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AHLUWALIA CONTRACTS (INDIA) LIMITED

Ratings

Facilities Amount (Rs. crore)

Ratings1 Remarks

Long-term Bank Facilities 342 CARE BBB (Triple B) Revised from CARE BBB+ (Triple B Plus)

Long/Short-term Bank Facilities 800 CARE BBB/CARE A3 (Triple B / A Three)

Revised from CARE BBB+/ CARE A2

(Triple B Plus/A Two)

Total Facilities 1,142

Rating Rationale

The revision in the ratings of bank facilities of Ahluwalia Contracts (India) Limited (ACIL) takes into account the weak financial performance of the company in FY13 (refers to the period from April 1 to March 31) with the company reporting operating loss due to increased raw material cost and delays in project execution on account of slowdown in infrastructure and real estate sector and deterioration in the overall leverage levels The ratings continue to take into account the increasing working-capital requirements and vulnerability to increasing competitive pressures and inherent cyclical trends associated with the construction sector.

The ratings continue to derive strength from ACILs experience in diversified construction activities, past track record and project execution capabilities and reputed client base. The ratings also factor marginal improvement in profitability in H1FY14, recent acquisition of relatively big orders, unsecured loans infused by the promoters as well as the impending right issue which is expected to improve the liquidity position and capital structure of the company.

Ability of the company to successfully raise funds as envisaged, manage working-capital requirements efficiently and timely execution of the projects while improving profitability shall be the key rating sensitivities.

Background

ACIL was incorporated on June 2, 1979 as a private limited company in the name of Ahluwalia Contracts (India) Private Limited, and subsequently converted into a Public Limited Company in 1990. ACIL is a medium-sized construction company engaged in the civil construction and turnkey projects and has a pan-India presence.

Credit Risk Assessment

Experienced promoters and established track record of operations

The Board of ACIL is professionally managed, headed by Mr Bikramjit Ahluwalia, who holds diploma in civil engineering and has over 41 years of experience in the construction industry. He is assisted by a team of professionally qualified executives. In the past, the company has successfully completed several projects ranging from construction of institutional buildings, corporate office complexes, industrial buildings, multi-storied housing complexes, township development projects, hospitals, 5-star hotels, educational & technical institutes, gymnasiums & sport complexes etc.

Deterioration in financial risk profile

Though the total operating income of ACIL increased marginally by around 2% y-o-y during FY13, the company incurred cash losses during the year. General slowdown in the economy, especially construction industry led to significant impact on new projects and implementation of ongoing projects. The increase in raw material cost like sand, aluminum, bricks has resulted in loss at the PBILDT level since majority of contracts were fixed price contracts without price escalation terms. Loss at PBILDT level coupled with the increased interest cost, resulted in net loss in FY13.

During H1FY14, the total operational income declined by 32.5% on y-o-y basis Rs.469.76 cr due to slowdown in execution of ongoing projects and muted order book. However, the company has renegotiated prices in certain contracts and surrendered/

1Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications

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closed certain other projects and has sold non-core assets, resulting in marginal profit of Rs.2.01 crore in H1FY14. The promoters have also infused unsecured loans, which stood at Rs.14.48 cr as on September 30, 2013.

Moderate order book with diversified and reputed clientele

As on September 30, 2013, the company has unexecuted order book of Rs.2,511.51 cr (1.8x FY13 turnover). The order book is spread across various areas like construction of residential and group housing projects (50%), construction of commercial buildings (30%) electrical and plumbing works (8%) and infrastructure projects (3%).

ACILs order book is geographically diversified and the company is currently executing projects in 17 states and union territories across India. At present, the company has more than 120 projects under execution with a diversified client base which includes leading private and public sector entities viz Jaypee Green Noida, Vedanta Aluminium Ltd., Indian Oil Corporation, Airport Authority of India, Delhi Airport Metro Express Pvt. Ltd., NBCC Ltd., State PWD etc. The client concentration stood low during FY13 with top five projects contributing 22% of the total operating income. ACIL in consortium with Dhoot Infrastructure Pvt. Ltd. has been awarded construction of Bus Terminal cum Commercial Complex during FY08 on Design-Built-Operate-Transfer (DBOT) Annuity basis by Rajasthan State Road Transport Corporation. The project is on 40-year concession period with total project cost of around Rs.72 cr. The project is almost complete and is expected to start operation by March 2014. Further, ACIL has received an order in Bihar worth Rs.417 cr and has also received order from Safdurjung hospital for Rs.196 cr in Q3FY14 which has strengthened the order book position.

Working capital intensive operations resulting in deteriorated gearing level

Though improved slightly, the working capital cycle remained high at 95 days as on March 31, 2013 primarily due to slowdown in execution of the ongoing projects, postponement of new projects and high collection period. The receivables of the company due for more than six months increased from Rs.165.43 crore as on March 31, 2012 to Rs.198.08 crore as on March 31, 2013 and further to Rs.266 crore as on September 30, 2013 due to retention money and elongated payment cycles. Working capital limits remained almost fully utilized (97%) for the 12 months ending November 2013.

The overall gearing ratio deteriorated as on March 31, 2013 due to losses in FY13 coupled with increased working capital limits availed by the company.

Prospects

With prevailing high interest rate, slowdown in the overall economic growth and increasing raw material prices, the operational environment for the construction industry has become highly challenging. The growth prospects of the companies like ACIL would depend upon timely execution of its order book while managing volatility in raw material prices and effective management of working capital requirements.

Financial Performance (Rs. Cr)

For the period ended / as at Mar.31, 2011 2012 2013 (12m, A) (12m, A) (12m, A) Working Results Net Sales 1687.53 1359.60 1382.79 Total Operating income 1695.27 1374.18 1400.69 PBILDT 161.13 28.45 -11.07 Interest 20.01 28.26 39.58 Depreciation 33.81 42.87 35.20 PBT 107.51 -40.38 -76.16 PAT (after deferred tax) 70.79 -40.63 -76.22 Gross Cash Accruals 103.42 2.23 -41.03 Financial Position Equity Capital 12.55 12.55 12.55 Networth 303.42 263.00 186.68 Total capital employed 468.54 477.15 440.25 Key Ratios Growth Growth in Total income (%) 7.74 -18.94 1.93

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For the period ended / as at Mar.31, 2011 2012 2013 (12m, A) (12m, A) (12m, A) Growth in PAT (after D.Tax) (%) -13.45 NM NM Profitability PBILDT/Total Op. income (%) 9.50 2.07 -0.79 PAT (after deferred tax)/ Total income (%) 4.18 -2.96 -5.44 ROCE (%) 30.55 -3.05 -9.94 Average cost of borrowing (%) Solvency Long Term Debt Equity ratio (times) 0.05 0.12 0.30 Overall gearing ratio(times) 0.54 0.81 1.35 Interest coverage(times) 8.05 1.08 NM Term debt/Gross cash accruals(years) 0.22 13.68 NM Total debt/Gross cash accruals(years) 1.59 95.55 NM Liquidity Current ratio(times) 1.18 0.93 0.84 Quick ratio(times) 0.93 0.65 0.62 Turnover Average collection period (days) 89 130 123 Average creditors (days) 58 79 77 Average inventory (days) 37 52 49 Operating cycle (days) 68 103 95

Analyst Contact Name: Jatin Babbar Tel: 011-45333246 Mobile: 9999568722 Email: jatin.babbar@careratings.com

(This follows our rationale for entity published on 22 January 2014)

DISCLAIMER

CAREs ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments.

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