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.

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

• ­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

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.

­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.

­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.