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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 50.50 | ACUITE BB- | Stable | Upgraded | - |
| Bank Loan Ratings | 35.00 | - | ACUITE A4+ | Upgraded |
| Total Outstanding Quantum (Rs. Cr) | 85.50 | - | - |
| Rating Rationale |
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Acuité has upgraded its long-term rating to ‘ACUITE BB-’ (read as ACUITE double B minus) from 'ACUITE B+' (Read as ACUITE B plus) and short-term rating to ‘ACUITE A4+’ (read as ACUITE A four plus) from 'ACUITE A4' (read as ACUITE A four) on the Rs 85.50 Cr bank facilities of K GOWDA & CO (KGC). The outlook is ‘Stable’. Rationale for the rating The rating upgrade takes into account KGC’s improvement in operating performance marked by increase in operating income of the firm and range bound operating margins. The operating income of the firm stood at Rs.114.86 Cr in FY2023 (Prov) as againstRs 100.17 Cr in FY22. The operating margins have recorded an upward trend over the last three years. The rating also derives comfort from the experienced management; established track record of operations and moderate order book position providing adequate medium term revenue visibility. However, the rating is constrained by its working capital intensive operations, below average financial risk profile and Tender based nature of operations. |
| About the Company |
| K Gowda and Co is a Bangalore-based proprietorship firm established in 1979 by Mr. H R K Gowda. It was converted into a partnership firm in 2010. Currently, Mr. H R K Gowda, Mr. Rakshith Kempeere Gowda, Mr. Vijaysurya Kempeere Gowda, Smt. Bhagyamma are partners in the firm. The firm is a Class-I Contractor engaged in civil construction of buildings, irrigation water supply systems and roads for several government organisations. The partners possess over three decades of experience in civil construction industry. |
| Analytical Approach |
| Acuité has considered the standalone business and financial risk profiles of the KGC to arrive at this rating. |
Key Rating Drivers
| Strengths |
| Established track record and experienced management The firm has been engaged in infrastructure development work for more than three decades with established track record in construction of buildings, irrigation water supply systems and roads for several government organisations. It has executed several government projects in the State of Karnataka. The firm is established by Mr. H R K Gowda as Bangalore-based proprietorship firm in 1979, and was converted into a partnership firm in 2010. The firm has an unexecuted order book position of approx. Rs 380 Cr as on July 31, 2023. This provides adequate revenue visibility for the next 10 – 12 months. Acuité believes that the partner’s extensive industry experience will aid the firm’s business risk profile over the medium term. Improving operating performance KGC’s operating income improved to Rs 114.86 crore in FY23 (Prov) as against Rs.100.17 Cr in FY2022 and Rs. 89.91 Cr in FY2021. The improvement in revenues is on account of govt tenders received in FY22 – FY23. Profitability margins have remained range bound i.e. EBITDA Margin for the FY23 (Prov) stood at 10.32% as against 7.77% in FY22 and 8.53% in FY2021. Net Profit margin rose to 6.74% in FY23 (Prov) from 2.68% in FY22 and 3.64% in FY21. Acuité believes that the revenue is expected to improve backed by its moderate order book position and profitability margins are expected to remain stable over the medium term. |
| Weaknesses |
| Working capital intensive operations The operations of the firm are working capital intensive in nature marked by GCA Days of 200 days in the FY23 (Prov) as against 56 days in FY22. Further the receivables days stood at 16 days in FY23 (Prov) & 47 days in FY22. The inventory holding days stood at 74 days in FY23 (Prov) & 15 days in FY22. The creditor days of the company stood at 256 days in FY23 (Prov) as against 113 days in FY22. Further, the average bank limit utilization in the last twelve months ended June, 2023 remained at 89.71 percent for fund-based and 91.46 percent for non-fund based. Acuité believes that the working capital requirements will continue to remain intensive over the medium term on account of slightly high GCA days. Below Average Financial risk profile The financial risk profile of the firm remained below average marked by average net worth, average debt protection metrics and moderately high gearing ratio. The net worth of KGC stood at Rs 12.15 Cr as on FY23 (Prov) as against Rs 10.13 Cr as on FY22. The gearing level (debt-equity) stood at 2.42 times as on FY23 (Prov) as against 2.76 times as on FY22. Total outside liabilities to Tangible net worth (TOL/TNW) ratio stood high at 5.38 times in FY23 (Prov) as against 4.69 times in FY22. The coverage indicators are moderate marked by Interest Coverage Ratio (ICR) of 5.68 times for FY23 (Prov) as against 3.30 times for FY22. Debt service coverage ratio (DSCR) stood at 5.68 times in FY23 (Prov) as compared with 2.85 times in FY22. Acuite believes that financial risk profile of the firm may continue to remain moderate over the medium term in absence of any major debt funded capex plan. Tender based nature of operations Tender based operations limit pricing flexibility in an intensely competitive industry. Revenue and profitability depend entirely on the ability to win tenders. Entities in this segment face intense competition, thus requiring them to bid aggressively to procure contracts; this restricts the operating margin to a moderate level. Also, given the cyclicality inherent in the construction industry, the ability to maintain profitability margin through operating efficiency becomes critical. Acuité believes that the firm's business profile and financial profile can be adversely impacted on account of presence of stiff competition, and has inherent risk of susceptibility to tender based operations. |
| Rating Sensitivities |
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Timely execution of its order book leading to substantial improvement in scale of operations while maintaining profitability margins over the medium term. Further deterioration in working capital cycle and liquidity profile of the firm. Any weakening of financial risk profile of the firm. |
| Material covenants |
| None |
| Liquidity Position |
| Stretched |
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Liquidity of KGC is stretched marked by elongated working capital cycle and high reliance on bank facilities to fund working capital requirements. The firm’s gross current asset days stood at 200 days as on March 31,2023 (Prov). Further for twlve months ended June ,2023 average bank limit utilization for fund based facilities stood at 89.71% and BG utilization stood at 91.46%. the firm also generate cash accruals of Rs. 10.07 Cr in FY23 (Prov) against NIL maturing debt obligation during the same period. The current ratio stood at 1.38 times in FY23 (Prov). The firm has unencumbered cash and bank balances of Rs 0.12 Cr as on 31 March 2023(Prov). Acuite believes that liquidity may continue to remain stretch in near term with intensive working capital nature of operations. |
| Outlook: Stable |
| Acuité believes that KGC will continue to benefit over the medium to long term on account of long track record of operations, experienced management in the industry and improving operating performance. The outlook may be revised to 'Positive', in case of in case of timely execution of its unexecuted order book leading to higher-than-expected revenues and profitability with improvement in financial risk profile. Conversely, the outlook may be revised to 'Negative' in case KGC registers lower-than-expected revenues and profitability or any significant stretch in its working capital management or larger-than-expected debt funded capital expenditure leading to deterioration of its financial risk profile and liquidity. |
| Other Factors affecting Rating |
| None |
| Particulars | Unit | FY 23 (Provisional) | FY 22 (Actual) |
| Operating Income | Rs. Cr. | 114.86 | 100.17 |
| PAT | Rs. Cr. | 7.74 | 2.68 |
| PAT Margin | (%) | 6.74 | 2.68 |
| Total Debt/Tangible Net Worth | Times | 2.42 | 2.76 |
| PBDIT/Interest | Times | 5.68 | 3.30 |
| Status of non-cooperation with previous CRA (if applicable) |
| Brickworks vide its press release dated 1st February 2023, had downgraded the company to BWR B/Stable/A4; Issuer Not Cooperating. |
| Any other information |
| None |
| Applicable Criteria |
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• 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 |
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