Rationale-Press Release Malhotra Constructions Private Limited February 05, 2018 Ratings Amount Facilities Rating1 Rating Action (Rs. crore) CARE B+; Stable Long-term Bank Facilities 3.00 (Single B Plus; Assigned Outlook: Stable) CARE A4 Short-term Bank Facilities 11.00 Assigned (A Four) 14.00 Total Facilities (Rs. Fourteen crore only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The ratings assigned to the bank facilities of Malhotra Constructions Private Limited (MCP) are constrained by its small and stable scale of operations with low net worth base, leveraged capital structure and working capital intensive nature of operations. The ratings are further constrained by fragmented nature of the construction sector and business risk associated with tender-based orders. The ratings, however, derive strength from experienced promoters in the construction industry, adequate order book position, moderate profitability margins & debt coverage indicators and positive outlook for construction industry Going forward, the ability of the company to successfully execute projects in time and recover contract proceeds, maintaining its profitability margins would remain the key rating sensitivities. Detailed description of the key rating drivers Key Rating Weaknesses Small and stable scale of operations with low net worth base: The company is a small regional player involved in executing construction contracts. The ability of the company to scale up to larger-sized contracts having better operating margins is constrained by its low net-worth base of Rs. 3.73 crore as on March 31, 2017 and total operating income of Rs. 14.43 crore in FY17 (refer to period April 01 to March 31). The small scale of operations in a fragmented industry limits the pricing power and benefits of economies of scale. Furthermore, the scale of operations of the company stood stable during FY16-FY17 period owing to absence of incremental orders from customers. Additionally, MCP reported total operating income of Rs. 9.90 crore in 9MFY18 (refer to period April 01 to March December 31, based on provisional results). With the low base of own funds, its operations are highly susceptible to any business shock, thereby limiting its ability to absorb losses or financial exigencies. Leveraged capital structure The capital structure of the company stood moderate with overall gearing ratio of 1.93x as on March 31, 2017. The same marginally improved from 1.96x as on March 31, 2016 mainly due to gradual repayment of term loans and repayment of unsecured loans amounting to Rs. 0.39 crore in FY17. Working capital intensive nature of operations: The company has working capital intensive nature of operations as reflected by almost full utilization of sanctioned fund based working capital borrowings for the last 12 months ended December, 2017. Also, the average operating cycle of the company stood elongated at 135 days for FY17 (PY: 165 days) 1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 CARE Ratings Limited Rationale-Press Release mainly due to high inventory period on account of maintenance of inventory at different sites to carry out execution smoothly. The company receives payment from the customers on percentage of completion basis. Nearly 90% of the bill amount raised by the company is received within 1-1.5 months while the remaining amount is received after competition of the contract. Furthermore, the main customers for the company are government bodies / departments and due to procedural delays, there is normally. Delay in realisation of funds. The same resulted in high average collection period for FY15. The company receives average credit period of around two months from its suppliers of raw materials, however, payment period stood high for FY17 due to higher stock of raw material purchased in March, 2017 for orders to be executed going ahead. Consequently, the average inventory period stood high at 190 days for FY17 (PY: 179 days) The working capital limit stood fully utilised for the last 12 months period ended December, 2017. Fragmented nature of the construction sector albeit improving growth prospects: The construction sector in India is highly fragmented with a large number of small and mid-sized players. Additionally, continued increase in execution challenges including regulatory clearances and elongated working capital cycle due to longer gestation period of the projects collectively put pressure on the credit profile of the players. Despite these road blocks faced by the industry, the sector is expected to grow, given huge economic significance associated with it and rising investor interest. Also, the outlook for Indian construction sector continues to be stable in the medium to long-term on account of increased thrust of Government on development of infrastructure to support economic growth. Business risk associated with tender-based orders The company majorly undertakes government projects, which are awarded through the tender-based system. The tender-based business is characterized by intense competition and the growth of the business depends on its ability to successfully bid for the tenders and emerge as the lowest bidder. Hence, going forward, due to increasing level of competition and aggressive bidding, the profits margins are likely to be under pressure in the medium term. Key Rating Strengths Experienced promoters in the construction industry: MCP is engaged in the civil construction work and is managed by Mr. Rajesh Malhotra, Mr. Vinay Malhotra and Mrs. Manisha Malhotra. Mr. Rajesh Malhotra has around three and a half decades of experience in construction industry gained through his association with MCP and Malhotra Constructions (operations discontinued). Whereas, Mrs. Manisha Malhotra and Mr. Kusum Vinay Malhotra have experience of around a decade in the construction industry. Apart from this, the promoters are engaged in another group concern namely, Kay Vee Infra Projects Private Limited (KVI), incorporated in 2010 and engaged in similar business. Additionally, the promoters are supported by a team of experienced and qualified professionals having varied experience in the technical, finance and marketing fields. Adequate order book position: The company has a comfortable order book position with outstanding order book of Rs. 78.00 crore as on January 25, 2018, to be executed in next 24 months. The current order book of the company is ~5.40x times of the revenue for FY17. The order book of the company comprises orders in relatively early stages of execution, which provides sufficient visibility on the revenue stream. The order book of the company is also well diversified. However, the company ability to execute the contracts in timely manner is largely dependent on its operational efficiency and timely payments received from customers. Moderate profitability margins and debt coverage indicators: The profitability margins marked by PBILDT margin and PAT margin of the company stood moderate at 13.20% and 2.25%, respectively, in FY17. The PBILDT margin improved from 12.47% in FY16 mainly due to execution of contracts having better margins. However, the PAT margin has remained stable at around 2.25% in last 2 financial years (FY16 and FY17) mainly due to increase in interest and depreciation costs. 2 CARE Ratings Limited Rationale-Press Release Furthermore, the interest coverage ratio remained moderated at 1.58x in FY17 however, the total debt to GCA ratio stood weak at 13.60x for FY17. The total debt to GCA deteriorated from 12.79x for FY16 due to increase in debt levels. Analytical approach: Standalone Applicable Criteria CARE’s Criteria on assigning Outlook to Credit Ratings CARE’s Policy on Default Recognition Rating Methodology - Service Sector Companies Financial ratios –Non-Financial Sector Criteria for Short Term Instruments About the Company Malhotra Constructions Private Limited (MCP) was incorporated in 1989 as a private limited company and is currently being managed by Mr. Rajesh Malhotra, Mr. Vinay Malhotra and Mrs. Manisha Malotra. MCP is engaged in civil construction work for public sector undertakings, central government and state government departments in Uttar Pradesh and Haryana which includes construction of buildings like hospitals, educational institutes, bus terminals, housing board flats, mini secretariats etc. The company is registered as a Class ‘A’ civil contractor with Public Works Department (PWD) of Haryana, U.P. State Construction and Infrastructure Development Corporation Limited (UPSCIDC) and Defence Research and Development Organisation (DRDO). Brief Financials (Rs. crore) FY16 (A) FY17 (A) Total operating income 14.47 14.43 PBILDT 1.80 1.90 PAT 0.33 0.32 Overall gearing (times) 0.69 1.17 Interest coverage (times) 1.59 1.58 A: Audited Status of non-cooperation with previous CRA: Not Applicable Any other information: Not Applicable Rating History for last three years: Please refer Annexure-2 Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to [email protected] for any clarifications. Analyst Contact: Name: Mr Achin Nirwani Tel: 01145-333228 Email: [email protected] About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the