New Asian Construction Company
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January 05, 2018 New Asian Construction Company Summary of rated instruments Instrument* Rated Amount (Rs. crore) Rating Action Long-term Fund-based facilities 3.00 (earlier 7.00) [ICRA]B(Stable); upgraded from [ICRA]D Long-term Non fund-based facilities 8.00 (earlier 15.00) [ICRA]B(Stable); upgraded from [ICRA]D Unallocated limits 11.00 [ICRA]B(Stable)/[ICRA]A4; upgraded from [ICRA]D Total 22.00 *Instrument details are provided in Annexure-1 Rating action ICRA has upgraded the long-term rating to [ICRA]B (pronounced ICRA B) from [ICRA]D (pronounced ICRA D) assigned to the Rs. 3 crore (earlier Rs. 7.00 crore)1 fund based bank facility and Rs. 8.00 crore (earlier Rs. 15.00 crore) non-fund based bank facility of New Asian Construction Company (‘NACC’ or ‘the firm’)2. ICRA has also upgraded the long term rating to [ICRA]B and short term rating to [ICRA]A4 (pronounced ICRA A4) to the unallocated limits of Rs. 11.00 crore. The outlook on the long term rating is Stable. Rationale The ratings upgrade takes into account the regularisation of debt servicing obligations by NACC for the past five months. The ratings also derives comfort from the firm’s long track record of more than four decades in the construction industry and the strong outstanding order book of the firm translating to 17.52 times the revenues book during FY2017. The ratings are, however, constrained by the stretched liquidity position emanating from sluggishness in realisation of receivables and advances given to a group company, which limits its financial flexibility. ICRA also notes the execution related delays on the outstanding order book which are largely attributable to client-side factors; consequently the company’s ability to execute the order-book within budgeted time and cost parameters is critical. Moreover, the rating also remains constrained by the small scale of operations, the partnership nature of the entity, the high sectoral, geographical and client concentration risks, as 100% of the outstanding order book is concentrated in the irrigation and dam segment in the Ahmednagar District of Maharashtra, bagged from various divisions of the Godavari Marathwada Irrigation Development Corporation (GMIDC). Going forward, the ability of the firm to smoothly execute the orders in hand and achieve timely realisation of receivables to fulfill its debt servicing requirement will be the key rating sensitivities. 1 100 lakh = 1 crore = 10 million 2 For a complete rating scale and definitions, please refer to ICRA’s website (www.icra.in) or other ICRA rating publications. Outlook: Stable The stable outlook reflects ICRA’s expectation that NACC will continue to benefit from the extensive experience of its promoters and high order book position which provides revenue visibility in the near to medium term. The outlook may be revised to 'Positive' if substantial growth in revenue and profitability, and better working capital management, strengthens the financial risk profile. The outlook may be revised to 'Negative' if the execution of orders gets delayed and revenues and profitability are lower than expected, higher receivables and inventory levels stretch the working capital cycle and weakens liquidity. Key rating drivers Credit strengths Long track record in the construction sector, particularly in the execution of irrigation projects, along with technically qualified promoters - New Asian Construction Company is engaged in the construction of dams, power houses, pump houses, canals and bridges. The firm and the promoters have extensive experience of more than four decades in the civil construction industry. NACC has an established presence in the irrigation segment and primarily executes projects like dams and canal work, tunnel drilling or lift irrigation work, particularly in Maharashtra. At present, it is constructing a dam on the Pravara River, which is a tributary of the Godavari. Along with the dam, the firm is also constructing lift canal irrigation and tunnel projects within a radius of 50-60 km of the dam. Strong order book outstanding at Rs. 178.95 crore provides revenue visibility in the near to medium term - The outstanding order book of the company stood at Rs. 178.95 as on November 30, 2017 (compared to Rs. 203.21 crore) as on March 31, 2016 translating to 17.52 times the revenues booked during FY2017. However, the execution is slow moving for the outstanding order book on account of lack of funds with the concerned departments of GMIDC. A few of the orders are also running behind schedule and extensions of timeline have been received from the respective divisions. Going forward, the timely completion of orders without any cost over-runs will continue to remain crucial for the firm. Nevertheless, NACC is hedged against raw material price escalation risks on account of the price variation clauses provided in the contracts. Credit weaknesses Delays in debt servicing track record, despite the account having been regular in the recent past – The firm had been delaying in repayment of interest and overutilisation of the bank facilities availed following delays in collection of receivables and slow execution of the order book. However, from August 2017, the debt servicing obligations have been met in a timely manner supported by funding from promoters in the form of capital and interest free unsecured loans. Small scale of operations and partnership nature of entity - The company has been operating on a moderate scale at present. In FY2016, the firm has registered a year-over-year de-growth in revenues of ~18% to report an operating income (OI) of Rs. 29.66 crore. The decline in revenues is majorly because of stoppage of work on certain orders due to paucity of funds with the respective Government divisions. Operating income has declined significantly to Rs. 10.21 crore in FY2017, as work to the tune of Rs. 7.71 crore completed by the firm was not certified by the authorities due to lack of funds. Sluggishness in realisation of receivables resulting in stretched liquidity position in FY2017, necessitating increased utilisation of working capital limits and delaying payments to creditors - The liquidity position of the company has remained stretched owing to the high receivables outstanding as on March 31, 2017. This has led to full utilisation of the working capital limits and delayed payment to the creditors. However, funding from promoters in the form of capital of Rs. 10.39 crore and interest free unsecured loans to the tune of Rs. 3.50 crore in FY2017 has provided some comfort. Large corporate guarantee and advances given to group concern, New Asian Infrastructure Development Private Limited, which has a weak financial profile - At present an amount of Rs. 5.39 crore is outstanding towards the civil construction work undertaken for the group concern New Asian Infrastructure Development Private Limited (NAID), which has stretched the liquidity position of the firm further. NACC has also provided corporate guarantee to NAID. However, the guarantee was not invoked by the lender despite the delays in debt servicing by NAID. In addition, loans and advances of Rs. 18.39 crore have been provided to the partners by NACC, which has been routed to NAID for funding the hydro power project. High sectoral and client concentration risk with 100% of the order book comprising projects in the dams and irrigation segment from Godavari Marathwada Irrigation Development Corporation (GMIDC) - As on March 31, 2017, 100% of the outstanding order book consisted of irrigation and dam works, all concentrated in the Nilwande Village of Ahmednagar district in Maharashtra—exposing NACC to high segmental and geographic concentration risks. Moreover, the client concentration risk also remains high as the firm has bagged the dam and irrigation project from various divisions of (GMIDC). Analytical approach For arriving at the ratings, ICRA has applied its rating methodologies as indicated below. Links to applicable criteria Corporate Credit Rating – A Note on Methodology Rating Methodology for Construction Entities About the company The New Asian Construction Company (‘NACC’ or ‘the firm’) is a partnership firm established in 1967 to undertake construction of dams, power houses, pump houses, canals and bridges. NACC is registered with the Public Works Department (PWD) of Maharashtra in the A-1 category. The firm has an established presence in the irrigation segment and primarily executes projects like dams and canal work, tunnel drilling or lift irrigation work, particularly in Maharashtra. NACC is managed by Mr. Syed Abdur Rasheed and his two sons, Mr. Syed Abdur Zubair and Mr. Syed Abdur Umair. The group company, New Asian Infrastructure Development Private Limited (NAID), developed a 7MW hydro power project at the foot of the Nilwande Dam on the Pravara River in Maharashtra, on a Build, Operate and Transfer (BOT) basis. NAID was rated at [ICRA]B(Stable) in September 2017. Key Financial Indicators (Audited) Particulars FY2016 FY2017 Operating income (Crores) 29.66 10.21 PAT (Crores) 1.51 0.52 OPBDIT/ OI (%) 15.02% 38.04% RoCE (%) 13.60% 9.89% Total Debt/ TNW (times) 1.30 0.59 Total Debt/ OPBDITA (times) 3.37 3.40 Interest coverage (times) 2.09 1.51 NWC/ OI (%) -16% 35% OPBDITA: Operating Profit before Depreciation, Interest, Taxes and Amortisation; PAT: Profit after Tax; NWC: Net Working Capital; RoCE: Return on Capital employed; TNW: Tangible Net Worth Source: Financial statements of NACC and ICRA research In FY2017, NACC reported a net profit of Rs. 0.52 crore on an operating income of Rs. 10.21 crore, as compared to a net profit of Rs. 1.51 crore on an operating income of Rs. 29.66 crore during the previous year. Status of non-cooperation with previous CRA: Not applicable Any other information: Not applicable Rating history for last three years: Table: Chronology of Rating History for the Current Rating (FY2018) past 3 years Rated amount Date & Date & Date & S.