Arun Excello Constructions LLP

Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs. 135.15 Crs. of Arun Excello Constructions LLP (AECLLP or "The Firm")

Particulars

Facilities**	Amount(Rs.Crs.)	Tenure	Rating#
Fund Based	108.15	Long Term	BWR BBB - /Stable Assignment
Non Fund Based	27.00	Short Term	BWR A3 Assignment
Grand Total	135.15	(Rupees One Hundred Thirty Five Crores and Fifteen lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure RATING ACTION / OUTLOOK

BWR has assigned a long-term rating of ‘BWR BBB-/Stable’ to the fund based facility of Rs.108.15 crores and a short-term rating of ‘BWR A3’ to the non fund based bank facility of Rs. 27 crores of AECLLP. The rating assignment factors in the diversified business operations, extensive experience of the partners in the real estate and civil construction sector, improved pace of construction & sales velocity along with the favorable location of the ongoing real estate projects and improved performance of the hospitality segment supported by an overall moderate credit risk profile and adequate liquidity. The strengths are offset on account of the working capital intensive operation in the EPC segment leading to high working capital limits utilization, salability risk of projects under implementation, geographical concentration risk, intense competition and risk associated with the cyclicality of the real estate sector.

BWR believes that AECLLP's business risk profile will be maintained over the medium term. The 'Stable' outlook indicates a low likelihood of rating change over the medium term.

KEY RATING DRIVERS

Credit Strengths:

Extensive Management Experience :
The LLP is a part of the Arun Excello Group which is into operations for over 35 years and has more than three decades of experience in the execution of residential and EPC projects. The operations of the firm are managed by Mr. P Suresh, who is also the group’s Managing Director and has more than three decades of experience in the construction business. Further, the other partners of the firm viz. Mr. S. Rajaji, Mr. A.M. Sundar, and Mr P. Karthikeyan are adequately qualified and possess relevant industry experience. The firm manages end-to-end work including land procurement, designing, execution/construction, and marketing to sales. An in-house team of designers, engineers, architects, and other professionals for smooth execution of the projects continues to support the overall business profile of the firm.
Improved pace of construction and sales velocity supported by the favorable location of the ongoing projects :
The firm’s operations were impacted due to the pandemic, resulting in a slowdown in the overall sales velocity/collections remaining volatile over the past 21 months ending Dec 2021. However, subsequently, the firm has reported good traction in its key real estate projects and has witnessed an improvement in the sales velocity. The firm reported average quarterly sales and collection of Rs. 25.08 crs and Rs. 22.96 crs respectively from its ongoing and completed projects during Q2-Q4FY22 respectively. As of April 2022, the firm has five ongoing projects, wherein ~39% of the total project cost of Rs. 136 crs has been incurred and ~19% of the area has been sold, out of which ~63% of the amount from the sold portion has been received. The firm also has four upcoming projects, which include two plotting projects for which ~ 80 % of the cost has been incurred already and two residential projects, which are yet to commence. The favorable location of the ongoing and upcoming projects also aids in the sales velocity. Although there has been a decline in the overall revenue of the firm (Rs. 107.16 crs in FY 22 (Prov) vis-a-vis Rs. 129.05 crs in FY 21 (A), the EBITDA margins stood moderate in the range of 16%-28% for the past three years ending FY 22 (Prov). The net losses are on account of the accrued interest charges on the unsecured loans from group companies, which is ploughed back as additional USL.
Sufficient cash flow visibility for future debt servicing :
The firm relies on advances from customers, unsecured loans from group companies, and external debt for executing real estate projects. The firm has a total of Rs. 450.64 crs of unsecured loans from its group companies, wherein the interest is accrued and no repayment of the same is to be made resulting in Analysed TNW of Rs. 348.88 crs and Analysed D/E of 0.65x for FY22 Prov (FY21A: Rs 317.24 crs and 0.72x respectively). For the EPC projects, the firm relies majorly on interest-free mobilization advances as well as the working capital limits. The expected cash flows for FY23 are sufficient to service the debt obligation, given the fact that the firm has made a prepayment for the loans and no principal repayment is due till April 24.
Revenue visibility from EPC Segment :

The firm reports ~ 60% of its revenue from the EPC segment and has received two new contracts totaling Rs. 331 crs during April 2022 resulting in a total unexecuted order book of Rs. 424.96 crs as of April 2022 (vis-a-vis of Rs. 94 crs as of 31 Dec 2021). Of this, ~Rs. 260 crs of orders are expected to be executed in FY23 and the balance in FY24. The firm has already commenced both the new projects and has reported a cash inflow of Rs. 46.46 crs during April 2022, which includes the mobilization advances. The firm has also bid for new projects and expects ~Rs 100 crs of new orders in FY23.
Improvement in the Convention Center- cum resort business :

The firm owns a convention center-cum-resort which is managed by Marriott group on a royalty arrangement under the brand name of Four Points by Sheraton. The business which was significantly impacted by the pandemic in FY21 has witnessed an improvement in FY22 - sales of ~ Rs. 15 crs in FY 22 vis a vis Rs. 6.52 crs in FY 21, with increased occupancy levels and an increase in the events organized in the resort. Further from Jan to Apr 22, the firm has registered a total business of ~Rs 8.5 crs. Given the increase in corporate events as well, the improvement is expected to continue going ahead.

Credit Risks:

Susceptibility to cyclicality inherent in the real estate industry :
The real estate sector in India is cyclical and affected by volatile prices, interest rates opaque transactions, and a highly fragmented market structure. Hence, the business risk profile will remain susceptible to risks arising from any industry slowdown and competition from other regional players operating in the market. Having said that, the diversified revenue stream partially mitigates the risk.
Geographical Concentration :

The firm operates majorly in and around Chennai and hence the operations remain susceptible to any regional political and environmental risks. The firm is planning to diversify its EPC segment however will continue the Real Estate segment as it is; to benefit from the market reputation.
Working Capital Intensive operations :
The firm undertakes the construction projects and relies on the mobilization advances along with the available working capital limit; additionally, projects in the real estate segment are also funded through customer advance to an extent, coupled with any moderation in sales velocity lead to high working capital requirements and higher dependency on working capital borrowings. This is however supported by the flexible terms with its suppliers and creditors and supports the overall requirements. Nonetheless, faster realization and improving sales/project velocity will help improve the working capital requirements and therefore will remain monitorable.
Exposure to risk related to salability for upcoming projects :
The firm currently has five ongoing projects and four upcoming projects. Though the funding for the ongoing projects is fully tied up, the salability of the upcoming projects remains to be seen. Further the projects are in the phase of execution partly imparting risks related to implementation. The operating performance will remain susceptible to the flow of advances from customers and will remain monitorable.

ANALYTICAL APPROACH - Standalone

BWR has essentially relied upon the Standalone Audited Financials of AECLLP up to FY21, management-certified provisional financials for FY 22, projections till FY 24 publicly available information, and information/clarifications provided by the management and has applied its rating methodology as detailed in the Rating Criteria.

RATING SENSITIVITIES

Positive: The ability of the firm to timely execute the real estate and EPC projects, the timely inflow of advances from the customers, and collection with a reduction in overall debt levels.

Negative: Significant deterioration in the business revenue, profitability, or financial risk profile and any significant delays in executing the projects and inflows, impacting the revenues and liquidity, slower-than-expected booking rates impacting the company's cash flow and the operating performance.

LIQUIDITY INDICATORS - Adequate

The firm is expected to generate cash accruals of over Rs 40 crore each in FY23 and FY24 against interest payment obligations of ~Rs. 14 cr in FY23 and ~Rs. 28 cr in FY24. Liquidity is further supported by unsecured loans from partners and group associates of over Rs. 450.64 crs in which the interest charged is ploughed back as additional unsecured loans. Unencumbered cash and bank balances of over Rs 5 crore and prepayment of Rs 20 crore in term loans further support liquidity. The current ratio is comfortable at 2.89x estimated as of March 31, 2022. Bank limit utilization however was high averaging at over 90% for the past six months through March 2022.

ABOUT THE ENTITY

AECLLP was initially incorporated as a partnership firm in the name of ‘Arun Excello Constructions’ which was subsequently converted into an LLP in the current name in 2011. The firm is a part of the Arun Excello Group and has three business segments viz., civil construction activities, residential real estate development, and operation of a convention center cum resort in Mahabalipuram. For the real estate segment, the firm focuses on low-cost compact housing and has successfully completed more than 10 residential projects with a total saleable area of ~14.38 lsf in Chennai, Tamil Nadu. The firm undertakes EPC contracts for both civil and mechanical projects.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	129.05	233.61
EBITDA	Rs.Crs.	37.37	36.29
PAT	Rs.Crs.	-31.55	-30.33
Tangible Net Worth	Rs.Crs.	10.15	10.15
Total Debt/Tangible Net Worth	Times	52.87	43.38
Current Ratio	Times	2.69	1.98

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities.

RATING HISTORY FOR LAST THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2022)			2021		2020		2019
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	108.15	BWR BBB-/Stable (Assignment)	NA	NA	NA	NA	NA	NA
Non Fund Based	ST	27.00	BWR A3 (Assignment)	NA	NA	NA	NA	NA	NA
Grand Total		135.15	(Rupees One Hundred Thirty Five Crores and Fifteen lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Hyperlink/Reference to applicable Criteria

Analytical Contacts
Srishti Kaushik Rating Analyst srishti.k@brickworkratings.com	Chintan Dilip Lakhani Director- Ratings chintan.l@brickworkratings.com
1-860-425-2742 \| media@brickworkratings.com

Arun Excello Constructions LLP

ANNEXURE-I

Details of Bank Facilities rated by BWR

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Yes Bank	Term Loan - Out-standing	61.65	_	61.65
2	Yes Bank	Cash Credit - Sanctioned	12.00	_	12.00
3	Yes Bank	Bank Guarantee - Sanctioned	_	27.00	27.00
4	Yes Bank	GECL - Sanctioned	34.50	_	34.50
Total			108.15	27.00	135.15
TOTAL (Rupees One Hundred Thirty Five Crores and Fifteen lakhs Only)

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