­Partners’ extensive experience in civil construction industry; established track record of operations & healthy order book providing long term revenue visibility
SPK, registered as a Class-1 EPC contractor with Tamil Nadu State Government department, has established presence in executing projects related to construction and maintenance of road work primarily for Tamil Nadu Road Sector Project (TNRSP) and Tamil Nadu Road Infrastructure Development Corporation (TNRIDC). SPK was established in 2010 by the managing partner, Mr.S.Nagarajan, joint managing partner, Mr.S.Balasubramani and other partners Mr.S.Pathinettampadi Karuppasamy, Mr.S.Eswaran and Mrs.S.Nagarathinam. All the partners have nearly two decades of experience in the civil construction industry and it is closely-held family business. The Partners are well supported by the other professional team. Timely execution of projects helped SPK establish a strong market position. Over the years, the firm has developed the technical capability to be the sole bidder for large engineering, procurement, and construction (EPC) contracts from National Highways Authority of India and state road development agencies. With the partner’s extensive industry experience and timely execution of its past projects, SPK has been able to establish long-standing relationship with its key principals. SPK has registered de-growth in operating income of around 29 per cent in FY2022 over FY2021. While the Earnings before Interest Depreciation and Tax (EBITDA) margins have remained range bound between 11.5-15 percent over the past three years. As on March 31, 2022, SPK has an unexecuted order book position of approx. Rs.1869 Cr; estimated to be executed over the next 24-36 months providing long-term revenue visibility. The outstanding order book is ~3.7x of the FY2022 revenue. Acuité believes that the partner’s extensive industry experience, established relation with its principal contractors and healthy order book will aid SPK's business risk profile over the medium term.

Tender based nature of operations; funded projects ensuring timely receivables
SPK executes only tender-based projects funded by central government, state government bodies or international agencies with low reliance on work received as a sub-contract from other civil construction entities. The funded projects either have budgetary support or are funded by a consortium of banks. Once the tender is allotted, Earnest Money Deposit (EMD) of around 0.5-2.00 per cent (varies on basis of department, nature, tenure and size of contract work) is deposited against the BG followed by performance guarantee of 2-10 percent. As per the part of Atmanirbhar Bharat 3.0 package, there is relaxation of Earnest Money Deposit (EMD) and Performance Security on government tenders. The firm raises bills on monthly basis. SPK has the option of availing mobilization advance, but avails limited amount from the same. The retention money is usually maximum 5 per cent of the contract value which is to be released after a defect liability period of 4-5 years; of which 2.5 percent is released against after 2-3 years. Since, the nature of operations is tender based, the business depends on the ability to bid for contracts successfully. SPK has success rate of 80-90 per cent in bidding. Acuité expects the operations of the firm to remain efficient on account of timely collection of work billed on monthly basis to its respective authorities.

Healthy Financial risk profile
SPK financial risk profile is healthy, marked by a healthy partner’s capital, low gearing and improving debt protection metrics. The healthy profitability levels vis-à-vis lower reliance on debt and lower finance cost has led to healthy debt protection metrics. The interest coverage ratio (ICR) and debt service coverage ratio (DSCR) stood at 27.28 times and 12.37 times, respectively in FY2022 as against 12.37 and 9.00 times, respectively in the previous year. The partner’s capital stood at Rs.450.99 Cr as on 31 March, 2022 as against Rs.427.17 Cr as on 31 March, 2021 and Rs.395.37 Cr as on March 31, 2020. This improvement is on the account of healthy accretion to reserves in FY2022. The gearing level (debt-equity) has improved and stood at 0.12 times as on 31 March, 2022. TOL/TNW (Total outside liabilities/Total net worth) stands at 0.37 times as on 31 March, 2022 against 0.49 times in previous year. 

Efficient working capital management
SPK's working capital operations are efficiently managed as evident from Gross Current Assets (GCA) of 85 -121 days during last 3 years historically ended through FY2022 due to prudent inventory management, and efficient collection of trade receivables supported by reputed clientele owing to a healthy realisation cycle. Given that large proportion of orders are either from strong counterparties such as NHAI or ADB/World Bank funded projects, the realisation is timely debtors were 28-42 days during last 3 years March 31, 2022. Working capital management is also supported by efficient utilisation of resources and low inventory around 1-26 days during the last 3 years ending through March 31, 2022. The firm focuses on the easy mobilisation of its resources, thereby improving the turnaround time and reducing the idleness of machinery and equipment. Furthermore, the firm benefits from the ability to stretch its payables 31-73 days during the last 3 years ended through as on March 31, 2022. This results in low reliance on bank limits at below 30 percent over 12 months through August 2022. Acuité believes that SPK's operation continues to be efficiently managed supported by healthy partners’ capital, efficient collection mechanism and just in time inventory levels.

­Exposure to risks related to the tender-driven nature of the business, and customer and geographic concentration in revenue
Revenue is primarily from orders from government agencies with an increased focus of the central government on the infrastructure sector, especially roads and highways; SPK is expected to reap benefits over the medium term. However, most of its projects are tenderbased and face intense competition, thus requiring the firm to bid aggressively to get contracts, which restricts the operating margin to a moderate level. Also, given the cyclicality inherent in the construction industry, the ability to maintain profitability margin through operating efficiency becomes critical. Further, civil construction industry is highly fragmented and intensely competitive, with several players executing small projects. Revenue growth should remain susceptible to the level of investments being made in the civil construction segment in Tamilnadu, and the extent of competition for the tenders. Operations continue to be focused on road projects, which contribute the bulk of the firm's revenue, unlike EPC players with a presence in multiple segments, such as commercial, residential, and industrial construction and infrastructure (irrigation, dams, and power). Acuité believes that the ability of the firm to maintain the scale of operations along with profitability would be the key rating sensitivity factor over the medium term.

Risk of capital withdrawal
SPK's constitution as a partnership firm is exposed to discrete risks, including the possibility of withdrawal of capital by the partners. Moreover, the partnership nature partially limits the flexibility to raise the funds visàvis a limited firm.