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.