RATING RATIONALE 7 Sept 2020 BGR Energy Systems Ltd

RATING RATIONALE 7 Sept 2020 BGR Energy Systems Ltd.

Brickwork Ratings revises the ratings for the existing/proposed Bank Loan Facilities aggregating to Rs.8428.00 Crs of BGR Energy Systems Ltd.

Particulars Amount Rating* (₹ Cr) Facilities/ Tenure Instrument** Previous Previous Present Present (Aug 2019)

Fund Based – CC 2309.00 2188.00 BWR BBB BWR BBB+ Long Term (Stable) Fund Based – CC (Stable) 800.00 800.00 Downgraded (Proposed)

Non-Fund Based – 4720.00^ 4240.00^ LC/BG BWR A3+ Short Term BWR A2 Downgraded Non-Fund Based – 1200.00 1200.00 LC/BG (Proposed)

INR Eight Thousand Four Hundred and Total 9,029.00 8428.00 Twenty-Eight Crores Only *Please refer to BWR website www.brickworkratings.com/ for the definition of the ratings ** Details of Bank Loan facilities are provided in Annexures-I ^ Includes LC limits which is a sub limit of fund-based facility (CC) of Rs.315.00 Crs.

RATING ACTION / OUTLOOK

The rating revision, inter alia, factors the current order book position and its execution and operational difficulties arising out of the current pandemic scenario, high working capital requirements and leverage position, low debt protection metrics and coverage indicators. Furthermore, receivables remain high especially delays in receipt of margin money from its nearing completion projects, though it has reduced as compared to last year, low operating and net profitability margins, where EBITDA has fallen by 45.59% during FY20, whereas interest servicing remained high and uncertainty of new order book remains key sensitivities. As per Brickwork Ratings (BWR) estimates, the revenues are expected to decrease during the current year as the order execution activities of current orders remains weak on account of the lockdown during April-May 2020, labour migration and its mobilization, and pandemic scenario.

The rating continues to factor the experience of promoters, established position in the BTG (Boiler, Turbine and Generator) and BOP (Balance of Plant) segments of power sector, long www.brickworkratings.com Page 1 of 9

existing operational track record, current order book position of Rs.8000 Crs, which can be sustainable for next 2-2.5 years, moving more in to Water and Transmission & Distribution (T&D) segments, which comes under environmental engineering division (currently stood at 7.32% of total order book), and its execution capabilities of large and long-term power projects (BOP) which has demonstrated by the company over the years. Furthermore, BGR Energy Systems Ltd. (BGRESL or the company) has moderate debt to equity ratio and repaid its term loans during FY20 and currently enjoying only project specific working capital limits, which the company is reducing on a year-on-year basis and non-fund- based facilities from banks. It has generated low cash accruals of Rs.48.03 Crs as of FY20 and recovered retention money of Rs.196.69 Crs from its previous and existing projects which was utilised to meet debt obligations and reduce liability. The company is expecting to receive about Rs.400 Crs during FY21 from release of retention money from completed projects. This can be utilised to meet any shortfalls in operational cash flows to meet debt obligations during FY21.

However, the rating is constrained by lower EBITDA and profitability in FY20, compared with the projected financials, exposure to counterparty credit risk as TANGEDCO currently has weak finances, high receivables of Rs.3326.96 Crs as on FY20 (of which Rs.1037.93 Crs as of FY20, are from TANGEDCO, reduced from Rs.1115.31 Crs as of FY19) including retention money of Rs.2432,52 Crs and high dependency on working capital requirement with high utilization levels. However, receivables have reduced from Rs.4040.06 Crs, including retention money of Rs.2629.21 Crs as of FY19. Further, as per company receivables are expected to reduce during H2 FY21. Furthermore, delays in project execution of its current order book is expected to increase the volatility of revenue and margin for the company during H1 FY21.

The outlook for the company remained Stable, considering the expected realization of retention money from its completed projects, on-going project execution delays arising out of the current pandemic situation, whereby project execution may be extended by three to six months, and will result in delays in completion of its order book during FY21. Furthermore, building up new order book will take time till the situation normalizes, which the company is expecting during Q3 & Q4 of FY21. It’s EBITDA expected to remain low in FY21, due to the high operational expenditure on account of the lockdown in April-May 2020 and current economic slowdown due to COVID-19, availing moratorium of interest on working capital limits, which might have impact on cash accrual generation and profitability during H2 FY21. The company’s ability to improve revenues and profitability margins, recovered margin/retention money for its completed projects, improve and diversified its order book position and improve capital structure given the current scenario for the power sector remain key rating sensitivities.

KEY RATING DRIVERS

Credit Strengths: Experienced and established promoters: The Company was started by Late Mr B. G. Raghupathy, after the demise of Mr B. G. Raghupathy in 2013, Ms Sasikala Raghupathy was appointed as chairperson of the Company. Mr Arjun Raghupahty, S/o Mr B. G. Raghupathy www.brickworkratings.com Page 2 of 9

is the Managing Director (MD) & Chief Executive Officer (CEO) of the Company and Mrs Swarnamughi Karthik, D/o Mr B G Raghupathy is a Director (Corporate Strategy). Further, Mr V. R. Mahadevan who was the Joint Managing Director has been in the Company for more than two decades, has resigned from the Board and continues as an Advisor. Mr. A Swaminathan who was also Director on the Board, but now continuing as a Special Director for Engineering & Construction Business. The Board is assisted by well qualified and experienced teams for the various divisions.

Established player in the power projects segment: It is an established player in India for execution of Balance of Plant (BOP) and Boiler, Turbine & Generator (BTG) projects in the power sector. Over the years, the Company has developed expertise in in-house design and engineering capabilities which has helped a long standing relationship with Public Sector Undertakings (National Thermal Power Corporation Ltd. (NTPC), Neyveli Uttar Pradesh Power Ltd.(NUPPL), Maharashtra State Power Generation Company, Tamil Nadu Generation and Distribution Corporation Ltd. (TANGEDCO) etc.). However, due to the economic situation and stress in the power sector, the company is in the process of diversifying from power (which accounts ~71% of the total order book as of FY20) to other segments especially in Water and T&D. Already the company has increased work orders from Water, Environmental and T&D projects (at present stood at 7.32%). The company is also exploring possibilities in road projects which will result in reduced dependence from revenue from power projects.

Order book position: At present, the company is having an orderbook of ~Rs.8000 Crs, as of July 2020, which comprise of Power project division (71%), Electric Project Division (18.11%), Environmental engineering division (7.32%), Air Fin Cooler division (1.94%) and rest is from Oil & Gas equipment division. In the power projects division, the majority of the projects are from NTPC, MUNL, TANGEDCO and NUPPL. Some of its projects with NTPC, MUNL and OPGCL are nearing completion and expected to be completed within the next 6-12 months.

Credit Risks:

Moderate financial profile: The company’s financial profile has marginally deteriorated during FY20, with generation of low EBITDA of Rs.206.86 Crs as against interest servicing of Rs.277.47 Crs, however, it has generated positive cash accruals of Rs.48.30 Crs due to sale of investment, deferred tax and receipt of retention money from its completed projects. However, on a standalone basis, debt equity ratio has improved to 1.51 as on FY20 from 1.61x as on FY19, mainly due to term loan repayments. However, other indicators remain low, with ISCR of 0.75x mainly due to high interest servicing and current ratio of 1.00x as on FY20. However, the company has paid off its entire term debt and reduced its working capital limits during FY20. Its tangible net-worth stood at Rs.1414.90 Crs as on FY20, compared with Rs.1403.09 Crs as on FY19. Further it has non-current investments of Rs.359.35 Crs as on FY20 in subsidiary companies in energy business and associates and joint ventures.

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Dependence on power sector: The power sector contributed to 71% of the total order book as of FY20, which has come down from 85% as of FY17. The Company's order book is primarily concentrated in the power sector to the extent of 71% as of FY20. The sector has been facing several issues like reduced PLFs and liquidity stress due to delayed receivables from Discoms. The power industry contributes to ~17% of NPAs in the banking sector due to which financing to the sector has slowed down. Therefore, the new investments in the sector have slowed down considerably, which has resulted in high receivables to the company. The Company has diversified its operations to other divisions like water, environmental, T&D, road etc. However, the build-up of work orders from other sectors remained at low and accounts for ~29% of the total orderbook as of FY20 and the power sector continues to contribute substantially to the order book.

High receivables, retention money and Counterparty risk: The company is dealing with mainly PSUs such as NTPC, NUPPL, MUNL, APGENCO, TANGEDCO, and OPGCL etc. However, its receivables remain at a high level of Rs.3326.96 Crs as of FY20 from Rs.4040.06 Crs as on FY19, resulting high days receivables, which decreased to 154 days as on FY20 from 177 days as on FY19, after adjusting with retention money, but remained higher. At present retention money stood at Rs.2432.52 Crs under various projects, which came down from Rs.2629.21 Crs as of FY19. Of these receivables of Rs.1037.93 Crs are from TANGEDCO only and Rs.1106.40 Crs are of non-current in nature as of FY20, which came down from Rs.1126.27 Crs as of FY19. Further, as per company receivables are expected to reduce during H2 FY21. However, the company is persistently following up with the customers for return of the BG for the completed projects to close the liability.

Impact of Covid-19 pandemic on operational performance during FY20 and Q1 FY21: The company operational performance have severely impacted due to low execution activities of current orders on account of the lockdown during April-May 2020, labour migration and its mobilization, and pandemic scenario during FY20 and Q1 FY21. Where the company has witnessed a sharp revenue drop to Rs.279.38 Crs in Q4 FY20 from Rs.968.27 Crs in Q4 FY19 and resulted in operation losses. However, operational activities have started during the current year, but considering varies lockdown position in various states added woes to the company. At present the company is working with 50-60% of the required labour. As per BWR estimates, delays in project execution of the current order book, which is expected to increase the volatility of revenue and margin for the company during H1 FY21, in line with Q4 FY20. However, things have started improving after easing the lockdown situation in the month of Jun 2020 onwards.

ANALYTICAL APPROACH AND APPLICABLE RATING CRITERIA For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria below (hyperlinks provided at the end of this rationale). BWR has taken a consolidated view on the company’s operational and financial performance, promoter’s contribution and current order book position and its execution while arriving at the rating.

RATING SENSITIVITIES Going forward, the Company’s ability to obtain adequate orders in the lights of stiff competition due to limited projects in the market and current market uncertain condition due www.brickworkratings.com Page 4 of 9

to present pandemic, timely receipt of the receivable from its clients, retention money from its completed and ongoing projects, especially from TANGEDCO and other PSU customers, ensuring timely implementation of current orderbook over the next two to three years and the generation of adequate operating and net profit from the power segment and moving in to more diversified segments will be key monitorables and sensitivities for the company.

Positive: The outlook may be revised to Positive, if the order execution improves substantially, along with timely receipt of receivables from customers and realisation of retention money, received new orders from customers and there is a substantial improvement in the company’s financial profile and debt servicing metrics.

Negative: The outlook may be revised to Negative, if the company unable to achieve optimum project execution levels, and receipt of adequate retention money from its customers and improves its receivables position, generates lower than adequate EBITDA to meet its interest servicing obligations and increase reliance on high working capital requirements, low visibility of new project pipeline, lower revenues from power project execution, and there is deterioration or no improvement in debt coverage metrics.

LIQUIDITY: Adequate Stretched liquidity characterized by EBITDA generation of Rs.206.86 Crs as against interest payment of Rs.277.47 Crs as of FY20. However the company is expected to receive Rs.400 Crs out of the retention money for old projects which would be utilised to meet any shortfalls in EBITDA from operations for meeting its interest obligations, Long-term borrowings (Including CPLTD) as of FY20) during FY21. Its working capital limits stood at Rs.2129.96 Crs of FY20 as against operating income of Rs.2691.97 Crs during FY20. Furthermore, it has generated cash accruals of Rs.48.30 Crs as of FY20, mainly due to sale of investment of Rs.39.10 Crs and deferred tax of Rs.84.79 Crs as of FY20. Receivables as in FY20 are at Rs.3326.96 Crs, however, it includes retention money from various projects of Rs.2432.52 Crs. As of FY20, its Cash and cash equivalents stands at Rs.361.53 Crs, including lien marked fixed deposits of Rs.335.46 Crs as a margin money with the banks.

COMPANY PROFILE BGR Energy Systems Limited (BESL) is a listed company and was incorporated in 1985 as GEA Energy System India Pvt ltd, as a joint venture between GEA Energie technik GmbH, Germany and the Promoter, Mr B G Raghupathy to manufacture and sell Online Condenser Tube Cleaning Systems, Debris Filters and Rubber Cleaning Balls used in Thermal and Nuclear Power Plants. In 1993, BGR family became the sole shareholders of the Company as a joint venture partner exited the business. During 2007, erstwhile GEA Energy System (India) Ltd. was renamed to BGR Energy Systems Ltd.

BGRESL business comprises of Five divisions viz., Power Projects division (71.16% of total projects), Oil & Gas Equipment Division (1.48%), Air Fin cooler division (1.94%), Environmental Engineering division (7.32%) and Electrical Projects Division (18.11%). Majority of the projects of the company are in the BTG (Boiler, Turbine & Generator) and BOP (Balance of Plant) segments for the power sector. The remaining revenues are from T&D, Water, and EPC etc. www.brickworkratings.com Page 5 of 9

KEY FINANCIAL INDICATORS (in INR Crs) During FY20, on a standalone basis, the Company has reported a fall in operating income by 16.64% to Rs.2,691.97 Crs from Rs.3,229.31 Crs during FY19. This was mainly due to the current pandemic situation and lockdown during Mar’20. However, EBITDA has fallen ~45.59% during FY20 to Rs.206.86 Crs from Rs.380.20 Crs in FY19 mainly due to high operating expenses. Similarly, PAT has declined to the extent of Rs.13.52 Crs in FY20 from Rs.29.05 Crs in FY19. However, the Company is able to generate cash accruals of Rs.48.30 Crs as of FY20 as compared to Rs.56.88 Crs as of FY19. Total debt stood at Rs.2143.31 Crs as on FY20, which is entirely working capital in nature. Its tangible net worth slightly improved to Rs.1414.90 Crs as on FY20 from Rs.1403.09 Crs as on FY19 on account of profits during FY20.

FINANCIAL INDICATORS – ISSUER (Standalone) Key Parameters Units FY19 FY20 Result Type Audited Audited Operating Income Rs. Crs 3229.31 2691.97 EBITDA Rs. Crs 380.20 206.86 PAT Rs. Crs 29.05 13.52 Tangible Net-worth Rs. Crs 1403.09 1414.90 D: E Ratio Times 1.61 1.51 Current Ratio Times 1.02 1.00

KEY COVENANTS OF THE INSTRUMENT/FACILITY RATED The terms of the sanction of loans from all banks and financial institutions include standard covenants normally stipulated for such facilities by banks/FIs. The WC facilities from banks are secured by hypothecation of inventories, trade receivables, movable current assets of the respective contracts. The Company has availed contract specific working capital loans from various banks.

NON-COOPERATION WITH PREVIOUS RATING AGENCY IF ANY: NA

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RATING HISTORY FOR THE PREVIOUS THREE YEARS [including withdrawal and suspended]:

S. No. Instrument Current Rating Rating History Type Amount 2019 2018 2017 (Long NCD/ Outstandin Term/ Rating Bank Loan g Short Date Rating Date Rating Date Rating ( Crs) Term) ₹ Fund 1. Based – 2188.00 BWR BBB BWR WC/CC BWR BWR Long (Stable) 27 Aug 31 Dec A- 11 Aug BBB+ A- Fund Term Downgrad 2019 2018 (Negativ 2017 Based – (Stable) (Stable) 2. 800.00 ed e) CC (Proposed) BWR 30 Jul A- 2018 (Stable) Non-Fund 3. Based – 4240.00^ LC/BG BWR A3+ Short 27 Aug 31 Dec BWR 11 Aug BWR Downgrad BWR A2 Non-Fund Term 2019 2018 A2+ 2017 A2+ Based – ed 4. 1200.00 LC/BG (Proposed) 30 Jul BWR

2018 A2+ Total 8428.00 INR Eight Thousand Four Hundred and Twenty-Eight Crores only ^ Includes LC limits which is a sub limit of fund-based facility (CC) of Rs.315.00 Crs.

COMPLEXITY LEVELS OF THE INSTRUMENTS

For more information, visit www.brickworkratings.com/download/ComplexityLevels.pdf Hyperlink/Reference to applicable Criteria

● General Criteria ● Approach to Financial Ratios ● Infrastructure Sector

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Analytical Contacts Investor and Media Relations Vipula Sharma Liena Thakur Director - Ratings Assistant Vice President - Corporate B: +91 80 4040 9940 Communications [email protected] +91 84339 94686 [email protected] Mukesh Mahor Senior Manager - Ratings B: +91 80 4040 9940 Ext :333 [email protected]

BGR Energy Systems Ltd. (BGRESL)

ANNEXURE I th Details of Bank Facilities rated by BWR (As on 30 Jun 2020) Sl. Type of Long Term Short Term Total Name of the Bank No. Facilities (₹ Crs) (₹ Crs) (₹ Crs) CC LC BG

1. SBI Bank Loan 931.00 65.00 (175*) 1588.00 2584.00 Canara Bank 2. Bank Loan 292.00 0.00 (65*) 378.00 670.00 (Syndicate Bank) 3. PNB Bank Loan 165.00 0.00 277.00 442.00

4. IDBI Bank Loan 117.00 0.00 429.00 546.00

5. BOI Bank Loan 89.00 0.00 (10*) 200.00 289.00

6. Central Bank of India Bank Loan 69.00 0.00 158.00 227.00

7. Axis Bank Bank Loan 60.00 0.00 156.00 216.00

8. ICICI Bank Bank Loan 75.00 0.00 135.00 210.00

9. Indian Bank Bank Loan 235.00 30.00 (30*) 387.00 652.00

10. Union Bank of India Bank Loan 75.00 0.00 (25*) 257.00 332.00 Bank of Baroda 11. Bank Loan 65.00 0.00 (10*) 35.00 100.00 (Vijaya Bank) 12. Exim Bank Bank Loan 0.00 0.00 100.00 100.00 Kotak Mahindra 13. Bank Loan 15.00 0.00 35.00 50.00 Bank 14. KVB Bank Loan 0.00 0.00 10.00 10.00

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95.00 Total – Sanctioned 2188.00 4145.00 6428.00 (315*) Proposed/Un-tied Bank Loan 800.00 500.00 700.00 2000.00 Portion TOTAL 8428.00 ^ Includes LC limits which is a sub limit of fund-based facility (CC) of Rs.315.00 Crs.

Total INR Eight Thousand Four Hundred and Twenty-Eight Crores only.

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About Brickwork Ratings : Brickwork Ratings (BWR), a Securities and Exchange Board of India [SEBI] registered Credit Rating Agency and accredited by Reserve Bank of India [RBI], offers credit ratings of Bank Loan, Non- convertible / convertible / partially convertible debentures and other capital market instruments and bonds, Commercial Paper, perpetual bonds, asset-backed and mortgage-backed securities, partial guarantees and other structured / credit enhanced debt instruments, Security Receipts, Securitisation Products, Municipal Bonds, etc. BWR has rated over 11,400 medium and large corporates and financial institutions’ instruments. BWR has also rated NGOs, Educational Institutions, Hospitals, Real Estate Developers, Urban Local Bodies and Municipal Corporations. BWR has Canara Bank, a leading public sector bank, as one of the promoters and strategic partners. BWR has its corporate office in Bengaluru and a country-wide presence with its offices in Ahmedabad, Chandigarh, Chennai, Hyderabad, Kolkata, Mumbai and New Delhi along with representatives in 150+ locations.

DISCLAIMER Brickwork Ratings (BWR) has assigned the rating based on the information obtained from the issuer and other reliable sources, which are deemed to be accurate. BWR has taken considerable steps to avoid any data distortion; however, it does not examine the precision or completeness of the information obtained. And hence, the information in this report is presented “as is” without any express or implied warranty of any kind. BWR does not make any representation in respect to the truth or accuracy of any such information. The rating assigned by BWR should be treated as an opinion rather than a recommendation to buy, sell or hold the rated instrument and BWR shall not be liable for any losses incurred by users from any use of this report or its contents. BWR has the right to change, suspend or withdraw the ratings at any time for any reasons.