in India especially in the field of coke oven and green hydrogen/ammonia, further TISPL will continue to enhance the competitive advantages of its parent globally. While TISPL operates as an independent subsidiary, it also benefits from operational support through transfer of technological know-how from its parent including new technologies like coke oven for steel industry and green hydrogen/ammonia for chemical and fertilizer industries. Some more techniques such as nitric acid,and caustic Soda have been acquired through technology sharing with parent, and should drive growth going forward.

 

Strong order book position providing revenue visibility in medium term

The company is present in the chemical, petrochemical, fertilizer, refinery and metallurgical segments and has executed orders for varied end-user segments. The overall order book as on June 31, 2023 was Rs 3,398 crore, with order book-to-revenue ratio of 3.2 times, providing healthy revenue visibility over the medium term. Further, the company is venturing into projects utilizing newly acquired technologies of coke oven and green hydrogen/ammonia. The company was able to secure its first assignment for a development of a complete green hydrogen / green ammonia complex in India. Focus on new technology will improve order book diversity and revenue visibility over the medium term.

 

Healthy financial risk profile

Revenue increased at a healthy compound annual growth rate of 15-20% for the three fiscals through 2023, supported by sizeable order book and timley execution. The company has strong capital structure with no external debt on its books, leading to low financial charges (only financial charges being commissions on bank guarantees and interest on customer advances). Liquidity is strong with unencumbered cash and bank balance of ~ Rs 191 crore as on March 31, 2023 and ~Rs 240 crore as on August 31, 2023. TISPL is expected to generate moderate cash accrual over Rs 50 crore per annum for the next few fiscals against which it does not have any debt obligation. 

 

Despite being in the highly working capital-intensive construction industry, the working capital cycle has been moderate, as the business model entails execution of EPC/EPCM projects against customer advances and back-to-back arrangements with the suppliers leading to nil fund based working capital utilization.

 

Weaknesses:

Exposure to intense competition and cyclicality in the EPC and EPCM segments along risk related to contingent liabilities

Revenue remains susceptible to economic cycles that impact the EPC and EPCM segments. Furthermore, the company mainly caters to government agencies and PSUs, expenditure of which is directly linked to the economy. Any delay or deferment of capital expenditure (capex) in end-user industries could adversely affect revenue. The risk is mitigated owing to the strong reputation of the company in diversified segments such as petrochemicals, refinery and fertilizers.

Due to the nature of business, TISPL has sizeable off-balance sheet liabilities, primarily bank guarantees given to clients. Hence, the company is exposed to the liquidity risk that may arise out of these contingent liabilities.

 

Modest operating profitability

The operating margin has been 5-7% for the past few fiscals owing to  intense competition in the industry and high fixed costs, especially employee costs Further, the operating margin declined in fiscal 2023 due to increase in the input price owing to the  Russia- Ukraine war, which impacted the shipping lines- this led to  higher raw material cost that the company was unable to pass on to the customers.

The margin is projected at 5-7% over the medium term, led by healthy execution of the sizeable order book position (~Rs 3,398 crore as on June 31, 2023) though ramp up in execution remains a monitorable.

Liquidity: Strong

Liquidity is supported by healthy cash and cash equivalents, moderate utilisation of non-fund based bank limits, and nil debt; the comapnydoes not plan to take debt in the near term. Unencumbered cash and cash equivalents were Rs 191 crore as on March 31, 2023 and ~Rs 240 crore as on August 31, 2023. The company primarily depends on non-fund based facilities to fund its working capital requirement, wherein utilisation averaged 69% for the 12 months through June 2023. Net cash accrual, though expected to be moderate at over Rs 50 crore per annum for the next few fiscals, should remain comfortable in the absence of any repayment obligation over the medium term.  

Outlook: Stable

CRISIL Ratings believes TISPL will continue to benefit from its healthy financial risk profile backed by nil borrowing, adequate working capital cycle and adequate liquidity to tide over exigencies, if any. The business risk profile should also be supported by established market position and execution capabilities and strong order pipeline.

Rating Sensitivity Factors

Upward factors:

• Substantial and sustainable increase in revenue and profitability ,leading to accruals of more than Rs 200 crores
• Sustenance of prudent working capital management and capital structure

 

Downward factors:

• Significant decline in revenue and operating margin, leading to lower-than-expected net cash accrual
• Significant stretch in the working capital cycle, resulting in deterioration in the financial risk profile and increase in total outside liabilities to tangible networth (TOLTNW) ratio to above 1.5 times

About the Company

TISPL, incorporated in 1977, as Uhde India Pvt. Ltd, got its present name in October 2014, after the merger of Uhde GmbH (then TISPL’s immediate parent) with TKISAG. TISPL is an established engineering consultancy company involved in the design and construction of plants for the chemical, petrochemical, fertiliser, refinery, and metallurgical industries in India and abroad. The company is one of the largest international group companies of TKISAG, a business area and a wholly-owned subsidiary of thyssenkrupp AG, Germany. TKISAG currently holds 80.43% shareholding in the company.

 

The company offers EPCM services and executes EPC lump-sum turnkey projects in India and abroad. It also works on the basic and detailed engineering design projects for its parent, TKISAG. The parent company has business presence in over 50 countries worldwide and has successfully implemented over 650 projects for its clients till date.

Any other information: Not applicable