CRISIL said that the ratings reflect expectation of sustained improvement in the operating performance of VEL because of focus on the stable cash-generating engineering, procurement and construction (EPC) business over the medium term and maintenance of a healthy capital structure and liquidity profile, aided by equity infusion to support the debt protection metrics.

Consolidated revenue is expected to increase by 20-23% in fiscal 2023, aided by EPC revenue which is expected to reach Rs. 550-600 crore in fiscal 2023 driven by orders of Rs 1,777 crore as on 30 June 2022.

Furthermore, 76% of the order book constitutes government projects, which provides visibility of cash flow over the medium term. Real estate collections are expected to increase gradually and will improve in the ongoing fiscal compared with Rs 73 crore in fiscal 2022 owing to liquidation of inventory of Rs 400.73 crore as on 31 March 2022, and receipt of pending receivables.

Operating performance improved in fiscal 2022, with revenue increasing by 30% and operating margin growing to 3.4% from 0.4% in fiscal 2021. This was on account of recovery in the execution of EPC projects, which were delayed amid the COVID-19 pandemic, and stable performance of GMP Technical Solutions, supported by revenue of Rs 194 crore from the segment in fiscal 2022 and improvement in the operating margin to 9% in fiscal 2022 compared with 7% in fiscal 2021.

As a result, net cash accrual (profit after tax and depreciation excluding dividends) improved to Rs 47 crore in fiscal 2022.

Earnings before interest, taxes, depreciation and amortisation from EPC and GMP will likely improve to Rs 40-50 crore per annum over the next two fiscals from Rs 44 crore in fiscal 2022, while net cash flow from real estate should sustain because of steady collections expected in fiscal 2023.

Also, the company reduced its debt by Rs 73 crore over the past two fiscals, with the total gross debt (including interest bearing mobilisation advances) standing at Rs 194 crore as of March 2022 against Rs 267 crore as of March 2020.

The debt was largely paid off through Rs 70 crore received from preferential share allotment to investors and the remaining through internal accruals. Consequently, capital structure has improved, with gearing of 0.22 as on 31 March 2022, compared with 0.34 time as on 31 March 2021, and expected to remain below 0.5 time over the medium term.

Unencumbered cash and equivalents stood at Rs 10.76 crore as on 30 June 2022 at the standalone level. Liquidity is further supported by average unutilised fund-based bank lines of Rs 9 crore during last twelve months ending 31 July 2022. VEL is likely to maintain cushion of 10% of the working capital limit and unencumbered cash and equivalents of Rs 7 crore for any exigency.

These strengths are partially offset by large working capital requirement, large slow-moving real estate inventory and exposure to intense competition and cyclicality in the EPC segment.

Vascon Engineers is engaged in the EPC, real estate construction and development business. The real estate business of VEL comprises construction of residential and office complexes along with information technology parks, industrial units, shopping malls, multiplexes, educational institutions and hotels. Under the EPC segment, VEL has executed construction contracts. It primarily caters to government departments and authorities.

Over the three months ended 30 June 2022, VEL registered revenue of Rs 201 crore and profit after tax (PAT) of Rs 11 crore against Rs 112 crore and Rs (7) crore, respectively, for the corresponding period of the previous fiscal.