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. www.brickworkratings.com Page 3 of 9 ​ ​ ​ 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.