| Established track record, experienced management, and a healthy order book providing adequate revenue visibility over the next 2-3 years:
SLMI and its promoters’ long-standing presence in the civil construction industry manifests the company’s established track record of operations and the extensive experience of its promoters. The promoters have 30 years of individual experience in the infrastructure construction industry. Since inception, SLMI has been executing projects floated through tenders by the government and civic bodies in Telangana. By pursuing numerous orders for its key principals for more than two decades, SLMI is presently registered as a special Class I contractor with the Roads and Bridges (R&B) division in Telangana. The promoter's extensive industry experience, established track record, and timely execution of past projects have enabled SLMI to establish long-standing relationships with its key suppliers and principals. Currently, SIPL has orders worth Rs. 1041.60 crore from the Ministry of Road Transport and Highways, which are to be executed in the next 12–36 months. 100% of the order book value pertaining to the Telangana region, which draws significant geographical concentration risk on the revenue profile of the company. However, the geographical concentration risk is mitigated to some extent by timely receivables, as the company only undertakes those projects that are specially funded by the central or state government.
Improvement in operations post-COVID:
The operations of the company have improved post-COVID-induced lockdown, which is evident from the improvement in revenue for FY22 to Rs. 128.97 crore from Rs. 91.15 crore in FY21. Further, the revenue was improved to Rs. 186.48 crore in FY23 (provisional). The company was able to maintain its EBITDA margins in the range of 11–11.5 percent in the past 4 years. In FY23 (provisional), the company reported an EBITDA margin of 11.01. The company undertakes only those projects that yield higher profitability. The company has leased an asphalt quarry located in Hyderabad. This quarry meets around 60 percent of the company’s asphalt requirements for laying roads. This captive consumption is one of the key factors in maintaining stable EBITDA margins over the past 3–4 years. Acuite believes that the company’s revenue will bounce back to the historic levels of Rs. 200–Rs. 220 crore on account of improved operations and a healthy order book, providing revenue visibility in the medium term.
Above-average financial risk profile:
The financial risk profile of the company is above average, marked by moderate net worth, healthy debt protection metrics, and a healthy debt-to-equity ratio. The net worth of the company stood at Rs. 78.55 crore as of March 31, 2022, as against Rs. 71.57 crore last year. The company has had healthy gearing in the range of 0.5 to 0.20 times in the past 3 years. The gearing of the company stood at 0.25 times as of March 31, 2022. Low reliance on long-term debts and moderate utilisation of fund-based utilisation have resulted in healthy debt-to-equity and debt protection metrics. The debt protection metrics of the company have improved in FY22; the interest coverage ratio and debt service coverage ratio stood at 5.69 times and 4.20 times, respectively, as of March 31, 2022, compared to 3.76 times and 1.37 times, respectively, in the previous year. Total outside liabilities to tangible net worth stood at 0.53 times as of March 31, 2022. Debt to EBITDA stood at 1.25 times as of March 31, 2022, compared to 1.67 times as of March 31, 2021. Acuite believes that the financial risk profile of the company will remain above average in the medium term as the company is not planning for any long-term debts.
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Moderately managed working capital:
The company’s working capital operations are moderately intensive, which is evident from the gross current asset (GCA) days of 212 as of March 31, 2022, as against 284 days in FY21. There is significant improvement in receivable days, which stood at 10 days as of March 31, 2022. Inventory days stood at 105 as of March 31, 2022. Generally, the company receives the bills within 30 days for highway projects. SLMI pays the raw material creditors within 0–30 days; certain portions of the creditors pertain to expenses payable to sub-contractors, resulting in creditor days of 110 days as of March 31, 2022. The moderate GCA cycle has led to moderate utilisation of fund-based limits at an average of 70 percent in the past 12 months ending FY22. Non-fund-based BG was utilised fully until December 2022.
High geographic and customer concentration risk on the revenue profile:
Currently, SIPL has orders worth Rs. 1041.60 crore from the Ministry of Road Transport and Highways, which are to be executed in the next 12–36 months. 100% of the order book value pertaining to the Telangana region, which draws significant geographical concentration risk on the revenue profile of the company. However, the geographical concentration risk is mitigated to some extent by timely receivables, as the company only undertakes those projects that are specially funded by the central or state government.
Tender-based nature of operations
SLMI executes only tender-based projects from government bodies, with a low reliance on subcontract work. Once the tender is allotted, earnest money deposits (EMD) in the range of 2.5–7 percent are deposited against the bank guarantee. The company raises bills on a monthly basis. The retention money is usually 7.5 percent of the contract value, which is in a few instances released against a bank guarantee. Since the nature of operations is tender-based, the business depends on its ability to bid for contracts successfully. SLMI has a success rate of 75 percent in bidding. Acuité believes that SLMI's revenue and profitability are susceptible to the risks inherent in tender-based operations, which limit pricing flexibility in an intensely competitive industry. |
