The upgrade reflects the significant improvement in
operational performance of the company in FY16, resulting in better cash flows
and better-than-expected consolidated leverage.
KEY RATING DRIVERS
Higher-than-expected Revenue with Strong Margins: MEIL reported revenue growth of 24.9% yoy to INR84.54bn in FY16 (FY15: 62.65bn), driven by the execution of the Western UP Power Transmission Company Limited (WUPPTCL) project and the Pattiseema Lift Irrigation project (which was executed in a compressed time frame of 12 months) among other projects. EBITDA margins also improved to 16.4% in FY16 (FY15: 15.1%), better than Ind-Ra’s expectation of around 15%, resulting in increase in operating EBITDA by 47.5% yoy. The company’s EBITDA does not completely reflect MEIL’s cash inflows as its deferred revenue also increased by INR16.17bn in FY16.
Significantly Lower Consolidated Debt: The improvement in operational performance as explained above added significantly to MEIL’s cash inflows enabling the company to execute the WUPPTCL project while restricting the project debt to INR5.3bn compared to the sanctioned debt of INR37.72bn. This resulted in consolidated leverage (debt/operating EBITDA) of 0.83x in FY16 (FY15: 1.02x), much lower than the agency’s expectation of 1.81x.
Improvement in Cash Management: The improvement in cash management also enabled the company to achieve a significant reduction in instances of over-utilisation in the working capital limits during January-September 2016, which was considered as one of the constraints on the company’s ratings during the last review.
CFO Turns Negative: Cash flow from operations (CFO) turned negative in FY16 due to the execution of the WUPPTCL project using the company’s cash flows. CFO is likely to improve significantly in FY18, as the WUPPTCL project will generate substantial annuity-like cash inflow of about INR10.0bn annually once complete. A significant portion of this cash inflow will be channelled to the company, as the SPV debt has been restricted to INR5.3bn, resulting in further improvement in the company’s cash flows.
Delay in WUPPTCL Project: While Lot-1 of the project has been commissioned in March 2016 and WUPPTCL has raised bills for transmission charges for July and August 2016, the first payment is yet to be received and is likely to be received by end-2016. Also, Lot-2 and Lot-3 have been delayed beyond the Scheduled COD of August 2016 and are now likely to be completed by end-2016. This exposes the company to demand for liquidity damages and capacity charges.
Strong but Concentrated Order Book: MEIL had a strong order book of INR544.67bn (6.44x FY16 revenue) at end-July 2016, which provides revenue visibility for the next three-to-four years. The order book has increased from INR422.98bn at end-September 2015 due to order inflow of INR255.76bn during the interim period. However, Telangana government irrigation and water supply projects accounted for more than 80% of the inflows, resulting in significant increase in concentration of the order book in projects with the state government to 69% of the order book in July 2016 from 58% in September 2016.
Capital Commitments: MEIL has a commitment of INR13.7bn towards the investment in SEPC Power (pending equity of INR6.5bn) and the execution of the city gas distribution project (CGD; capex of INR7.2bn). The commitment is likely to be met by using the cash inflow to be received from the WUPPTCL project. The power project and the CGD project are in the nascent stages of execution. MEIL’s track record in implementing such projects is limited and this exposes it to project implementation and potential cost overrun risks.
Deferred Revenue: MEIL had substantial deferred revenue of INR32.96bn at FYE16, up from INR16.79bn at FYE15 which is recognised in accordance with Accounting Standard 7 for ‘Construction Contracts’. MEIL’s deferred revenue is over 57% of the EBITDA projected for FY17-FY19 and will impact CFO.