­Experienced promotors and established track record of operations
Star Infratech is an EPC contractor engaged in the execution of government projects such as hospitals, housing colonies, layouts, roads, canal, bridges, water works and drains. The firm is a Class one contractor operating with a rich experience of more than three decades in the infrastructure industry. The firm along with its experienced managers - has been able to establish strong ties with the stakeholders, resulting in repetitive orders. Acuite believes, the experience of the promoters will help the firm to improve its scale of operations.

Strong order book position:
The firm has an outstanding order book of Rs.6089 Cr. as on March 31, 2024, which translates to 5 x of FY2024 estimated revenue. Additionally, the firm secured two orders worth Rs.1330 Cr. during the Q1 of FY2025, which further strengthens the order book position. However, the firm has ~Rs.1230 Cr. worth slow-moving orders for bridges, roads and canal works, pending from 2011 to 2019 period. More than 50 percent of these delayed projects are from the irrigation department, primarily due to land acquisition delays and litigation issues. However, the respective departments have now resolved these issues and work has commenced. Orders worth around Rs.300-400Cr are expected to be completed within 10 next months. Acuite expects the orders in hand to provide revenue visibility for near to medium term.

Stable operating performance:
Star Infratech’s revenue for FY2024 is estimated to be in range of Rs.1100-1150 Cr, compared to Rs.902.15 Cr. in FY2023 and has registered revenue of Rs.436 Cr. till July, 2024. Revenue in FY2023 was on lower side compared to the previous two years revenue due to, delay in tendering process.  However, due to receipt new orders during Q4 of FY2023 and Q1 of FY2024 coupled by timely execution of works aided in firm’s revenue improvement during FY2024. Currently, the firm has an outstanding order book of Rs.6,089 Cr, which is to be executed in next 3-4 year.  The operating profit margin of the firm is estimated to be in the range of 9.8 – 10 percent for FY2024, compared to 9.70 percent in FY2023. However, PAT margin is estimated to decline to the range of 4.3-4.5 percent in FY2024, due to increase in depreciation and interest expense for FY2024. Acuite believes that, firm’s revenue is expected to improve over the medium term, due to presence of strong order book while, profitability margins are expected to remain stable for the same period.

­Above average financial risk profile:
Star Infratech’s financial risk profile is above average, supported by healthy net worth position, moderate capital structure and moderate debt protection metrics. The net worth of the firm is estimated to improve in the range of Rs.300Cr-315 Cr. as on March 31, 2024, primarily due to accretion of profits to reserves, coupled by infusion of capital by partners worth ~Rs.39 Cr. during the year. The capital structure of the firm is estimated to deteriorate as of March 31, 2024 with deterioration of gearing level and total outside liabilities to tangible net worth to 1.21 times and 1.77 times respectively, compared to 0.48 times and 1.04 times as on March 31, 2023. The deterioration in capital structure is mainly due to increased dependency on short-term debt during the year. The firm secured an order worth Rs.2700 Cr. for lay out and development works in Bagalakote. As there was no mobilization advance in the project, star Infratech has availed short-term debt equivalent to 10 percent of the project cost. This brings the estimated total debt level as of March 31, 2024 to Rs.381.17 Cr, compared to Rs.108.30 Cr. as on March 31, 2023. Further, the debt protection metrics, i.e. debt service coverage ratio (DSCR), Interest coverage ratio (ICR) and Debt to EBITDA are also estimated to deteriorate for FY2024 to due to increase in interest expense and debt levels. Acuite believes that, the financial risk profile of the firm likely to above average over the medium term on account of stable operations and absence of major debt infusion.

Working capital intensive nature of operations:
Star Infratech’s operations are working capital operations intensive, as reflected by its expected gross current asset (GCA) range of 190-200 days for FY2024, compared to 115 days in FY2023. Elongation in GCA days is primarily due to expected stretch in debtor days to 113 days in FY2024 from 59 days in FY2023. GCA also includes other current assets portion in form of advances and deposits, which further take it to elongated levels. Additionally, the current ratio is estimated to decline to 1.50 -1.55 times as of March 31, 2024 from 1.80 times as on March 31, 2023, due to substantial increase in short-term debt, needed to support the increasing requirement of mobilization of works. The firm’s working capital limits were utilized at an average of ~60 percent over the past 6 months ending March, 2024.  Acuite expects the operations of the firm to remain working capital intensive on account of high GCA and debtor days.

Volatility in raw material prices and tender based nature of operations impacting profitability
Most EPC projects undertaken by the firm has a gestation period of 12-36 months, and during this time period, profitability remains susceptible to fluctuations in the input prices. However, majority of orders in hand have a built-in inflation index-linked price escalation clause, depending upon the extent of coverage of the actual increase in input prices, which mitigates the risk to an extent. Star Infratech operates in infrastructure construction industry which is highly competitive with presence of large number small, regional and large players. EPC projects executed by the Firm are tender based with wins going to, the lowest bidder qualifying the terms and conditions stipulated by the respective agencies floating the bids. This puts strain on profitability of the firm where the bidding can get aggressive.

Geographic concentration risk on the revenue profile:
All of the projects executed by the Firm are based out of Karnataka. This exposes the Firm to considerable amount of geographic and geopolitical risks. Any slowdown in project announcements by the governments of these states, or external factors such as socio-political unrest, change in governments policies could adversely affect the firm's reoperations.

Partnership nature of business
Star Infratech is a partnership firm and is exposed to the likeliness of the partners withdrawing capital from the business. Acuité believes that any substantial withdrawal of capital by the partners in future is likely to have an adverse impact on the capital structure.