Rationale
The assignment/reaffirmation of ratings with a ‘Positive'
outlook takes into account the healthy growth in revenue at a CAGR of 22%
during FY2018 and FY2021 on the back of improved order book along with timely
execution; the revenues improved by 31% on annualised basis to Rs. 1661 crore
in H1FY2022 from Rs. 2528 crore in FY2021 and the growth is expected to be
sustained over the medium term on the back of strong order book position of Rs.
6855 crore as on September 30, 2021. The operating profit margins also improved
to 16.2% in FY2021 and 16.3% in H1FY2022 from 15.6% in FY2020 supported by
scale benefits and reduced dependence on sub-contracting expenses. The ratings
also factor in improvement in working capital intensity to 7% in FY2021 from
16% in FY2020 with recovery of payments from Public Works Department in
Rajasthan; the working capital intensity is expected to remain at low levels
going forward with majority of order book comprising own Hybrid Annuity Model
(HAM) and EPC works from reputed customers. The ratings also consider reduction
in project risk with three of the four under construction HAM projects expected
to be completed in FY2022. Timely completion of these HAM projects within
budgeted costs and release of corporate guarantees extended to the debt availed
by its HAM SPVs remains a key rating monitorable in the near term. The ratings
continue to draw comfort from the promoters' long track record of over four
decades in the civil construction business; and diversified client portfolio
consisting of Government bodies like National Highways Authority of India
(NHAI), Ministry of Road Transport and Highways (MoRTH), and private road
developers like IRB Infrastructure Developers Limited, Tata Projects Limited,
Adani Road Transport Limited etc. The ratings, however, remain constrained by
the high consolidated TOL/TNW of 1.42 times as of March 31, 2021 owing to high
mobilisation advances and trade creditors. Further, the ratings factor in
sizeable equity commitment and pending execution related risks for the HAM
portfolio. HGEIL has a total of 10 HAM projects (4 ongoing and 6 newly
awarded), and has a total equity commitment of ~Rs. 1,143 crore. Of this, HGIEL
has infused Rs. 261 crore as of March 31, 2021 and the balance Rs. 882 crore
equity is expected to be infused over the next four years. The estimated cash
flow from operations along with the NCD proceeds is expected to be sufficient
for the scheduled debt repayments and equity commitments towards the HAM
projects. The heightened competition in the road sector along with steep
increase in input costs (steel, cement etc.) could exert pressure on HGIEL's
profitability. However, the presence of a price escalation clauses in these
contracts mitigates the risk to an extent. The positive outlook on the
long-term rating reflects ICRA's opinion that the credit profile of company is
expected to strengthen in the backdrop of sustained revenue growth and
profitability, while maintaining comfortable liquidity position on the back of
timely receipt of payments from its customers.
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