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SGIPL, a registered EPC contractor, has established presence in executing projects related to power EPC for various state discoms. Mr. K Gopala Raju, the managing director of SGIPL, has more than 4 decades of experience in the line of civil construction. Mr. K V N Soma Raju, Mr. K Vijay Kumar Raju and Ms. K Neelima are other promoter directors of the company having combined experience of more than 3 decades. SGIPL is ably supported by an experienced second line of management. Initially, SGIPL worked as sub-contractor for M/s. Nagarjuna Constructions Company limited (NCC) and executed works worth Rs.230 Cr in the difficult areas of Assam. Later, from the year 2008- 09 onwards, it started taking orders as independent contractor directly from various State Discoms. Over the years, SGIPL has successfully executed various projects in the far-flung areas like Nagpur & Solapur in Maharashtra, Gulbarga & Mysore in Karnataka, Hisser & Sirsa in Haryana, Chaibasa in Jharkhand, Bemetara in Chhattisgarh, Uttar Pradesh, Bihar, Assam and West Bengal etc. With the promoters’ extensive industry experience and timely execution of its past projects, SGIPL has been able to establish long-standing relationship with various discoms in different states.
As on November 30, 2022, SGIPL has an unexecuted order book position of approx. Rs.2,097 Cr; estimated to be executed over the next 24-36 months providing long-term revenue visibility. The outstanding order book is ~7x of the FY2022 revenue. The order book contains L1 worth Rs.1,583.23 Cr for which company has already submitted earnest money deposit (EMD)of 3 percent. Acuité believes that the promoters’ extensive industry experience, established relation with its principal contractors and healthy order book will aid SGIPL's business risk profile over the medium term.
One of the major problems faced by EPC player in power industry is payment in timely manner from its primary customers which are Discoms of various states. To overcome such hurdle, company mainly takes turnkey orders which are funded by Central Government/ international funded. SGIPL’s major strength is its bidding strategy i.e. bidding for projects which are mostly funded by central government and/or international agency (i.e. REC, PFC, World Bank or Asian Development Bank) under various schemes such as Integrated Power Development Scheme (IPDS), Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), Backward Region Grant Fund (BRGF) scheme, Restructured Accelerated power development and reforms programme (RAPDRP), Gotham Feeder Separation Scheme (GFSS), High Voltage Distribution System and Atal Jyothi Yojana etc. The unexecuted order book and orders in tendering stage or expected works is/are completely funded by central government schemes for which funds are allocated in budget and are maintained in separate accounts. Thus, there is lower risk of payment due to liquidity issue of State Discoms, as the funds are provided by Central Governments/International funds which means payments are technically from AAA rated entities.
Once the tender is allotted, Earnest Money Deposit (EMD) of around 1-2 per cent (varies on basis of department, nature, tenure and size of contract work) is deposited against the BG. SGIPL has the option of availing mobilization advance, but avails limited amount from the same. The retention money is usually 5.0-7.5 per cent of the contract value which is to be released after a defect liability period of 2-3 years. Since, the nature of operations is tender based, the business depends on the ability to bid for contracts successfully. SGIPL has success rate of ~70-75 per cent in bidding. Acuité expects the operations of the company to benefit from executing only funded projects.
SGIPL purchases raw materials like transformers, conductor, cables, panel boards, switch controls and boards, etc. from reputed government approved vendors. Thus, as the suppliers are approved by DISCOMs, quality of the product is maintained. As SGIPL is in this business for more than 15 years, it has established and maintained good relationships with various suppliers. Further, as a strategy company gives order to more than 2 approved suppliers for every project, so as to avoid dependency on single suppliers. As a strategy, SGIPL procures raw materials required for project only upon confirmation of particular order. Also, all the contracts are having escalation clauses which shield the company from the raw material price movements and maintain the margins. Acuité believes that established relation with key suppliers, order-backed sourcing and presence of price escalation clauses will lead to better operating margins of the company.
SGIPL has diversified from Jharkhand to North eastern states and Haryana which has better receivable days. Moreover, SGIPL has completed all of its orders in Jharkahnd and is unlikely to bid for projects in this state in medium to long run given the stretched receivable cycle. Notably, SGIPL has forayed into water segment orders too in the state of Uttar Pradesh and Rajasthan wherein orders tendered are to the tune of ~Rs.700 Cr. Out of the unexecuted order book of Rs.2,097 Cr as on November 30, 2022, 38 percent of orders are to be executed for Assam Power Distribution Company Ltd (APDCL)., 29 percent for State Water & Sanitation UP projects, 15 percent from Kashmir Power Distribution Corporation Limited and remaining from other state discoms. Acuité believes that gradual customer and geographical diversification will help SGIPL in improving its receivable cycle and lower down its concentration risk on revenue profile.
SGIPL financial risk profile is moderate, marked by a moderate networth, low gearing and moderate debt protection metrics. The EBITDA margins of the company declined to 10.94 per cent in FY2022 against 15.46 per cent in FY2021. The PAT margins of the company improved marginally to 2.16 per cent in FY2022 against 1.99 per cent in FY2021 underpinning the lower interest cost resulting from higher non-interest bearing unsecured loans infused in FY2022 and lower dependence on debt. The interest coverage ratio (ICR) and debt service coverage ratio (DSCR) stood at 1.46 times and 1.32 times, respectively in FY2022 as against 1.30 times and 1.19 times, respectively in the previous year.
The net worth of the company stood at Rs.260.51 Cr as on March 31, 2022 as against Rs.239.01 Cr as on March 31, 2021. This improvement is on the account of moderate accretion to reserves and infusion of unsecured loans by promoters to the extent of Rs.15 Cr in FY2022; unsecured loans amounting to Rs.25 Cr are treated as quasi equity as on March 31, 2022. The gearing level (debt-equity) stood at 0.39 times as on March 31, 2022 as against 0.44 times as on March 31, 2021. TOL/TNW (Total outside liabilities/Total net worth) stood at 1.09 times as on March 31, 2022 against 1.30 times in previous year.
The total debt of Rs.101.00 Cr as on March 31, 2022, consist of long-term debt of Rs.13.18 Cr, Unsecured loans (USL) from directors/promoters of Rs.29.79 Cr, short-term debt of Rs.57.29 Cr and maturing portion of long term borrowings of Rs.0.75 Cr. NCA/TD (Net cash accruals to total debt) was at 0.08 times in FY2022 as against 0.06 times in FY2021. Acuité expects the financial risk profile to improve yet remain moderate over the medium to long term.
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SGIPL's working capital cycle is intensive marked by high gross current assets (GCA) days in the range of 300-600 days over the last 3 years ending March 31, 2022. The GCA days are marked by high receivables in the range of 85-220 days (excluding retention money) and moderate inventory days in the range of 14-45 days over the last 3 years ended March 31, 2022. The GCA days include the other current asset portion in form of security deposits, retention money and EMD which manifests GCA days at slightly elevated levels. The inventory days and debtor days were at 22 days and 149 days, respectively, as on March 31, 2022. These are partially offset by the support extended by its creditors which ranged between 230-670 days over the last 3 years ended March 31, 2022. SGIPL’s working capital cycle is supported by the fact that SGIPL places a back-to-back order to its suppliers as and when it receives from its customers. Hence, the time span of the collection days’ replicates and is applicable for its creditors too, majorly to its sub-contractors. SGIPL’s creditor days are high mainly because of LC backed creditors with usance period of 90-120 days and payables to its sub-contractors + retention money/security deposits payable to its sub-contractors. The high GCA cycle has led to high utilization of its bank lines to an average of 85-90 percent for fund-based and 50-60 percent for non-fund based over the last 12 months ended November 30, 2022.
SGIPL has completed majority of its work orders from Jharkhand Bijli Vitran Nigam Ltd (JBVNL) which constituted major portion of its order book and revenue over the last 2 years ending March 31, 2021. Only 0.6 percent of work was pending for execution as on November 30, 2022 vis-à-vis total receivables of Rs.64.15 Cr and retention money of Rs.98.47 Cr.
Acuité believes that the operations of the SGIPL will remain highly working capital intensive on account of continuous submission of security deposits and retention money. Besides, timely receipt of payments from JBVNL will remain key monitorable over the near to medium term.
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 this industry, the ability to maintain profitability margin through operating efficiency becomes critical. Acuité believes that the company’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.
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