­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 FY2024. 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.

Strong Order Book position
ULCCS as on September 30, 2024 has order book worth Rs.5028.90 Cr. Rs.4052 Cr. to be completed in 24-30 months providing healthy revenue visibility over the medium term. Further to this ULCCS received new order worth Rs.280Cr in November, 2024. ULCCS bids for a wide variety of projects and has a bidding success ratio of 70 percent but majority of the projects have small ticket size (90 per cent of the projects in hand had tender value below Rs 25.00 Cr. amounting to ~Rs 1780 Cr.) Government of Kerala has appointed ULCCS as one of the Accredited Agency in certain departments for execution of projects without tendering procedure. This include Finance Department, Local Self Government Department, Tourism Department, Labour Department, Co-operation Department and MLA works (For projects completed under discretionary spending of MLAs).

Access to funding from quasi government bodies and public in form of Fixed deposits:
The Society receives large amounts of funding in form of fixed deposits and project support fund from Kerala government. ULCCS currently has FD’s of Rs 1786.23 Cr. from Primary Agriculture credit cooperative societies (PACS) as on March 31, 2024. The society also had received short term deposits Rs.622.89 Cr. from general public as on March 31, 2024 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.

Improvement in profitability albeit decline in revenue:
ULCCS’s revenue declined by 16 percent to Rs.2011.42 Cr. in FY2024 from Rs.2398.23 Cr. in FY2023, driven by lower segmental revenue, particularly in roads and buildings segments. Slower execution in the ongoing road projects in Talapaddy – chengala region, due to rains resulted in decline in revenue by 24 percent and 24.5 percent respectively in road and buildings segments. In the H1FY2025, ULCCS has registered revenue of Rs.960.30 Cr. and expected to close the year in the range of Rs.2050-2150 Cr. aided by Rs.5028.90 Cr. outstanding order book. However, the operating profit margins have improved to 20.37 percent in FY2024 from 15.71 percent in FY2023. The improvement in operating profit is on account of execution of works which yielded better margins and lower subcontracting 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 extremely thin in the range of 0.20-0.25 percent. Acuite expects the revenue of ULCCS to show a steady improvement owing to the presence of strong order book.

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.642.40 Cr. as on March 31, 2024 as compared to Rs.605.62 Cr. as on March 31, 2023. Improvement in net worth is mainly due to additions in the revaluation reserves by Rs.32.18 Cr. during the year. The leverage structure of the society is marked by high gearing and high total outside liabilities to tangible net worth (TOL/TNW) which stood at 6.34 times and 7.42 times respectively, as on March 31, 2024 as compared to 6.26 times and 7.78 times respectively as on March 31, 2023. Marginal deterioration in leverage indicators is due to increase in overall debt levels to Rs.4070.37 Cr. as on March 31, 2024 compared to Rs.3791.84 Cr. The debt protection metrics are weak with interest coverage ratio and debt service coverage ratio at 1.12 times and 0.38 times as on March 31, 2024 respectively as against 1.14 times and 0.28 times as on March 31, 2023 respectively. Despite an increase in total debt, debt to EBITDA improved marginally to 9.85 times as on March 31, 2024 compared to 9.96 times as on March 31, 2023, due to increase in operating profit. DSCR is low primarily due to the high portion of short term deposits collected by ULCCS from general public. As per discussions with the management, the interest accrued and 90 per cent of the principal 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 nature of operations:
The society 's operations are working capital intensive in nature as reflected by its Gross Current Asset (GCA) days of 685 days during FY2024 compared to 575 days in FY2023. The stretch in GCA days is due to high debtor and inventory days given the nature of its operations. The GCA underpins the high inventory levels of 205 days and high debtor days of 1120 days during FY2024. The high inventory levels are on account of high amount of work in progress. Additionally, the high proportion of unbilled revenue in form of other currents assets has further elongated the GCA days in FY2024. The society also maintains large amount of inventory primarily due to the high number of projects handled resulting in high working capital utilization. The fund based working capital limits highly utilized at an average of about ~99 percent over the past 12 months ended October 2024. Acuité believes that the working capital operations of the company will remain intense on account high inventory levels and debtor days.