Product Quantum (Rs. Cr) Long Term Rating Short Term Rating
Bank Loan Ratings 116.00 ACUITE BBB- | Stable | Reaffirmed | Negative to Stable -
Bank Loan Ratings 4.00 - ACUITE A3 | Reaffirmed
Total Outstanding Quantum (Rs. Cr) 120.00 - -
 
Rating Rationale

­Acuité has reaffirmed its long-term rating of ‘ACUITE BBB-’ (read as ACUITE triple B minus) and short-term rating of 'ACUITE A3' (read as ACUITE A three) on the Rs.120 Cr on the bank facilities of K SESHAGIRI RAO AND CO (KSRC).
The outlook is revised to 'Stable' from 'Negative’.

Rationale for Reaffirmation and revision of outlook:
The rating reaffirmation factors in the stable operating and financial performance of KSRC marked by stable operating income, and improved operating margins. The rating is, albeit, constrained by KSRC’s working capital intensive nature of operations, high bank limits utilization, low sales traction in real estate segment. The firm’s revenue growth was muted in FY22 as it as it stood at Rs.119.81Cr as against Rs.119.88Cr in FY21 in slag handling segment, while the operating margins improved and stood healthy at above 20 percent during the past two years. The gearing levels of the company stood healthy at 0.36 times as on March 31, 2022. The debt protection metrics stood moderate during FY22. Going forward the firm ability to improve its scale of operations while maintaining the healthy EBITDA levels will be a key rating monitorable aspect.

The outlook is revised to stable considering the reduced funding risk and reduced project execution risk to some extent. The lenders have sanctioned Rs.100Cr debt for the real estate project, the same will be disbursed based on the progress of the construction. However, the bank limits remained highly utilized and the project is exposed to saleability risk.
 

About the Company

­K. Seshagiri Rao & Co. (KSRC) was established by late Mr. Koneru Seshagiri Rao in 1965. KSRC is engaged in excavations, slag handling, scrap, skull recovery in steel industries, hiring of heavy machinery and in the erection and commissioning of heavy machinery and other Infrastructure equipment. In Janaury 2021, the firm has proposed a residential real estate project ‘KSR Greens’ at Madeenaguda, Hyderabad, Telangana. The Project comprising of total land area of ~ 12,748 sq. meters which has a total build up area of ~ 1,07,602 sq. meters. The proposed project consists of 476 Nos. of 3BHK apartments spread in two towers Blocks “A” & “B” and a club house and each tower is a stilt plus 30 floors. KSR Greens total project cost of Rs. 315.07 Cr and expected to be funded by promoter's contribution of about Rs.68.23Cr (~22 percent of project cost), bank funding of about Rs.100 Cr (~32 percent of project cost) and customer advances of about Rs. 146.84 Cr (~ 47 percent).
 
Analytical Approach

­Acuité has considered the standalone view of the financial and business risk profile of KSRC to arrive at the rating.
 

Key Rating Drivers

Strengths

­Experienced management and reputed clientele
KSRC was established by late Mr. Koneru Seshagiri Rao in 1965 who had more than 5 decades of experience in slag and material handling. Currently, his son Mr. K. Venkateswara Rao is handling the business, who has more than 2 decades of experience in the industry. It has a established relationship with reputed organizations like Jindal Steel Works Limited (JSWL), Jindal Steel and Power Limited (JSPL), Tata Projects Limited, Rastriya Ispat Nigam Ltd among others. Repeated Orders over the years has helped KSRC in establishing a strong relationship with the key customers. Acuité believes that the KSRC derives significant benefit from its promoter experience and established strong relationships with its customers as well as suppliers for repeated business.

Favourable project location
The project is located at Madeenaguda is a neighbourhood of Hyderabad, Telangana, just off NH65 Highway, which provides good connectivity to the main city. The project location has adequate social infrastructure and basic amenities in and aroundits surroundings, thereby enhancing the project’s marketability.

Moderate financial risk profile:
The financial risk profile of the firm is moderate marked by moderate net worth and debt protection metrics. The net worth of the firm stood at Rs.113.88Cr as on March 31, 2022. The gearing level of the firm is healthy at 0.36 times as on March 31, 2022. Debt protection metric of the firm improved during FY22 on account of healthy improvement in absolute EBITDA. Interest coverage ratio stood at 7.11 times as on March 31, 2022 against 4.92 times in the previous year. Debt service coverage ratio improved to 2.42 times as on March 31, 2022 from 1.37 times in the previous year. TOL/TNW stood at 0.72 times as on March 31, 2022.  The project  has sanctioned term loan of Rs.100Cr with a door to door tenure of 5 years 9 months for the real estate project. However, the actual disbursement of the term loan will be based on the progress  in construction of the project and will be proportionate  to the advances from the customers.

Acuite believes that with expected addition of term loan to the total debt, the debt protection metrics of the company as estimated to remain in the similar range in the medium term.

Weaknesses

­Exposure to saleability and project execution risk
The Firm has started at residential project in January 2021 with a total project cost of Rs.315.07 Cr for the total built up area of ~ 1,07,602 sq. meters. The project is expected to be funded by promoter's contribution of about Rs.68.23 Cr (~22 percent of project cost), bank funding of about Rs.100 Cr (~32 percent of project cost) and customer advances of about Rs.146.84 Cr (~ 47 percent).The lenders has sanctioned loan of Rs.100Cr during October , 2022 which eliminates the funding risk. However, the project is exposed to saleability risk. The  firm has sold 18 flats out of total flats of 476 till December 2022.

Acuite believes that any delay in project construction, leading to delay in the operations and sale of the project, can impact cash flows. Hence, timely completion and selling will continue to key rating sensitivity factors.

Working capital intensive nature of operations
Working capital operations of the firm are highly intensive with the Gross current asset (GCA) days more than 400days as on March 31, 2022. High GCA days are mainly due to increasing inventory as work in progress from real estate segment. Delayed receivables from the clients by 30 – 45 days was leading to high dependency the fund based bank limits as the firm has to maintain huge diesel inventory in order to run the slag handling works continuously. The bank limits utilization stood in the range of 95 – 99 percent over the past 12 months ending February, 2023. The debtor days stood in the range of 113- 130 days in the past three years and creditor days are more than 250 days in FY22.

Acuite believes that the working capital cycle of the firm will remain intensive in the medium term as the nature of the business requires to maintain adequate stock levels for continuous operations.

Rating Sensitivities

  • ­Consistent improvement in the scale of operations and improvement in profitability

  • Better-than-expected sales performance or faster-than-anticipated construction progress, resulting in healthycash flows

  • Any significant delay in project execution or any significant cost over-runs in on-going projects Sharp decline in cash flow due to slower customer advances or delays in project execution

  • Significant fund withdrawals and deterioration in the working capital cycle leading to stress on the liquidity position
 
Material covenants

­None
 
Liquidity Position: Adequate

­Liquidity position of the firm is adequate with sufficient Net Cash Accruals (NCA’s) to repay their maturing debt obligations. Firm has generated NCA’s of Rs.26.04Cr as on March 31, 2022 against their debt obligations of Rs.8.25Cr for the same period. The firm is expected to generate NCA’ in the range of Rs.24. Cr – Rs.25Cr against debt repayment obligations in the range of Rs.5Cr – 9Cr in the medium term. The firm has availed Rs.100Cr loan for real estate project, the loan amount will be disbursed based on the prgress in construction and the repayment of the same will start after the completion of the project construction. The bank limits have been highly utilized at average of 96 percent during the past 12 months ending February, 2023. The firm has unencumbered cash and bank balances of Rs.1.15Cr as on March 31, 2022.

Acuite believes that liquidity position of the firm will remain adequate in the medium term on account of sufficient NCA against debt repayment obligations.
 
Outlook: Stable

­Acuité believes that KSR & Co will continue to benefit over the medium to long term on account of long track record of operations, experienced management in the industry and moderate financial risk profile. The outlook may be revised to 'Positive', in case of sustainable improvement in scale of operations, profitability in slag handling business and more than expected sales in the real estate segment. Conversely, the outlook may be revised to 'Negative' in case decline in topline or any significant stretch in its working capital management or in case of low sales traction leading to delay in construction and  deterioration of its financial risk profile and liquidity position.
 
Other Factors affecting Rating
­None
 

Particulars Unit FY 22 (Actual) FY 21 (Actual)
Operating Income Rs. Cr. 144.52 144.36
PAT Rs. Cr. 20.16 19.91
PAT Margin (%) 13.95 13.79
Total Debt/Tangible Net Worth Times 0.36 0.34
PBDIT/Interest Times 7.11 8.23
Status of non-cooperation with previous CRA (if applicable)

­CRISIL  vide its press release dated 6.1.2023, had rated the company to CRISIL A4; INC
 
Any other information

­None
 
Applicable Criteria
• Default Recognition :- https://www.acuite.in/view-rating-criteria-52.htm
• Rating Process and Timeline: https://www.acuite.in/view-rating-criteria-67.htm
• Service Sector: https://www.acuite.in/view-rating-criteria-50.htm
• Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm
• Complexity Level Of Financial Instruments: https://www.acuite.in/view-rating-criteria-55.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
18 Feb 2022 Proposed Long Term Loan Long Term 100.00 ACUITE BBB- | Negative (Reaffirmed)
Bank Guarantee Short Term 4.00 ACUITE A3 (Reaffirmed)
Cash Credit Long Term 13.00 ACUITE BBB- | Negative (Reaffirmed)
Dropline Overdraft Long Term 2.00 ACUITE BBB- | Negative (Reaffirmed)
Proposed Bank Facility Long Term 1.00 ACUITE BBB- | Negative (Reaffirmed)
08 Oct 2020 Cash Credit Long Term 10.00 ACUITE BBB- | Stable (Assigned)
Bank Guarantee Short Term 2.00 ACUITE A3 (Assigned)
Proposed Bank Facility Long Term 8.00 ACUITE BBB- | Stable (Assigned)
­

Lender’s Name ISIN Facilities Date Of Issuance Coupon Rate Maturity Date Quantum (Rs. Cr.) Complexity Level Rating
HDFC Bank Ltd Not Applicable Bank Guarantee (BLR) Not Applicable Not Applicable Not Applicable 4.00 Simple ACUITE A3 | Reaffirmed
HDFC Bank Ltd Not Applicable Cash Credit Not Applicable Not Applicable Not Applicable 14.00 Simple ACUITE BBB- | Stable | Reaffirmed | Negative to Stable
HDFC Bank Ltd Not Applicable Dropline Overdraft Not Applicable Not Applicable Not Applicable 2.00 Simple ACUITE BBB- | Stable | Reaffirmed | Negative to Stable
State Bank of India Not Applicable Term Loan Not available Not available Not available 100.00 Simple ACUITE BBB- | Stable | Reaffirmed | Negative to Stable
­

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