RKEC Projects Ltd

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs.300.00 Crs of RKEC Projects Ltd

Credit Strengths:

• Experienced management and established track record :

  RKEC, with an established operational track record of over fifteen years, is specialized in the business of civil and defence construction such as construction of buildings, highways, marine works and bridges. The main promoters of RKEC, a closely held family business, have over three decades of experience in the EPC business.  RKEC is ranked amongst the top five companies for designing and executing marine works in the country.  The company has demonstrated its project execution capability in the sector and has been able to win repeat orders from various government agencies based on its track record.

• Established clientele and adequate order book :

  RKEC has diverse and reputed clientele including Military Engineering Services, Director General Navy Projects, Defence Research Development Organisation; National Highways Authority of India, Indian Railways, Rashtriya Ispat Nigam Limited, etc., and various ports like Jawaharlal Nehru Port Trust [JNPT], Cochin Port Trust [CoPT], Mumbai Port Trust [MbPT], Adani Port and Special Economic Zone Limited, Vedanta Limited, Public Works Department, Government of Odisha, R&B Department, Government of Andhra Pradesh. The company has been associated with these clients for a long time, and the successful execution of the projects has also helped it in getting repeat orders. Due to reputed client profiles, the company has low counterparty credit risk although at times, there can be delays in the realisation of some bills. Current orderbook size of the company is Rs.1474.07 Crs, of which the unexecuted portion was Rs.866.83 Crs as on 30 Sep 2021 to be executed in the next 2-3 years. This ensures medium term revenue visibility. During H1FY22, the company booked orders worth ~Rs.294 Crs, of which work contracts for ~Rs.160 Crs are awaited.

• Above average financial risk profile :

  The financial risk profile is considered above average marked by modest scale of operations and adequate profitability, gearing and debt protection metrics. Operating revenue for FY21 was Rs. 202.31 Crs against Rs.297.93 Crs in FY20. EBITDA and PAT were Rs.34.54 Crs and Rs.12.76 Crs respectively during FY21 as against Rs.71.56 Crs and Rs.30.27 Crs respectively in FY20. Operating and net profit margins were 17.07% and 6.31% respectively during FY21. TNW has grown to Rs.132.85 Crs (PY: Rs.120 07 Crs) and debt has  increased to Rs.110.51 Crs (PY: Rs.69.57 Crs) as on 31 Mar 2021. Despite the increase in debt level on a y-o-y basis, D/E ratio continues to be comfortable at 0.83 times and TOL/TNW at 1.59 times as on 31 Mar 2021. Debt protection metrics remained adequate with ISCR and DSCR of 2.09 times and 1.69 times respectively for FY21. Current ratio continues to be adequate as marked by 1.38 times as on 31 Mar 2021. RKEC achieved operating revenue of Rs.35.23 Crs in Q1FY22. 

• Geographical, segmental and customer concentration :

  Around 53% of the unexecuted orders are in West Bengal and ~45% is from marine construction segment. This exposes the company to geographical & segmental concentration risks. Top 5 projects under execution comprise ~90% of the unexecuted order book, as on 30 Sep 2021 causing  significant customer concentration risk. However, the associated risks are mitigated by the low counterparty risk of its clientele such as Military Engineering Services, Director General Navy Projects amongst others.

• Working-capital-intensive nature of operations :

  The company’s operations are working-capital-intensive in line with general industry trend mainly due to the high cost of construction material, high labour cost, advance to suppliers and delays in getting payments from government departments, among others. The days receivables increased to 249 days (PY: 116 days) as on 31 Mar 2021, due to the pandemic situation. On the other hand, the days payables increased to 381 days (PY: 224 days), thereby keeping the the working capital cycle at 33 days as on 31 March 2021. The company has sufficient financial flexibility to enhance the working capital limits, if required.

• Execution risk and susceptibility to industry competition and volatility in raw material prices :

  The company’s operations are susceptible to many external factors such as timely clearances from various regulatory bodies, the handover of sites, the mobilisation of funds, the change in governments policies and directives, cost escalation due to departmental delays, labour unrest and climatic vagaries. The effect of any of these could be substantial on the company's timeline of the completion of projects, working capital utilisation level and overall profitability. Since all of the operations are tender-based, revenue and profitability are expected to remain susceptible to risks inherent in tender-based operations and a competitive landscape. The company has limited control over the prices of raw materials such as cement and steel used by it during the project execution. The current contracts of the company are a mix of fixed price and those with price escalation provisions. In the case of the fixed-price contracts, the company has to bear the cost escalation of raw materials, which affects its profitability. Impact of any fresh wave of the Covid-19, if any, on the supply chain of the company shall be a key monitorable.

The Company has entered into Joint Venture with M/s Suryadevara Engineers & Contractors, Vijayawada, M/s Qingdao Construction Engineering Group Co. Ltd, M/s Rapid Net Sports System and M/s N.G. BHOIR & M/s Samudra Dredging Private Limited. The consolidated financials of RKEC comprise revenues of RKEC and the four Joint Ventures. While assigning the ratings, BWR has adopted a standalone approach as the contract receipts are almost fully reflected in the standalone financials only.

Ability of the company to increase its scale of operations with healthy growth in order book position, improve profitability and execute the orders in hand without delay and  manage its receivables position to ensure adequate liquidity would be the key rating sensitivities.

Positive:

• Significant improvement in the scale of operations and profitability on a sustained basis with the timely completion and delivery of projects 
• Geographical, sectoral and client-wise diversification of operations

Negative

• Delays in the execution of ongoing orders, a reduction in fresh order inflows or a stretch in the receivables cycle of the company
• Deterioration in financial risk profile on account of stretch in working capital cycle or any large, debt-funded capital expenditure 
• Material impact on the financial risk profile due to any crystallization of contingent liabilities or non realization of receivables

The liquidity position has been considered as adequate on account of adequate net cash accruals to meet long term debt obligations. RKEC’s utilization of fund based working capital facilities of Rs.50 Crs is above 90% and the utilisation of non-fund based facilities is ~75-80%.  The undrawn lines provide liquidity cushion for exigencies. EBITDA for FY21 (~Rs.35 Crs) adequately covers the interest and finance charges for the previous 2 years. Current ratio was 1.38 times and cash & cash equivalents were Rs.1.64 Cr as on 30 Sep 2021. Company maintains term deposits of ~Rs.37 Crs  as margin money with various banks apart from balances in current account. Cash conversion cycle was 33 days as on 31 Mar 2021 due to high days payables and low days inventory. Projected cash accruals of ~Rs.41 Crs and ~Rs.51 Crs respectively for FY22 and FY23 are sufficient to meet long-term debt repayments of ~Rs.13 Crs and ~Rs.10 Crs respectively for the same period. The proposed enhancement in the working capital facilities is expected to ease the liquidity position going forward.

RKEC Projects Limited, an NSE listed company, was incorporated in April 2005 as a private limited company, at Visakhapatnam, Andhra Pradesh. Subsequently, in 2016, the company was converted into a public limited company and listed on NSE in 2017. RKEC is an enlisted contractor with the Ministry of Defence as ‘Super Special Class’ civil contractor for Military Engineering Services [MES], ‘S-02’ contractor for Director General Navy Projects [DGNP] to undertake Civil engineering works, Electrical engineering works and Miscellaneous contracts, ‘Civil category CIV-IV class’ for Defence Research Development Organisation [DRDO]. It is also registered as ‘Special Class - Civil’ contractor for R&B Department, Government of Andhra Pradesh and ‘Super Class’ civil contractor for Public Works Department, Government of Odisha.

Shri G Radhakrishna is the Chairman & Managing Director. Smt G Parvathi Devi, Shri G Venkata Ram Mohan, Dr G Sita Ratnam, Vice Admiral Satish Soni [Retd.], Shri T. Lucas Peter, Brig. J K Rao and Lt Gen P R Kumar (Retd.) are the other directors.

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

N.A.

Nil

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• General Criteria
• Engineering Procurement and Construction (EPC) Companies
• Approach to Financial Ratios
• Short Term Debt