­Established market position

The company has a long track record of three decades in the aluminum conductors and power cable manufacturing business. The company also commenced infrastructure turnkey projects by laying down transmission and distribution lines and constructing power substations. The long experience has resulted in establishing LPIPL as a major player in the eastern part of India especially for EPC projects in the power distribution sector where the company is executing projects for West Bengal State Electricity Distribution Company limited (rated at Acuité BBB/Stable/A3+), South Bihar Power Distribution Company Limited, Assam Power Distribution Company Limited, National Thermal Power Corporation (NTPC) and Power Grid Corporation Limited. For the aluminum conductors and cables manufacturing segment, the company is catering to reputed companies such as Larsen & Toubro Limited, Jindal Steel & Power Ltd and Tata Steel among others. Acuité believes that the long track record and rich experience of the promoters augur well for the relationship with their key suppliers and customers.

Healthy financial risk profile

The financial risk profile of the company is marked by healthy net worth, comfortable gearing and debt protection metrics. The tangible net worth of the company improved to Rs.333.85 Cr as on March 31, 2022 from Rs.286.32 Cr as on March 31, 2021 due to accretion of reserves. Acuité has considered unsecured loans of Rs.25.00 Cr as on March 31, 2022, as quasi-equity as the management has undertaken to maintain the amount in the business over the medium term. Gearing of the company stood comfortable below unity at 0.87 times as on March 31, 2022 as compared to 0.90 times as on March 31, 2021, although there was some increase in the debt levels in FY2022 due to the higher working capital requirements. Acuité notes that the company has been regularly incurring capex in the last few years for debottlenecking and improving efficiency. The Total outside Liabilities/Tangible Net Worth (TOL/TNW) declined to 2.15 times as on 31 st March, 2022 as against 2.74 times as on 31st March, 2021.
The deterioration in profit margins in FY2022, with the company posing lower than expected EBITDA, was owing to the very sharp increase in raw material prices which further resulted in weakening of its debt protection metrics. The high debt, coupled with the pressure on EBITDA generation, further translated into deterioration in their Debt to EBITDA levels. However, the coverage indicators continue to remain comfortable despite increase in working capital requirement in FY2022 following the increase in raw material prices. The comfortable debt protection metrics of the company is marked by Interest Coverage Ratio at 2.77 times and Debt Service coverage ratio at 1.96 times as on 31st March, 2022. Net Cash Accruals/Total Debt (NCA/TD) stood at 0.22 times as on 31st March, 2022. Capex of ~Rs 30 Cr. is to be incurred in FY23 which is expected to be largely funded by a term loan of Rs. ~Rs 20 Cr, but given the healthy cash generation, Acuité does not foresee any material impact on company’s capital structure and debt metrics. Acuité expects while the new capex initiatives would increase the debt levels, healthy revenues and profits generated from the existing business are expected to adequately support the financial profile over the medium term, followed by limited debt repayment obligations.

Order Book build-up, improvement likely in FY23

The company has an outstanding order book from domestic market of about Rs 1178.90 Cr. consisting of Rs 359.57 Cr. from manufacturing of cables and conductors and Rs 819.34 Cr. from EPC contracts. Further, EPC orders worth Rs 150.02 Cr of orders are in L1 Position as on October 2022. Further, the company is planning to submit more bids under GoI’s revamped distribution sector scheme within the last quarter. Major portion of EPC orders has an escalation clause which helps the company to mitigate the price fluctuation risk. This will improve the order book position in near term, providing strong medium-term revenue visibility. The revenue improved and stood at Rs 923.95 Cr in FY22 as against Rs 841.09 Cr in FY21 due to healthy order flow. Further, the company has registered a revenue of Rs 583.03 Cr till September 2022 (Provisional). The scale of operation is expected to improve substantially over the medium term backed by healthy order inflow in power sector.

However, the operating margin declined to 13.57 per cent in FY2022 from 18.41 per cent in FY2021. The increasing share of the manufacturing business (66.67%) in the revenue mix reduced the EBITDA margin in FY22, given their weaker margin profile compared to the project segment. However, Acuité also notes that the profit margins have remained healthy in FY2022, despite very sharp increase in raw material prices due to benefit of operating leverage and cost control measures. The PAT margin of the company also declined to 5.15 per cent in FY2022 from 7.56 per cent in FY2021. Acuité expects further moderation in the profit margins as the company is expected to maintain a revenue mix with a higher share of manufacturing business and a scaled-down EPC business in the current year. However, the correction in metal prices (copper and aluminum) in H2FY23 would positively impact the cost structure going forward. While raw material prices had softened in the last few months, LPIPL’s ability to revive its profitabilitywill be key monitorable.

­Working capital intensive nature of operation

The working capital management of the company has marginally improved in FY22, although marked by Gross Current Assets (GCA) of 343 days in 31st March 2022 as compared to 377 days on 31st March 2021 with increased efficiencies in debtor management. The working capital intensity remains inherently high in the EPC business due to the long execution period of projects, milestone-based payments and the retention money requirement that is released post the defect liability period. Even though the debtor days have improved from 252 days as on 31st March 2021, it is still high at 241 days as on 31st March 2022 since the receivables include retention money of projects also given the preponderance of government clients. Most of the state power utility contracts have payments terms of 60 per cent within 30 days of supply, 30 per cent after installation and 10 per cent to be released after expiry of guarantee period. LPIPL has back-to-back arrangement with its sub-contractors for few projects. Consequently, part of the retention money is funded by way of stretching the creditors. However, the inventory period improved to 98 days on 31st March 2022 as compared to 139 days on 31st March 2021. The inventory levels of the company have been historically high owing to the lengthy order execution cycle, which entails multiple inspections at various stages of execution. Going forward, the receivables position is expected to further come down as the company is now increasingly focusing on the manufacturing operations where the payment terms are relatively favourable. Acuité believes that any elongation in the receivable period or further inventory build-up may lead to a further strain on the working capital profile and, hence, will remain a key monitorable.