RATING RATIONALE 05 Mar 2021 BGR Energy Systems Ltd. Brickwork Ratings revises the ratings for the Bank Loan Facilities aggregating to Rs. 8305.00 Crs of BGR Energy Systems Ltd. Particulars Amount ( Cr) Rating* ​ ​ ₹ Facilities/ Tenure Previous Instrument** Previous Present Present (Sep 2020) Fund Based Cash Credit Existing 2188.00 2111.00 BWR BBB BWR BBB Long Term (Negative) (Stable) Cash Credit – 800.00 800.00 Reaffirmation with Proposed change in Outlook Non-fund Based Letter of Credit 95.00 85.00 BWR A3 Bank Guarantee 4145.00 4109.00 Short Term BWR A3+ Downgrade LC/BG Proposed 1200.00 1200.00 INR Eight Thousand Three Hundred and Five Total 8428.00 8305.00 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 ​ RATING ACTION / OUTLOOK The change in outlook and revision of short term rating has taken into account slow project execution rate during the 9M FY21 due to COVID related disruptions leading to significant fall in revenue and incurrence of losses. The rating continues to factor the experience of promoters, company’s established market position in the BTG (Boiler, Turbine and Generator) and BOP (Balance of Plant) segments of power sector with long operational track record; order book position of Rs.7356 Crs at the end of Dec’20, which can be sustainable for next 2-3 years; its execution capabilities of large and long-term power projects (BOP) which has been demonstrated by the company over the years. Furthermore, BGR Energy Systems Ltd. (BESL or the company) has moderate debt to equity ratio and repaid its term loans during FY20 and currently enjoys only project specific working capital limits. However, the rating is constrained by lower operating income and losses during 9M FY 21 because of slow project execution rate due to COVID related disruptions, compared with the projected financials;; high receivables of Rs.3326.97 Crs as on FY20 (of which Rs.1037.93 www.brickworkratings.com Page 1 of 8 ​ ​ ​ Crs as of FY20, are from TANGEDCO, reduced from Rs.1115.31 Crs as of FY19) and high dependency on working capital requirement with high utilization levels. However, receivables have reduced from Rs. 3326.97 Crs as on FY20 to Rs. 2654.72 Cr at the end of Dec’20. The outlook for the company has been revised from Stable to Negative, considering the on-going project execution delays arising out of the current pandemic situation leading to sharp fall in operating income with 9M FY21 figures nearly 1/3rd of 9M FY20 figure. Furthermore, addition of new orders have been muted with only Rs. 86.84 Cr of new orders added in the last 9 months. It’s Operating profit is expected to be low or negative and expected to incur net losses during FY 21. The outlook will be revised to Stable if project execution rate improves leading to improvement in revenues and profitability. Also realisation of receivables, recovery of margin/retention money, improvement in order book position and improvement in capital structure remain key rating sensitivities. KEY RATING DRIVERS Credit Strengths: Experienced promoters and established market position: 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 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). The Board is assisted by well qualified and experienced teams for the various divisions. The company’s business comprises of five divisions viz., Power Projects division (72% of total orderbook), Oil & Gas Equipment Division (0.78%), Air Fin cooler division (2.46%), Environmental Engineering division (5.28%) and Electrical Projects Division (18.53%). Majority of the projects of the company are in the BTG (Boiler, Turbine & Generator) and BOP (Balance of Plant) segments in the Power Project Division. The remaining revenues are from T&D, Water, and EPC etc. 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 7-8%). The company is also exploring possibilities in road projects which will result in reduced dependence from revenue from power projects. Healthy order book position: At the start of FY 21, the company had a total order book position of Rs. 8006.61 Crs. During the 9M FY 21, only Rs. 86.84 Cr of new orders have been added and it has executed order book of Rs. 737.03 Cr with net order book position at the end of 31 Dec 2020 was at Rs. www.brickworkratings.com Page 2 of 8 ​ ​ ​ 7356.42 Crs which is around 2.5-3x of FY 20 annual operating income. The company is further evaluating Rs. 2650 Cr worth of orders for bidding in the coming 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. 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. Other indicators remain low, with ISCR at 0.75x mainly due to high interest servicing and current ratio of 1.00x at the end of 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. During 9MFY 21, the company has booked a total operating income of Rs. 758.88 Cr, operating loss of Rs. 188.85 Cr and net loss of Rs. 300.19 Cr. Operating losses are due to unavoidable fixed cost components in the operating expenses. However, on a quarterly basis, the performance has been improving. Due to COVID pandemic, there were supply chain disruptions and stoppage of work at project sites resulting in only Rs. 123 Cr of operating income in Q1 FY 21. With gradual restoration of normalcy at project sites, Q2 FY 21 operating income more than doubled compared to Q1FY 21.The pace of execution has increased post monsoon and in Q3 FY 21, there have been 33% increase in operating income compared Q2FY21.Operating losses also came down in Q3 compared to Q2. High dependence on power sector: The power sector has a large share of the total order book with 71% as of Dec’20, though it has come down from 85% in FY17. 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. 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 Dec’20. 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. At the end of Mar’20, the receivable position was at Rs.3326.97 Crs, out of which Rs.1037.93 Crs were from TANGEDCO only and Rs.1106.40 Crs were of non-current nature. At the end of Dec’20, the receivables have come down to Rs. 2654.72 Cr, out of which Rs. 531.80 Cr are non-current in nature. The receivables include retention money with the clients. At the end of Dec’20, the retention money portion was Rs.1359 Cr, out of which Rs.545 Cr were from completed projects. 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). www.brickworkratings.com Page 3 of 8 ​ ​ ​ RATING SENSITIVITIES Upward Factors: ● Improvement in order execution rate, timely realization of receivable and retention money ● Increase in order book position, improvement in company’s financial profile Negative Factors: ● Inability to improve order execution rate, revenue and profitability falls short of projection ● Low visibility of project pipeline, delay in receipt of retention money, increase in receivable days leading to deterioration in working capital cycle. ● Deterioration in debt servicing indicators due to losses LIQUIDITY: Adequate Adequate liquidity position marked by no term liability and a moderate cash balance of Rs. 25.81 Crore as on Mar’20.