Product Quantum (Rs. Cr) Long Term Rating Short Term Rating
Bank Loan Ratings 1606.97 ACUITE BBB | Positive | Reaffirmed | Stable to Positive -
Non Convertible Debentures (NCD) 113.80 ACUITE BBB | Positive | Reaffirmed | Stable to Positive -
Bank Loan Ratings 4702.52 - ACUITE A3+ | Reaffirmed
Total Outstanding Quantum (Rs. Cr) 6423.29 - -
 
Rating Rationale

Erratum: In the original PR dated June 21,2023, under the Section “Key Rating Drivers” in Strength, some inadvertent typographical errors were observed which has now been corrected in this version.

Acuité has reaffirmed its long-term rating of Acuité BBB (read as ACUITE triple B) and its short-term rating of Acuité A3+ (read as Acuité A three plus) on the Rs. 6,423.29 crore bank facilities / Non Convertible Debentures of Patel Engineering Limited (PEL). The outlook has been revised from 'stable' to 'positive'.

Rationale for rating reaffirmation and revision in outlook
The revision in outlook reflects a substantial and sustained improvement in the realisation of receivables during FY23 and FY22 and a consequent improvement in the liquidity position of the company. The receivable days of the company witnessed continuous improvement to 67 days for FY23 as against 103 days for FY22 and 136 days in FY2021. The improvement was primarily on account of a healthy collection efficiency of more than 95% from its top projects (which constitute 80 percent of overall revenues). The revision in outlook also reflects the turnaround of the business operations of the company, as reflected by healthy topline growth while achieving significant improvements in its working capital cycle. Acuite also observes quicker churn in the bank guarantee facilities enjoyed by the company and reduced reliance on working capital limits. Furthermore, with increased thrust on infrastructure projects, Acuite expects continued improvement in the business and financial risk profiles of the company over the near to medium term.

The rating takes into account the strong order book position of the company, which continued to drive healthy growth in scale of operations. The unexecuted order book position of the company stood at Rs. 20807 crore as of March' 2023 (including L1 orders of Rs. 3221 crore, out of which projects worth Rs. 847 crore have been converted into LOAs in Q1 FY24). The liquidity position of the company remained adequate, with adequate net cash accruals against matured debt obligations. The liquidity position of the company is also supported by the management’s continuous focus on the monetization of the company’s non-core assets and the use of the proceeds to repay obligations, along with the execution of projects on time. Acuité also takes note of the successful rights issue of Rs. 325 crore by the company in March 2023 to reduce debt levels and the additional infusion of Rs. 105 crore by the promoters during FY23 to augment working capital requirements in view of the large orderbook currently at hand.

While the continuous improvement in the realisation of debtors has been noted, the high working capital intensity and the competitive pressures in the construction industry continue to be constraining factors in the rating.

About the Company

Incorporated in 1949, Mumbai-based Patel Engineering Limited (PEL) has been engaged in the construction of dams, bridges, tunnels, roads, piling works, industrial structures, and other kinds of heavy civil engineering works in areas like hydro, irrigation and water supply, urban infrastructure, and transport. PEL has also forayed into the development of power, road, and real estate projects in the past. The company has a consistent track record of executing complex domestic and international projects. PEL has completed over 84 dams, 33 hydroelectric projects, and 200 km of tunnelling projects.
 
Analytical Approach

­Acuité has taken a standalone view of the business and financial risk profile of PEL to arrive at the rating.
 

Key Rating Drivers

Strengths

Established business operations and experienced management
PEL has been engaged in EPC/infrastructure development for more than six decades with a national presence and a track record of civil contract execution across India. Mr. Rupen Patel, Managing Director of PEL, has more than two decades of experience in the construction industry. His father, Mr. Pravin Patel (Ex-Chairman), has a wide experience of more than four decades in EPC industry, town planning and architecture. The management is ably supported by a well-qualified and experienced team of professionals. Some of the landmark projects completed by PEL includes 1880 MW Koyna Hydro Electric project, 900MW Srisailam Left Bank Hydro Power Station, Kalwakurty Lift Irrigation Project, Construction of highaltitude roads (Karzok to Chumar), construction of Dam for Shillong Water Supply and the Tuirial Hydroelectric Project in Mizoram among others. The company is also construction the largest hydro project in India with 2000 MW in Subansiri river in Arunachal Pradesh. The extensive experience of the promoters in the industry has helped the company build its market presence across the country. Also, the company has experienced in execution of well diversified projects among segments like hydropower/ tunnelling, irrigation, transportation & urban infrastructure.

Acuité believes that PEL will continue to benefit from its experience in the infrastructure sector and its diversified order book over the medium term.

Reputed clientele over the years
PEL has gained necessary pre-qualification criteria for heavy infrastructure sectors by successfully completing large ticket, technologically advanced and technically complex projects. On account of its established presence in the industry, PEL has been able to build esteemed client profile spanning both private as well as government agencies. Some of the key customers include North Eastern Electric Power Corporation Limited (NEEPCO), National Thermal Power Corporation Limited (NTPC), National Hydro Power Corporation (NHPC), National Highway Authority of India (NHAI), Karnataka State Highways Improvement Project (Government of Karnataka), Satluj Jai Vidyut Nigam Ltd (SJVN, Mini Ratna) and IRCON among others. Further, it has entered into joint venture partnerships with several esteemed companies around the globe including Age Construction and Trading Inc., a Turkish Co. and the Hyderabad based KNR Constructions Ltd among others. The capabilities of its JV partners enhance credibility and capability to execute complex and special projects.

Healthy business risk profile with a strong order book position
The business risk profile of the company remained healthy reflected by continuous improvement in revenue from operations over the years. The revenues of the company witnessed healthy growth of ~49% CARG over FY21-23 period majorly on account of strong execution of orders and health order book position of the company. The revenue booked by PEL stood at Rs. 3817.13 Cr. in FY23 as against Rs.3027.79 Cr. in FY22 and Rs.1719.13 Cr. in FY21. The company have been majorly focusing on bidding and execution of hydro projects (which constitute ~60% of the total order book position). stood at Rs.20807 Cr. as on March' 2023 (including L1 orders of Rs.3221 Cr. out of which projects worth Rs.847 Cr. has been converted into LOAs in Q1FY24) which includes a total of 49 projects. The strong and healthy order book shows a revenue visibility over a medium term. Further, the projects of the company are geographically segmented across the 15 states which includes Jammu & Kashmir, Himachal Pradesh, Madhya Pradesh, Maharashtra, Rajasthan, Bihar, Meghalaya among others. However, the operating profit margin of the company witnessed declined in FY23 majorly on account of high input costs. The EBIDTA margin of the company declined to 14.16% in FY23 as compared to 15.43% in FY22. On the other hand, the absolute EBITDA of the company improved to Rs.540.48 Cr. in FY23 compared against Rs.467.12 Cr. in FY22.

Acuité believes that the revenues of the company will continue to show a positive growth over the medium term on account of healthy order book position and strong execution of projects.

Better realisation of receivables and monetization of non-core assets improved the liquidity position
The realisation of receivables by the company has improved significantly marked by improvement in receivable days over the years. The receivable days of the company improved and stood at 67 days for FY23 as against 103 days for FY22 and 136 days for FY21. The improvement was majorly on account of healthy collection efficiency of more than 95% from its top projects (which constitutes ~80 percent to overall revenues). Further, more than 90 per cent of the contracts won and executed by PEL are from central and state Government agencies. Also, the monetization of non-core assets from the management as per earlier plans also supported the improvement in liquidity position of the company and the requisite funds having been distributed to lenders towards repayment of debts.

Acuité believes that improvement in realisation of receivables along with timely monetization of non-core assets will remain a key rating sensitivity going forward.

Above average financial risk profile
PEL’s financial risk profile remains above average marked by healthy net worth, relatively low gearing and moderate debt coverage indicators. The net worth of the company stood at Rs.2856.54 Cr. as on March 31, 2023 compared against Rs.2554.14 Cr as on March, 31 2022 and Rs 2492.05 Cr as on March, 31 2021. The company have also successfully complete the rights issue of Rs.325 Cr. in March 2023 which was utilised towards project executions and repayment of debt obligations. The gearing level of the company remained improved to 0.54x as on March 31, 2023 as against 0.78x as on March 31, 2022. The company has a total debt of Rs.1552.18 Cr. which comprises long-term debt, short term debt and unsecured loans from promoters. Furthermore, the debt protection matrices of the company remain moderate with interest-coverage-ratio and debt-service- coverage-ratio of 1.70 times and 1.03 times respectively for FY23. Also, the debt to EBITDA of the company witnessed improvement to 2.27x for FY23 as against 3.64x for FY22.

Acuité believes that the financial risk profile of the company will continue to remain above average on account of healthy scale of operations and profitability over the medium term.

Weaknesses

Continuing working capital intensive operations
PEL’s working capital operations continue to be intensive marked by Gross Current Asset days (GCA) of 483 days for FY23 as against 577 days for FY22. The inventory days stood at 363 days for FY23 as against 413 days for FY22 which is majorly on account of unbilled revenue, bills raised but not yet approved by the government and arbitration claims pending awards being classified in work-in-progress. However, the receivables days has improved significantly and stood at 67 days for FY23 as against 103 days for FY22. The improvement in receivable days is majorly on account of healthy collection efficiency from its projects. The company has witnessed working capital stretch in the past due to delayed payments from clients, which in turn had slowed down project execution in certain cases. However, the same has seen an improvement in last years. The working capital intensity is reflected in high average utilization of fund based bank limits at 87 percent for the six months ended March 2023; whereas non fund based bank limits remain utilized at 75 percent over the same period.

Acuité believes that the company’s ability to improve its working capital cycle will remain critical for a stable credit risk profile. 

Competitive and fragmented industry
PEL is engaged as an EPC contractor. This particular sector is marked by the presence of several mid to large sized players. The company faces intense pricing competition from the other players in the sectors. The risk becomes more pronounced as tendering is based on minimum amount of bidding on contracts and susceptibility to inherent cyclicality in the sector. Acuité believes that PEL is well positioned on account of its longstanding relationship with well-established international players in the infrastructure industry and the long track- record of its promoters spanning nearing six decades. Further, PEL is also exposed to regulatory risks, which can affect its ability to complete projects in a timely manner and to secure new projects from time to time. PEL had in the past experienced delays in commencement as well as execution of projects on account of delays in regulatory and environmental approvals. This may, in turn, result in significant cost escalations leading to lower than expected operating profitability.

ESG Factors Relevant for Rating

The environmental risks associated with the civil engineering industry are GHG emissions, material efficiency, and waste management. Issues such as air pollution emissions, energy efficiency, and environmental management are also critical to the industry. The company has programmes and initiatives for the reduction of GHG emissions, waste, and overall energy usage. Community support and development, employee safety, and human rights are primary concerns for the civil engineering industry. Other issues, such as product quality and responsible procurement, are critical to the industry. The company has adopted policies and strategies related to community services, human rights, and product or service quality. Additionally, the company provides training and career development to its employees. Factors such as management compensation and board independence hold primary importance within this industry. Similarly, business ethics, financial audit and control, and shareholders’ rights are other material issues for the industry. The company has adopted policies on board independence and the retention of its Key Managerial Personnel. Additionally, the company complies with the Companies Act 2013 for board independence, external auditor rotation, audit committee, and SEBI regulations for related party transactions.
 
Rating Sensitivities
  • ­Improvement in scale of operations while maintaining healthy profitability margins
  • Timely realization of arbitration awards and monetization of non-core assets
  • Any deterioration of receivable days leading to further elongation of the working capital cycle
 
Material covenants
­None
 
Liquidity Position
Adequate

PEL has an adequate liquidity position, marked by sufficient net cash accruals against its maturing debt obligations. The company generated a net cash accrual of Rs. 236.21 crore in FY23 as against a maturing debt obligation of Rs. 214.95 crore during the same period. Further, the company is expected to generate a net cash accrual in the range of Rs. 392 crore to Rs. 594 crore over the medium term against the maturing debt obligation in the range of Rs. 50 crore during the same period. Further, the Company continues to focus on the monetization of non-core assets to reduce debt and further increase liquidity for the Company. The company continues to receive funds from arbitration awards. Going forward, the company is expecting to receive funds of Rs. 100 crore by FY24 against arbitration awards, which will be utilised to prepay the debt obligations of FY24 and FY25. With the improved realisation of bills, which stood at more than 90% of total billing done for the top 10 receivables in FY23, the liquidity of PEL is expected to improve going forward. Furthermore, the liquidity of the company is also supported by the infusion of funds via rights issue in March 2023 (100% subscription), and additional Rs. 105 crores were infused by the promoters during FY23. Also, the average utilisation of working capital limits remained at 87% for the six months ended March 2023. PEL has an unencumbered cash and bank balance of Rs. 170.56 crore and a current ratio of 1.26 as of March 31, 2023.
 
Outlook: Positive

­Acuité believes that PEL will maintain a ‘Positive’ outlook over the medium term owing to its healthy order book position of the company and continuous improvement receivables over the years. The rating may be upgraded if the company demonstrates substantial and sustained growth in its revenues and profitability from the current levels and is able to timely monetize its non-core assets and further improvement in the liquidity position. Conversely, the outlook may be revised to 'Stable’ in case the company registers lower than expected growth in revenues and profitability or deterioration in its working capital management due to further pileup of receivables leading to deterioration in its financial risk profile and liquidity.
 
Other Factors affecting Rating
­None
 

Particulars Unit FY 23 (Actual) FY 22 (Actual)
Operating Income Rs. Cr. 3817.13 3027.79
PAT Rs. Cr. 155.56 52.51
PAT Margin (%) 4.08 1.73
Total Debt/Tangible Net Worth Times 0.54 0.78
PBDIT/Interest Times 1.70 1.39
Status of non-cooperation with previous CRA (if applicable)
­Not Applicable
 
Any other information
­None
 
Applicable Criteria
• Default Recognition :- https://www.acuite.in/view-rating-criteria-52.htm
• Infrastructure Sector: https://www.acuite.in/view-rating-criteria-51.htm
• Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm
Note on complexity levels of the rated instrument

­In order to inform the investors about complexity of instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex. Acuite’ s categorisation of the instruments across the three categories is based on factors like variability of the returns to the investors, uncertainty in cash flow patterns, number of counterparties and general understanding of the instrument by the market. It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk. For more details, please refer Rating Criteria “Complexity Level Of Financial Instruments” on www.acuite.in. 
 

Date Name of Instruments/Facilities Term Amount (Rs. Cr) Rating/Outlook
02 Dec 2022 Term Loan Long Term 17.90 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Cash Credit Long Term 105.94 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Bank Guarantee Short Term 397.20 ACUITE A3+ (Upgraded from ACUITE A3)
Bank Guarantee Short Term 328.84 ACUITE A3+ (Upgraded from ACUITE A3)
Cash Credit Long Term 1.55 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Cash Credit Long Term 91.72 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Bank Guarantee Short Term 252.42 ACUITE A3+ (Upgraded from ACUITE A3)
Term Loan Long Term 10.36 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Bank Guarantee Short Term 214.90 ACUITE A3+ (Upgraded from ACUITE A3)
Cash Credit Long Term 97.50 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Cash Credit Long Term 112.66 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Bank Guarantee Short Term 10.59 ACUITE A3+ (Upgraded from ACUITE A3)
Term Loan Long Term 60.00 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Term Loan Long Term 1.26 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Cash Credit Long Term 137.18 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Term Loan Long Term 8.32 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Bank Guarantee Short Term 318.93 ACUITE A3+ (Upgraded from ACUITE A3)
Bank Guarantee Short Term 365.87 ACUITE A3+ (Upgraded from ACUITE A3)
Cash Credit Long Term 336.17 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Working Capital Term Loan Long Term 4.26 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Bank Guarantee Short Term 112.46 ACUITE A3+ (Upgraded from ACUITE A3)
Bank Guarantee Short Term 499.62 ACUITE A3+ (Upgraded from ACUITE A3)
Term Loan Long Term 15.39 ACUITE BBB | Stable (Upgraded from ACUITE BBB- | Stable)
Cash Credit Long Term 10.00 ACU