Rationale

 The ratings reaffirmation reflects Mecon Limited’s (Mecon) strong liquidity position, reflected in its sizeable free cash/bank and liquid investments of over Rs. 550 crore and nil fund-based debt as on March 31, 2024. Its status as a 100% Government of India (GoI)-owned public sector undertaking (PSU) lends it with a high degree of financial flexibility, supporting the rating action. Mecon’s profitability has remained highly volatile because of the operating losses in the past and low margins. In FY2024, Mecon is estimated to report low single-digit operating margin. The net cash accruals are, however, expected to be supported by the substantial non-operating income from its large cash and investment balance. Going forward, while a healthy outstanding order book position provides revenue visibility in the near term, the operating profitability is expected to continue to be subdued. Nonetheless, Mecon’s debt-free status and a healthy liquidity position will keep the debt metrics comfortable. The execution of high-margin contracts and diversification into the non-metal segments is expected to improve the company’s financial performance in the medium term and will be a key monitorable. The ratings continue to factor in Mecon’s high level of competency in the engineering and consultancy segment with a demonstrated track record of more than four decades and its continued efforts in diversifying into the higher margin nonmetal segment, thus reducing the sectoral concentration risk. Further, the high share of revenue from PSU clients limits the counterparty risks. However, an elongated receivable period will keep the working capital cycle elevated. The company has seen limited accretion to reserves, given its volatile and subdued net profits because of the high manpower cost over the years. The Stable outlook on the long-term rating reflects Mecon’s comfortable revenue visibility, and ICRA’s expectation of a gradual pick-up in the execution of higher-margin orders, which would help the company maintain a healthy liquidity profile.