Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Vishvaraj Environment Private Limited (VEPL) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Stable/CRISIL A2+’.

 

The upgrade reflects the overall improvement in the credit risk profile of the company. The revenues of the company has been better than CRISIL’s expectations along with better operating profitability leading to higher cash accruals. The rating action also incorporates the strong financial risk profile driven by  healthy net worth  comfortable capital structure and robust debt protection metrics due to the limited reliance on the outside borrowings. The liquidity profile also remains strong due to the healthy cash accruals against nil repayment obligations and availability of healthy cash and bank balance.

 

The rating reflects the extensive experience of promoter and established market position in drinking water and waste-water infrastructure development sector and its healthy order book with reputed counterparties providing adequate revenue visibility. Financial risk profile is comfortable as reflected by strong networth and limited dependence on long term external borrowings with gearing of below 0.5 times. In addition, the equity towards under-construction project SPVs has already been infused and fulfilled, no further equity commitments towards any project from VEPL is expected over the near term. Furthermore, the rating also incorporates the continued need-based liquidity support from the ultimate parent company (Premier Financial Services Private Limited). These strengths are partially offset by its susceptibility to tender-based operations, large working capital requirement and project risks associated with its under-construction Hybrid annuity model (HAM) project

Analytical Approach

CRISIL Ratings has moderately combined the business and financial risk profiles of VEPL and its SPV for its HAM and PPP projects. In-line with CRISIL's moderate consolidation approach, the expected cost overrun in under-implementation projects have been factored into the financials of the company.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position in water and wastewater management industry: With a successful track record of project development and executions in water and wastewater sector such as Nagpur Wastewater Management Private Limited (NWWMPL), Chandrapur Waste Water Management Private Limited (CWWMPL) the company has established healthy track record in wastewater infrastructure development industry. Promoters past experience as well as financial flexibility further supports the company’s credit risk profile. The company has developed credentials and healthy expertise leading to higher tender wins from various government departments. As a result, revenues are estimated to increase to around Rs 900 to 1000 crores in fiscal 2024 led by the healthy execution of the order book from Rs 231 crores in fiscal 2022.

 

VEPL has executed projects of over Rs 1000 crores till date and VEPL’s assets (owned / managed) include 24 drinking WTPs (drinking water) with cumulative capacity of 210 crore liters per day , 32 STPs (sewage treatment) with a capacity of 102 crore liters per day. VEPL is one of the few private players globally to have setup and managed over 2.25 lac urban water pipeline connections in a single city. CRISIL Ratings believes that the established market position and project execution expertise of the company will continue to support the business risk profile over the medium term.

 

• Healthy order book with reputed counterparties providing adequate revenue visibility: The company has a healthy order book of around Rs 2300+ crores as on January 2024 which is to be executed over the next 30 months. The orderbook to revenue ratio of more than 2 times the estimated revenues of fiscal 2024, provides adequate revenue visibility for the medium term. Out of the total unexecuted projects in hand, around 25% of the projects are under Jal Jeevan Mission, around 12% are under National mission for Clean Ganga (Namami Gange) ( through HAM SPVs) and the remaining under state government bodies. Namami Gange and Jal Jeevan mission are central government funded projects which limits the counterparty risks in these projects. VEPL’s key clientele includes government bodies like UP Jal Nigam Board, National Mission for Clean Ganga (NMCG), etc. The management has a focused approach towards bidding and only takes those projects which are well funded and has limited operational or counterparty risks. NWWMPL has been successfully operating for 5 years and other SPVs are also gradually nearing completion with CWWMPL achieving provisional COD in the month of December 203. Timely execution of current orderbook while maintaining its working capital requirements will remain a key monitorable over the medium term.

 

• Healthy net worth and adequate debt protection metrics: VEPL has a healthy net worth estimated at around Rs 400 to Rs 420  crores as on March 31, 2024 (Rs 297 crores as on March 2023) due to healthy accretion to reserves. VEPL has a comfortable capital structure as reflected in estimated gearing and total outside liabilities to adjusted net worth of 0.28 times and 1.85 times as on March 31, 2023 estimated to be around 0.2 to 0.3 times and 1.8 to 1.85 times respectively as on March 31,  2024 backed by the expected increase in scale of operations and healthy accretion to reserves.  Debt protection metrics have been healthy with estimated interest coverage and net cash accruals to adjusted debt of 6.57 times and 0.89 times for fiscal 2023 estimated to be above 7 times and above 0.7 times respectively as on March 31, 2024. In addition, no further equity commitments towards any project from VEPL is expected as all equity commitments for existing SPVs (including under construction) are completed and no large investment or equity commitment towards any project is envisaged in the near term.

 

Weaknesses:

• Susceptibility to tender-based operations: Revenue and profitability entirely depend on the ability to win tenders. Also, entities in this segment face intense competition, thus requiring to bid aggressively to get contracts, which restricts the operating margin to a moderate level. While this is partially mitigated being a project developer and management’s policy of bidding selectively, sustained increase in operating margins amid competition remains a key sensitivity factor. Also, given the seasonality inherent in the water EPC industry, as more than 70% of the work is done in the 6 dry months of the year due to monsoon impact in the May-October months, the ability to maintain profitability margin through operating efficiency becomes critical.

 

• Seasonal working capital requirements: The EPC activities  of the Company are seasonal, with significant revenues in the second half of the year, leading to higher gross current assets at year end. The same is reflected by gross current asset (GCA) of 320 days as on March 31, 2023, primarily due to high debtors of around 260 days due to large year end billings and moderate inventory levels of 30-40 days. About 79% of the receivables as on March 31, 2023 had an ageing of less than 30 days and the company has limited debtors above 6 months. While the company has been managing its working capital requirement, with internal accruals and mobilization advances, timely receipts of the receivables . However, GCA days are high on account of high loans and advances comprising of security deposits and earnest money deposits as per the business requirements. 

 

• Project risk associated with under construction HAM project: VEPL  has 4 PPP/ HAM projects under SPVs with investment size of around Rs 1455 crores, out of which one PPP project of over Rs 575 crores is fully operational for past few years , another PPP project of around Rs 150 crores has achieved provisional COD in December 2023 and 2 HAM projects under NMCG scheme of cumulatively investment of around Rs. 700 are in construction stage. All the equity infusion and financial closure has been completed in all the projects and no additional equity commitment is expected over the medium term, thereby mitigating the financing risk to some extent. Though construction has commenced, and the company has achieved some milestones in under-construction projects, timely completion of the same remains a key monitorable and  it continues to be exposed to associated project risks such as construction risk for the remainder of the construction period .

Liquidity: Strong

Cash accruals are expected to be over Rs 70-90 crores which are sufficient against no term debt obligations over the medium term. In addition, it will be act as cushion to the liquidity of the company.

 

VEPL does not have any fund based working capital limits currently. All equity commitments from VEPL towards the SPVs are completed, and no further equity funding is expected towards any of its under construction HAM projections. Current ratio is healthy at 1.52 times as on March 31, 2023. Cash and cash equivalents stood at Rs 258 crores as on December 2023.

 

VEPL’s liquidity profile also draws comfort from past track record and continued need based funding support (in case of exigencies) from the parent company Premier Financial Services Pvt Ltd which had liquidity of around Rs 332 crores in the form  Equity investments, mutual funds, FDs and bonds as on Sep 2023

Outlook: Stable

CRISIL Ratings believe the group will continue to benefit from established market position in the water and wastewater management industry and healthy order book.

Rating Sensitivity Factors

Upward factors

• Significant and sustainable increase in scale of operations and improvement in operating margins leading to higher than expected cash accruals.
• Improvement in working capital cycle and sustenance of financial risk profile.
• Timely completion of close to 100% and stabilization of the under construction SPVs.

 

Downward factors

• Decline in scale of operations or lower operating margins of below 8% leading to lower than expected cash accruals.
• Large debt-funded capital expenditure or further stretch in its working capital cycle thus weakening its liquidity and financial risk profile.

About the Company

VEPL was incorporated in 2008. It is a wholly owned subsidiary of Premier Financial Services Pvt Ltd (PFSPL) and engaged in in the drinking water and waste-water management project sector; as a project developer ( in PPP/HAM mode ) and EPC works contractor, for constructing and operating projects such as drinking water treatment plants (WTPs), sewage treatment plants (STP), Industrial water reuse projects, urban and rural drinking water distribution networks for various government entities. The company is based in Nagpur, with registered office in Mumbai;  and operations all over India. The management includes the promoter Mr Arun Lakhani, assisted by a team of professionals who have been with the group since years

Any other information: Not Applicable