­Long track record in civil construction with GoK as the major stakeholder
ULCCS was formed in 1925, undertakes civil construction work in Infrastructure development in Kerala and is involved in construction of roads, bridges, buildings and allied infrastructure. Government of Kerala has increased its share holding by additional 10 percent in ULCCS in FY2023. Currently, major shareholder of the Society is Government of Kerala which owns 84.7 per cent of the issued shares and the rest are held by the members of the society. Major clients of the Society include National Highways Department for Highway projects, Public Works Department of Govt. of Kerala for State Road Development, Central Ministries such as Ministry of Panchayat Raj for rural roads under Pradhan Mantri Gram Sadak Yojana (PMGSY), several state government ministries such as Local Self Government, Co-operation, Tourism etc., and a host of reputed private enterprises.

Preferential treatment from Government of Kerala:
The Kerala government provides certain types of support and preferences to labour contract societies. This includes direct financial support as share capital contribution, loan or subsidy, concessions and preferences while awarding public works tenders.
Further, in cases when the lowest tender is from a Private Contractor, Labour Contract Cooperative Society will be awarded the work at up to 10 per cent above the lowest tender rates and over and above this, cooperative societies will be exempted from payment of Security Deposit and Earnest Money Deposit. They also benefit from advance payment of up to 20per cent of the cost of work depending on the projects. Acuite believe that the referential status from the Government of Kerala will support the ULCCS over the medium term.

Sustained growth in revenue albeit decline in margins:
ULCCS has reported significant growth in its revenue with a compounded annual growth rate (CAGR) of 28 percent over the past 3 years. The society has reported revenue of Rs.2343.99Cr during FY23(Prov.) against Rs.1430.03Cr in FY22 and Rs.1114.67Cr in FY21. The growth is on account of increasing order book in roads segment coupled by timely execution of works. Revenue from roads segment has been contributing more than 50 percent to the total revenue over the past 2 years and expected to contribute in the similar range going ahead. Currently, ULCCS  has order book worth Rs 4052 Cr  as on June 30, 2023 which  is to be completed in 2 years providing healthy revenue visibility over the medium term.

The operating margins of the society have declined during FY23 (Prov.), ULCCS reported EBITDA margin of 16.21 percent during FY23 against 20.58 percent. The decline in margin is on account of increased raw material prices and sub contract expenses. The benefits accruing from this collective labour are largely divided among the worker members of the Society and therefore, the PAT margins are low. PAT margins range between  0.25-0.30 percent. Acuite believes that ULCCS will continue its growth trend in medium term on account of presence of healthy unexecuted orderbook, established presence in the industry and support from government.

Access to funding from quasi government bodies and public in form of Fixed deposits:
Apart from capital contribution, the Society receives funding in the form of fixed deposits and project support fund from Kerala government and its entities. ULCCS currently has FD’s of Rs 1661.36 Cr from primary agriculture credit cooperative societies (PACS) as on March 31, 2023. The society also had received short term deposits Rs.622.46 Cr from general public as on March 31, 2023 as per the byelaws of the Co-operative Societies Department of Government of Kerala. ULCCS is, therefore, able to access funds at competitive rates in the form of fixed deposits from Service Co-operative banks and deposits from general public, which are usually lower than the bank borrowing rates.

Below-average financial Risk profile
Financial risk profile of ULCCS is below average marked by its leveraged capital structure and weak coverage indicators. The net worth of the Society stood at Rs 603.48 Cr as on March 31, 2023 (Provisional) as compared to Rs. 380.84 Cr as on March 31, 2022. Improvement in net worth is mainly due to infusion of equity capital of Rs.180Cr during FY23. Gearing is high at 6.29 times as on March 31, 2023 (provisional) as against 8.77 times as on March 31, 2022. Total outside liabilities to total net worth TOL/TNW is very high at 7.25 times as on March 31, 2023 vis-à-vis 10.29 times as on March 31, 2022. ULCCS debt/EBIDTA is also  high at 9.92 times as on March 31, 2023 vis-à-vis 11.12 times as on March 31, 2022. Debt protection metrics – Interest coverage ratio and debt service coverage ratio stood at 1.14 times and 0.28 times as on March 31, 2023(Prov.) respectively as against 1.11 times and 0.41 times as on March 31, 2022 respectively. DSCR is low primarily due to the high portion of short term deposits collected by ULCCS from general public. As per trend the interest accrued and 90 per cent of the principle amount had been reinvested by the depositors in the past few years, further to this, the FDs have increased over time providing low cost funding for the operations. As a cooperative society, ULCCS distributes the profits to its member labourers in the form of bonuses every year and maintains minimal net profit  margins. Acuité believes that financial risk profile of ULCCS will remain below average with presence of large amounts of deposits from public.

Working capital intensive operations:
The society 's operations are working capital intensive in nature as reflected by its Gross Current Asset (GCA) days of 548 days during FY23 (Provisional) due to high debtor and inventory days given the nature of its operations. The GCA underpins the high inventory levels of 164 days and high debtor days of 142 days during FY23(Prov.). The high inventory levels are on account of high amount of work in progress. The society also maintains large amount of inventory primarily due to the high number of projects handled resulting in high working capital utilization. Further, the increasing proportion of unbilled revenue also leads to increasing reliance of working capital limits. ULCCS’s working capital limits were highly utilized at about ~97 percent over the past 12 months ended July 2023. Acuité believes that the working capital operations of the company will remain intense on account high inventory levels and debtor days.

Volatile raw material prices and tender based nature of operations impacting profitability
Most EPC projects undertaken by the society 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 (the ones with tenure more than 1 year) 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. ULCCS operates in infrastructural construction industry, which is highly competitive with presence of large number small, regional and large players. EPC projects executed by the company 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 company where the bidding can get aggressive. However, the Society is accredited by many departments of Government of Kerala and many projects are allocated without tendering process.