­­Stable business risk profile with established track record of operations and experienced management
SEL was promoted by Mr. Navinbhai Dave and Mr. Nikhil Merchant who took over the management from J. P Goenka in 1992. The promoters have more than two decades of experience in the textile industry and have successfully completed real estate projects in Mumbai by monetizing their existing land assets. SEL through its subsidiary, CEIPL has developed real estate projects in Bangalore and Hyderabad, whereas the other subsidiary PVPL has land bank in Mangalore, Mysore and Chennai which it intends to develop in near future. SEL has also ventured into the energy sector through its subsidiaries, Swan LNG Pvt. Ltd. and Triumph Offshore Pvt. Ltd. by setting up an FSRU project at Jafrabad, Gujarat. The promoters are well supported by an experienced second line of management. The extensive experience of the promoters is reflected by the long standing relationship with its existing customers and suppliers and demonstrated record of developing real estate projects.

The operations of the company witnessed improvement in standalone revenues of the company which recorded 33.89% YoY growth and stood at Rs. 547.23 Cr. in FY23 as against Rs.408.72 Cr. in FY22 and Rs.252.59 Cr. in FY21. SEL currently owns and operates a textile processing unit at Ahmedabad, Gujarat with total capacity of 360 lakh meters. After significant deterioration, in the contribution from textile business from textile segment witnessed stable growth from 84.71% in FY21 to 41.67% in FY22 and 44.60% in FY23. The company also reported standalone revenues of Rs.113.58 Cr. in Q1FY24 and the contribution from textile segment again improved to 50.21% during the same period.

Acuité believes that SEL’s operations will continue to derive comfort from its experienced management and established track record in different verticals like textiles and real estate over the medium term.

Healthy Financial Risk Profile
The financial risk profile of the company is healthy marked by healthy net worth, low gearing, and moderate debt protection metrics. The tangible net worth of the company stood at Rs. 1281.26 Cr. as on March 31, 2023 as against Rs. 1280.15 Cr. March 31, 2022. The total debt of the company increased and stood at Rs. 280.24 Cr. as on March 31, 2023 as against Rs. 108.83 Cr. same period last year majorly on increase in unsecured loans from related parties. The debt outstanding of the company in FY23 comprises of long-term debt of Rs. 69.52 Cr., short term debt of Rs. 55.40 Cr. and Rs. 155.32 Cr. of unsecured loans. The gearing of the company marginally deteriorated yet remained low at 0.22 times as on March 31, 2023 as against 0.09 times in March 31, 2022. The TOL/TNW stood at 0.37 times as on March 31, 2023 as against 0.26 times March 31, 2022. The debt protection metrics remained moderate with interest coverage ratio of 1.73 times for FY23 as against 1.61 times for FY22. However, the debt service coverage ratio stood at 0.96 times for FY23 as against 1.50 times for FY22.

Furthermore, the SEL has tied up towards capital infusion by way of preferential allotment of Rs.1435.50 Cr. to GCAP INAB PTE Ltd. (Non-promoter) with a price of Rs.495/ share and upto 2,90,00,000 shares which is ~60% premium towards the CMP. The funds from the preferential allotment are likely to be received by end of October 2023 which will be utilised towards acquisition of RINL and other project purposes. The promoter’s shareholding is expected to deteriorate from 64% to 57% post issuance of the shares. Acuité believes that post this issuance, the financial risk profile is expected to continue remain healthy with expected improvement in networth.

Favourable domestic demand-supply dynamics of re-gasified liquefied natural gas (RLNG) entailing low demand risk w.r.t. the energy projects at subsidiary level:
Gas is currently used in India for both domestic and industrial consumption. The major idustrial consumers of gas are Fertilizers, Refineries and Petrochemicals and Power Generation. There are other industries like glass and ceramics, pharma units who also prefer to utilize gas as it is a more efficient and cleaner fuel. However, these industries are largely dependent on Naphtha and Fuel Oil (FO) due to lack of transmission and storage capacity for LNG. The offtake from the domestic segment is expected to grow steadily with the expansion of the city gas distribution (CGD) network in India. The demand for import of natural gas is expected to increase significantly over the medium term on account of these above demand drivers as also a decline in the production of natural gas from domestic reserves. The total gas consumption in India was around 158.2 MMSCMD and share of domestic gas and imported RLNG was about 45 percent & 55 percent respectively. The demand for LNG is slated to increase at a CAGR of 7.00-8.00 percent. The existing LNG infrastructure currently caters to only 31.6 MMTPA which is inadequate considering the large needs for RLNG. Though there has been a proposed increase in the capacity, the projected capacity of 45-50 MMTPA and is still likely to remain insufficient for bridging the gas demand supply gap and hence there is a need for further investments in RLNG capacity. While an additional 25- 30.00 MMTPA of capacity is under proposed and planning stages, they are unlikely to come on stream by FY2025. Acuité believes that SEL’s subsidiaries hold low demand/offtake risk given the huge demand-supply gap in the RLNG industry.

­­Continuous deterioration in profitability margins despite improvement in revenues
The standalone revenues of the company have witnessed growth of 47% CAGR over FY21-23 period. However, despite improvement in revenues, the profitability margins of the company reported continuous deterioration reflected by decline in EBITDA margin to 5.10% in FY23 as against 6.76% in FY22 and 8.42% in FY21. The EBITDA margin further declined to 4.62% in Q1FY24.  Similarly, the PAT margins of the company also witnessed a decline to 0.66% in FY23 as against 0.78% in FY22. The decline in margins was majorly on account increase in contribution from the low margin trading business and volatility in prices of goods traded.

Acuité believes that any improvement in the profitability margins will remain a key monitorable over the medium term.

Implementation risk associated with the LNG project:
SEL through its subsidiaries, Swan LNG Pvt. Ltd. and Triumph Offshore Pvt. Ltd. is setting up a Floating Storage and Regasification Unit (FSRU) project in Jafrabad, Gujarat with a regasification capacity of 5MMTPA of LNG. The said project has witnessed delays in the past due to non-achievement of financial closure. The project, initially expected to be commissioned by April 2020, then delayed to March, 2022 as financial closure was achieved in mid-2020. Presently, the project commissioning has been further delayed by 2 years to March 2024 on account of cyclone impact on Gujarat in May 2022. Acuité believes that any further delay would substantially impact the over financial risk profile of SEL considering the guarantees issued by it. The project is based on a business model of ‘Tolling terminal’ and 4.5 MMTPA (out of 5 MMTPA) throughput capacity has been booked on ‘Use or Pay’ basis for a period of 20 years by state / central PSU companies viz. GSPCL (1.5 MMTPA), IOCL (1 MMTPA), BPCL (1 MMTPA) and ONGC (1 MMTPA). With the achievement of the financial closure, the completion and delivery of the FSRU, the overall project is progressing as per the revised timelines. Furthermore, the final payment of the FSRU has been made. The main project contracts under SLPL are lumpsum-based contracts, possessing a low forex exposure and provision of 5 percent contingency in project cost, leads to low cost overrun risks. SLPL has achieved ~81% physical completion as of date, while the FSRU under TOPL was completed and delivered to TOPL in September 2020. 

In April 2021, Company entered into Time Chartered Party Agreement with M/s. TEMA LNG, a Ghana based company to deploy FSRU on charter hire for 270 days. Till the completion of the terminal, TOPL has also entered into a Heads of Agreement Term Sheet dated 31 December 2022 with BOTAS Trading IC Headquarters Jersey Ankara Main Branch, based in Turkey (“BOTAS”) for chartering of the FSRU on Bare boat basis (no expenses for maintaining the vessel), for a period of at least 304 days, starting from 02 January 2023 at the rate of USD2,50,000 per day (~Rs. 2 Cr. per day). However, the financial closure for the project is already completed resulting into low funding risk and majority of the land required for commissioning is already acquired too, leaving moderate risk w.r.t. land acquisition. Acuité believes timely commencement of the project within revised timeline will remain a key monitorable. 

Working capital intensive nature of operations
The operations of the company are working capital intensive in nature marked by GCA days which improved yet remained high at 282 days in FY23 compared against 405 days for FY22. The receivable days stood at 136 days in FY23 as against 193 days for FY22. The inventory levels of the company stood at 74 days during the same period compared against 83 days for FY22. The creditor days of the company stood at 141 days for FY23 compared against 221 days for FY22. However, the average bank limit utilisation by the company remained moderate at 86.38% for fund based facilities and 7.04% for non-fund-based facilities for in FY23.