By Samarth Dayama

India Ratings and Research (Ind-Ra) has affirmed Oswal Infrastructure Limited’s bank facilities as follows:
 

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based facilities

-

-

-

INR50 (reduced from INR110)

IND BBB(CE)/Stable/IND A3+(CE)

Affirmed

Non-fund-based facilities

-

-

-

INR550 (reduced from INR910)

IND A3+(CE)

Affirmed

Unsupported rating

-

-

-

-

IND BB+/Stable

Affirmed

Analytical Approach: Ind-Ra continues to take a consolidated view of Oswal Industries Limited (OIL) and its group company Oswal Infrastructure Limited (‘IND BBB(CE)’/Stable) to arrive at the ratings, due to a pre-default corporate guarantee extended by OIL for the entire debt taken by Oswal Infrastructure. Furthermore, there is fungibility of cash flows between these two entities in terms of unsecured loans, and according to the management, if any funds are required by Oswal Infrastructure, OIL will provide them.

KEY RATING DRIVERS

Long Track Record; Reputed Clientele: OIL and its promoter have an overall operational experience of more than three decades in the industrial valve manufacturing business, resulting in longstanding relations with its customers and suppliers. OIL’s clientele includes reputed companies such as GAIL (India) Limited (IND AAA/Stable), Indian Oil Corporation Ltd. (IND AAA/Stable), HPCL-Mittal Energy Ltd (IND AA+/Stable), Technip India Ltd, and so on. 

Medium Scale of Operations:
In FY20, the consolidated revenue grew to INR3,687 million in FY20 (FY19: INR2,741 million) on account of an increase in the sales volume in the valves business, due to new orders and the timely execution of orders in hand. Ind-Ra expects the consolidated revenue in FY21 to be lower year-on-year on account of the global slowdown in the industry in 1HFY21 due to COVID-19. 

In FY20, the standalone revenue of OIL grew to INR2,424 million (FY19: INR1,947 million). The revenue achieved in 9MFY21 was INR1364 million. OIL on 1 January 2021 had orders in hand of INR984 million, which the management expects to execute by end-June 2021. In addition to, this few orders were received in January 2021 of around INR500 million, which will be executed during FY22. 

Improved Credit Metrics: 
In FY20, the consolidated interest coverage (operating EBITDA/gross interest expense) improved to 5.6x (FY19: 4.2x) and the net leverage (adjusted net debt/operating EBITDAR) improved to 1.7x (2.2x) on account of an increase in the absolute EBITDA to INR421 million (INR355 million) and a reduction in the total debt to INR722 million (INR798 million). Ind-Ra expects the consolidated credit metrics to remain at similar levels in FY21 in the absence of major debt-led capex. 

Liquidity Indicator - Adequate
: The cash flow from operations remained positive in FY20 but marginally reduced to INR182 million (FY19: INR190 million) on account of the unfavourable changes in the working capital. The net cash conversion cycle in FY20 elongated to 75 days (FY19: 44 days) on an increase in the inventory days to 79 (FY19: 49). The  inventory days increased due to the slowdown in the industry and a reduction in the creditor days to 126 in FY20 (FY19: 174) . The consolidated cash and cash equivalents remained low at INR2.7 million in FY20 (FY19: INR0.7 million).  

OIL’s standalone average maximum utilisation of the fund-based working capital facilities and non-fund based working capital facilities was 96.3% and 89.9%, respectively, during the 12 months ended January 2021. No moratorium benefits were availed by the company during March to August 2020. A guaranteed emergency credit line was taken by the company in October 2020 of INR92.8 million for working capital purpose. 

Healthy EBITDA Margins; Likely to Reduce in FY21:
In FY20, the EBITDA margins marginally deteriorated to 11.4% (FY19: 12.9%) on account of an increase in the operating expenses. The return on capital employed was 17.3% in FY20 (FY19: 14.7%). Ind-Ra expects the consolidated EBITDA margins to marginally reduce year-on-year in FY21 on account of the global industry slowdown due to COVID-19, low bargaining power because of the client base and increasing competition. 

In FY20, the standalone EBITDA margins of OIL marginally improved to 13.3% (FY19: 12.9%) on account of control in the operating expenses. The return on capital employed was 14.9% in FY20 (FY19: 10.8%). The EBITDA margins achieved in 9MFY21 was 11.8%. 

Unsupported Rating reflects Modest Credit Profile: 
Oswal Infrastructure derives revenues from undertaking engineering, procurement and construction projects in the oil and gas sector and cross-country pipeline projects, and manufacturing and supplying process equipment, modular skids and process packages. 

In FY20, Oswal Infrastructure’s standalone revenue grew to INR1,308 million (FY19: INR880 million) on account of the timely execution of orders in hand. The revenue, however, fell to INR388 million during 9MFY21 due to no new orders received in 1HFY21 due to COVID-19. Oswal Infrastructure’s order book position as on 1 January 2021 was INR258 million, which, as per the management, will be executed till end-March 2021. According to the management, Oswal Infrastructure has bid for new orders worth INR7,000 million, out of which the management expects to receive orders worth INR2,000 million in March 2021. 

Oswal Infrastructure’s standalone EBITDA margins dipped to 7.3% in FY20 (FY19: 11.7%) on account of increased operating expenses as well as competition. The return on capital employed was 24.3% in FY20 (FY19: 36.6%). The interest coverage (operating EBITDA/gross interest expense) was 3.3x in FY20 (FY19: 2.3x)
 and the net leverage (adjusted net debt/operating EBITDAR) was 2.4x (2.2x). 

It had low standalone cash & cash equivalent of INR0.2 million in FY20 (FY19: INR0.2 million). The standalone net cash conversion cycle in FY20 deteriorated to 37 days (FY19: negative 51 days). The standalone average maximum utilisation of the fund-based working capital facilities and non-fund based working capital facilities was 56.7% and 41.9%, respectively, during the 12 months ended January 2021. 


RATING SENSITIVITIES

CE Rating:

Positive: Any positive rating action on OIL will be positive for Oswal Infrastructure’s ratings.

 

Negative:  Any negative rating action on OIL, will be negative for Oswal Infrastructure’s ratings. 

Unsupported Rating:

Negative:  Any decline in the revenue or profitability of Oswal Infrastructure with the net leverage deteriorating above 4x, on a sustained basis, will be negative for the ratings.

Positive: A substantial and sustainable increase in the revenue and profitability, leading to an improvement in the credit metrics, on a sustained basis, will be positive for the ratings.


COMPANY PROFILE

Incorporated in 2013, Oswal Infrastructure provides complete solutions as an engineering, procurement and construction company for utility, tank farms and plant piping. It also manufactures process skids and packages. The company has one manufacturing unit in Kalol, Ahmedabad. Incorporated in 1983, OIL  manufactures valves and castings at its two units in Kalol, Ahmedabad. 

FINANCIAL SUMMARY - CONSOLIDATED

Particulars

FY20

FY19

Revenue (INR million)

3,687

2,741

EBITDAR (INR million)

421

355

EBITDAR margin (%)

11.4

12.9

Gross interest coverage (x)

5.6

4.2

Net leverage (x) 

1.7

2.2

Source: OIL, Oswal Infrastructure, Ind-Ra 

FINANCIAL SUMMARY- OSWAL INFRASTRUCTURE (STANDALONE)

Particulars

FY20

FY19

Revenue (INR million)

1,308

880

EBITDAR (INR million)

95

103

EBITDAR margin (%)

7.3

11.7

Gross interest coverage (x)

3.3

2.3

Net leverage (x) 

2.4

2.2

Source: Oswal Infrastructure, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

30 December 2019

16 September 2019

29 November 2018

Fund-based facilities

Long-term/Short-term

INR50

IND BBB(CE)/Stable/IND A3+(CE)

IND BBB(CE)/Stable/IND A3+(CE)

Provisional IND BBB(CE)/Stable/Provisional IND A3+ (CE)

Provisional IND BBB(SO)/Stable/Provisional IND A3+(SO)

Non-fund-based facilities

Short-term

INR550

IND A3+(CE)

IND A3+(CE)

Provisional IND A3+(CE)

Provisional IND A3+(SO)

Unsupported rating

-

-

IND BB+/Stable

IND BB+/Stable

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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