MCNALLY BHARAT ENGINEERING COMPANY LIMITED

Transcription

1 MCNALLY BHARAT ENGINEERING COMPANY LIMITED Ratings Facilities Amount (Rs. crore) Ratings 1 Remarks Long-term Bank Facilities 3,904.2 (enhanced from 3,779.8) CARE A (Single A) Revised from CARE A+ (Single A Plus) Short-term Bank Facilities CARE A1 (A One) Revised from CARE A1+ (A One Plus) Total Bank Facilities 4,204.2 Non-convertible redeemable preference share CARE A- (Single A Minus) Revised from CARE A (Single A) Short Term Debt (including CP)* 80.0 CARE A1 (A One) Revised from CARE A1+ (A One Plus) * carved out of working capital limits Rating Rationale The revision in ratings of McNally Bharat Engineering Company Ltd. (MBEL) takes into account the deterioration in the financial risk profile of the company in FY13 (refers to the period April 1 to March 31) and Q1FY14 marked by decrease in net profit margin, significant increase in debt level and elongation of the extended collection period alongwith high exposure to group & associate companies with net losses on consolidated basis. The ratings however, draw strength from the established promoter group, long and satisfactory track record of the company, proven project execution capabilities with strong technical tie-ups, availability of captive equipment manufacturing facility and improvement in order book position. The ratings also factor in intense competition and sluggish growth currently being witnessed by the construction industry. Effective management of working capital, timely execution of orders and receipt of contract proceeds alongwith the extent of exposure to group companies and their performance are the key rating sensitivities. Background MBEL, incorporated in 1961, based in Kolkata, is one of the major engineering turnkey project execution companies of India belonging to the B. M. Khaitan group. MBEL has a track record of executing turnkey projects in different areas of its operations like bulk material handling, ash handling, port handling, mineral beneficiation plant, water management, road construction and maintenance, structural fabrication, erection, piping, utilities, etc. Credit Risk Assessment Long and satisfactory track record with established promoter group MBEL belongs to the Kolkata based B.M. Khaitan group which is having an established presence. MBEL has more than five decades of track record and has successfully completed more than 300 projects in different areas of its operations and in many cases, it has received commendation certificates from its clients. It has a pan-india presence with 62 site offices (including one overseas site) and one marketing office (in Kolkata). Deterioration in financial risk profile in FY13 & Q1FY14 Gross billing grew by about 5% in FY13 as compared to 18% in FY12 due to relatively slower movement in contracts resulting from the subdued economic scenario inspite of a healthy order book. PBILDT margin, though, increased mainly on account of cost containment initiatives undertaken by the company, PAT margin and interest coverage, declined significantly on account of increase in interest expense resulting from significant increase in borrowings. The trend continued in Q1FY14. Though PBILDT margin improved in Q1FY14, PAT margin and interest coverage deteriorated significantly due to increase in interest expenses on account of high level of borrowings. 1 Complete definitions of the ratings assigned are available at and other CARE publications 1

2 Average collection period increased to 137 days in FY13 from 113 days in FY12 owing to delay in certification process and late payments from clients. Accordingly, working capital requirements increased substantially which were mostly met through increase in borrowings. This resulted in significant deterioration in overall gearing ratio as on March 31, As against outstanding debtors of Rs.1,072.9 crore as on March 31, 2013, MBEL has been able to recover Rs.349 crore (approximately 33%) till August 13, 2013 which indicates significant delay in realization of debtors. Exposure to group and associate companies MBEL s exposure to group & subsidiary companies as on March 31, 2013 was about Rs crore (Rs crore as on March 31, 2012), accounting for about 64% of its net worth, comprising investments of Rs crore and receivables/advances of Rs.25.5 crore. The major investment (Rs crore) was in subsidiary company, MSEL. Essentially, MBEL has made the investment to strengthen its backward integration by having a large-scale construction equipment manufacturing company. Other than the above fund based exposure, MBEL provided corporate guarantee for its group companies aggregating to Rs crore as on March 31, The financial performance on a consolidated basis deteriorated with loss of Rs.23.2 crore in FY13 (PAT Rs.65.6 crore in FY12) on total operating income of Rs crore (Rs crore in FY12). The loss in FY13 was primarily on account of impairment loss of Rs.35.1 crore provided on diminution in value of investment in one of its subsidiaries, MBE Cologne Engineering Gmbh (MCEG). MCEG, the former manufacturing unit of KHD Humboldt Wedag is engaged in manufacturing of components and complete machines in the fields of engineering and plant construction. Proven project execution capabilities with strong technical tie-ups The company has tie-ups with leading technology providers all over the world in a number of areas giving it access to world-class technology. As of now, MBEL has collaboration with a Russian company for construction in steel sector and technical partnership agreement with a Singapore based company for constructing sea water desalination, water and waste water plant in industrial, municipal and agricultural sector. The company also has an agreement with a Chinese company for dry bottom Ash Handling systems. Besides, MBEL also uses technologies absorbed from German companies for material crushing and for accurate separation of materials that are difficult to screen. Furthermore, over the years, MBEL acquired two leading international companies to acquire the technologies in the area of ash handling and setting up coal & mineral beneficiation plants. MBEL also has 41.69% stake in Specialist Energy Group Plc (SEG), UK through its Singapore subsidiary MBE Mineral Technologies PTE Ltd to execute orders for super critical boiler circulating pumps. Improvement in order book position with diversified & reputed client portfolio Order book as on March 31, 2013 stood at Rs.4,809.4 crore as compared to order book of Rs.2,564.9 crore as on March 31, Furthermore, MBEL stood L1 for orders aggregating Rs crore, which the company expects to materialize shortly. However, out of the total order book as on March 31, 2013, MBEL has identified slow moving orders (mostly pertaining to power sector) aggregating Rs crore. MBEL s major portion (about 80%) of order book is generally from reputed public sector entities & balance from established private sector companies The orders are diversified and mainly comprise of orders from power sector (around 35%), material handling and cement (around 29%), non-ferrous (around 8%), steel, mines and ports (around 10%), infrastructure, oil and gas sectors (around 8%). Captive equipment manufacturing facility through subsidiary company McNally Sayaji Engineering Ltd. (MSEL rated: CARE BBB+/CARE A (SO) and CARE A2), a subsidiary of MBEL, is engaged in manufacturing various construction equipments which helps the company in procuring state-of-the-art construction equipment required for its various projects. Volatile input prices The raw material & labour cost (including sub-contracting) forms the major chunk of the total cost of sales (around 82%). The same are volatile in nature and impact profitability. However, MBEL keeps itself more or less insulated from these by virtue of cost escalation clause with respect to majority of its contracts. About 95% of the company s contracts have a price escalation clause linked to the Wholesale Price Index (for variation in raw material prices) and Consumer Price Index for industrial workers (for variation in labour rate). However, balance 5% is fixed price contracts where the company is exposed to the volatility in prices. 2

3 Prospects Currently, the scenario in the Indian construction sector appears challenging due to sluggishness in the flow of new orders, slow execution of the existing order book due to problems related to land acquisition and other issues, obtaining requisite clearances, labour shortage, etc. Additionally, Indian construction sector is also facing problems relating to high interest costs, elongated working capital cycles (due to delays in realizing payments from clients and piling inventory) and consequent increase in debt levels. However, the long-term outlook appears satisfactory on the back of major investment expected both from government and private sectors on infrastructure development. MBEL is having established track record, satisfactory order book position and execution capability which is likely to help the company in posting healthy revenue growth in the coming years. Going forward, steady flow of orders and timely receipt of contract proceeds alongwith satisfactory performance of the overseas acquisitions/investments of the company is crucial. Financial Performance (Rs. crore) For the period ended / as at Mar.31, m, A Working Results Net revenue 1, , , Total operating income 1, , , PBILDT Interest Depreciation PBT PAT (after defd. tax) Gross cash accrual (GCA) * Financial Position Equity share capital Tangible networth Total capital employed Key Ratios Growth (%) Growth in total income (%) Growth in PAT (after defd. tax) (%) (41.16) Profitability (%) PBILDT margin PAT margin ROCE Solvency Long term debt equity ratio (times) Overall gearing ratio (times) Interest coverage (times) Term Debt/ GCA (years) Liquidity Current ratio (times) Quick ratio (times) Turnover Average collection period (days)

4 For the period ended / as at Mar.31, m, A Average creditors (days) Average inventory (days) Operating cycle (days) *Including non-cash forex loss of Rs.7.4 crore Note: MBEL has ascertained its operating cycle as 24 months for the purpose of current, non- current classification of assets and liabilities. However, for our purpose of analysis we have taken the operating cycle as 12 months for classification assets and liabilities Rs.20.6 crore, being the aggregate amount of doubtful sundry debtors, interest receivable, loans & advances and deferred revenue expenditure, written off during FY03 against the revaluation reserve has been adjusted against revenue reserve for this analysis. Advances from customers to be adjusted within one year have been considered as current liabilities & those to be adjusted beyond one year have been considered as non-current liabilities for this analysis. Further, entire interest bearing advances have been included in debt for calculating overall gearing ratio. (This follows our brief rational for entity published on 11 September 2013) DISCLAIMER CARE s 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. 4

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