Annai Constructions September 29, 2017 Rating Facilities Amount Rating 1 Long-term Bank Facilities 5 CARE BB; Stable (Double B; Outlook: Stable) Total Facilities 5 (Rupees Five crore only) Details of instruments/facilities in Annexure-1 Rating Action Assigned Detailed Rationale & Key Rating Drivers The rating assigned to the bank facilities of Annai Constructions (AC) is tempered by its small scale of operations, short-term revenue visibility with high client concentration from current order book position, leveraged capital structure, working capital intensive nature of operations, partnership nature of business operations and presence in a competitive civil foundation works industry. The rating, however, derives strength from its experienced partners with established track record of entity and reputation of customers, increasing total operating income, satisfactory profitability margins, improving debt coverage indicators and healthy outlook for wind power generation in India. Going forward, ability of the firm to improve its profitability margins and capital structure along with its ability to bag new orders and increase its scale of operations will be the key rating sensitivities. Detailed description of the key rating drivers Key Rating Weaknesses Small scale of operations: The Total Operating Income of the firm stood at Rs.50.72 crore in FY17 (Provisional) reflecting small scale of operations for the firm. Further the networth of the firm is low at Rs.4.90 crore. The small scale of operations impacts the firm s negotiation capabilities with its suppliers and customers, while limiting its financial flexibility with the lenders. Short-term revenue visibility with high client concentration from current order book position: The firm has an order in hand of nearly Rs.14.70 crore from Suzlon Gujarat Wind Park Limited for laying of foundation works for wind power project in Thutukodi in Tamil Nadu. The said order provided revenue visibility for short-term period with single client concentration. However, the firm keeps on getting orders from other WTG manufacturers as a part of EPC agreement with wind power producers along with direct orders from wind power producers as and when required. The current order is expected to be executed by end of December 2017. Partnership nature of business with inherent risk of withdrawal of capital: Being a partnership nature of business, AC is exposed to risk of withdrawal of capital by partners on personal exigencies. Further limited and restricted capital funding due to inability to explore cheaper sources of finance as available to corporate entities affects growth potential of entity. Leveraged capital structure: The firm s debt structure includes secured loans from various financial institutions taken towards purchase of equipments and financing vehicles used for business along with unsecured loans from relatives and associates to manage business operations. Overall gearing of the firm improved on account of improved networth, but remained leveraged at 2.32x as on March 31, 2017 (Provisional) as against 3.71x as on March 31, 2016 owing to AC s low net worth of Rs.4.90 crore as against total debt of Rs.11.40 crore as on March 31, 2017 (provisional). Working capital intensive nature of operations: The firm usually enjoys a credit period of 45 to 60 days from its suppliers. Further the customers pay the dues in stages of execution of works such as 70% of dues are paid on laying foundation and balance after the commissioning of wind power generator. Few customers retain a part of dues ranging around 5% to 10% in order to safeguard against contingencies in executed works. Owing to elongated collection period dependent on stage of project execution, firm has a working capital intensive nature of operations. The working capital cycle (days) stood at 42 days in FY17 (Provisional). Further firm has an average working capital (cash credit) facility utilization of 65% for past 12 months ending August 2017. 1 Complete definition of the ratings assigned are available at www.careratings.com and other CARE publications 1 CARE Ratings Limited
Highly competitive and fragmented nature of civil construction industry: The Indian construction sector is highly fragmented with presence of many mid and large-sized players. Given the volatile economic environment, there has been a slowdown in release of new contracts, which has resulted in sluggish growth being witnessed by the construction industry. However the long term outlook appears satisfactory on the back of major investment expected from the government sector. Furthermore the total income earned and profit margins of the firm depend upon the bargaining power of AC to receive work orders with better margins. Key Rating Strengths Experienced Promoters with established track record of around two decades in executing wind mill foundation works: Promoters of AC, Mr. Gnana Thiriviam, Mr.Selvaraja and Mr. Thinakaran are engaged in the business of executing wind mill foundation works from 2001 and have vast experience of around 17 years. Since inception, AC has executed about 3000 projects of civil foundation works for wind power producers. Mr. Gnana Thiriviam is the Managing Partner who looks after the day to day operations of the business for the past 17 years and has a prior experience of around 10 years in procuring suitable land banks for wind industries. Increasing Total Operating Income with satisfactory profitability margins: Total Operating Income (TOI) has been increasing steadily year on year on account of increase in intake of number of orders from wind based power producers as well as manufactures of windmill turbine generators (WTG). TOI increased at a CAGR of 141% in FY17 (Provisional) to Rs.50.71 crore as against Rs.9.37 crore in FY15. Even though the profitability margin remained satisfactory, the PBILDT margin has been declining during review period on account of variation in raw material prices every financial years pertaining to cement, sand, glue materials and PVC pipes etc. The PBILDT margin stood satisfactory at 9.51% in FY17 (Provisional) as against 17.54% in FY15. However, PAT margins improved to 4.98% in FY17 (Provisional) as against 4.57% in FY16 owing to nominal increase in interest costs in comparison to rise in profit volume. Improving debt coverage indicators: The debt coverage indicators of the firm has been improving year on year marked by total debt/gca and interest coverage which stood at 2.83x and 6.01x respectively in FY17 (Provisional) due to increasing operating profit and cash accruals with low financial expenses and moderate debt levels. Reputed customer base in wind power generation segment: AC has provided services to reputed customers like Suzlon Gujarat Wind Park Limited, Gamesa Renewable Private Limited, Wind World India Limited etc. The top OEMs in terms of cumulative installed capacity in India are Suzlon Gujarat Wind Park Limited (35.4%), Wind World India Private Limited (18%), Gamesa Renewables Private Limited (10.1%), Vestas Wind Technology India Private Limited (7.6%), Regen Powertech Private Limited (7.3%) and Inox Wind Limited (5.68%). The current wind mill manufacturing capacity in India is around 10 GW. Healthy outlook for wind power generation in India: 500 GW is installed worldwide and India ranks fourth in the World after China, USA, Germany with 32 GW as of March 2017. Government of India fixed a target of 75 GW of Wind Power by 2022 and this is achievable given the technology and manufacturing capability by OEMs, Investment Climate for Independent Power Producers (IPPs) and lead taken by the Union Government and Wind States to promote wind power by favourable policies, and with financial institutions and banks playing an active role. After soaring to a record 5, 400 MW of installed capacity set up in 2016-17, the Indian wind industry is heading for a sharp nosedive this year. By the looks of it today, installations in 2017-18 could barely cross 1, 000 MW. (Source: Business Line) Government of India s promotion of Green Jobs through the National Skill Development Council is another demonstration to make wind industry as a career for young technicians and engineering students. Analytical Approach: Standalone Applicable Criteria: Criteria on assigning Outlook to Credit Ratings CARE s Policy on Default Recognition Financial ratios Non-Financial Sector About the Company Annai Constructions (AC) is a Partnership firm established in 2001 by Mr. Gnana Thiriviam and his two friends Mr. Xavier Selvaraja and Mr. Thinakaran in Tiruneveli District of Tamil Nadu. The firm is into the business of construction of civil foundation works for wind mill power generators. Some of its major customers are Suzlon 2 CARE Ratings Limited
Gujarath Wind Park Limited, Mytrah Energy Limited, kshema Power Infrastructure and Gamesa Renewables etc. Besides engaged in civil foundation works, AC has also a Wind mill with an installed capacity of around 750 KWP in Tirunelveli. The power generated from this wind mill is sold to Tamil Nadu Government approximately at a rate of Rs.2.67 per unit. However the income from this stream of business is nominal at Rs.0.79 crore in FY17 (Provisional). Brief Financials FY16 (A) FY17 (P) Total operating income 21.04 50.72 PBILDT 2.21 4.82 PAT 0.96 2.52 Overall gearing (times) 3.71 2.32 Interest coverage (times) 2.81 6.01 A: Audited P: Provisional Status of non-cooperation with previous CRA: Not Applicable Any other information: Not applicable Rating History for last three years: Please refer Annexure-2 Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to care@careratings.com for any clarifications. Analyst Contact Name: Mr Manish Kumar Tel: 040-6900 0504 Mobile: + 91 99495 47551 Email: manish.kumar@careratings.com **For detailed Rationale Report and subscription information, please contact us at www.careratings.com About CARE Ratings: CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the methodologies congruent with the international best practices. 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/outlooks 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. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is based on the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial performance and other relevant factors. 3 CARE Ratings Limited
Annexure-1: Details of Instruments/Facilities Name of the Instrument Date of Issuance Coupon Rate Fund-based - LT-Cash Credit Annexure-2: Rating History of last three years Sr. No. Name of the Instrument/Bank Facilities Type Current Ratings Amount Outstanding 1. Fund-based - LT-Cash Credit Maturity Date Size of the Issue Rating assigned along with Rating Outlook - - - 5.00 CARE BB; Stable Rating LT 5.00 CARE BB; Stable 2017-2018 Rating history 2016-2017 2015-2016 2014-2015 - - - - 4 CARE Ratings Limited
CONTACT Head Office Mumbai Ms. Meenal Sikchi Mr. Ankur Sachdeva Cell: + 91 98190 09839 Cell: + 91 98196 98985 E-mail: meenal.sikchi@careratings.com E-mail: ankur.sachdeva@careratings.com Ms. Rashmi Narvankar Mr. Saikat Roy Cell: + 91 99675 70636 Cell: + 91 98209 98779 E-mail: rashmi.narvankar@careratings.com E-mail: saikat.roy@careratings.com CARE Ratings Limited (Formerly known as Credit Analysis & Research Ltd.) Corporate Office: 4th Floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (East), Mumbai - 400 022 Tel: +91-22-6754 3456 Fax: +91-22-6754 3457 E-mail: care@careratings.com AHMEDABAD Mr. Deepak Prajapati 32, Titanium, Prahaladnagar Corporate Road, Satellite, Ahmedabad - 380 015 Cell: +91-9099028864 Tel: +91-79-4026 5656 E-mail: deepak.prajapati@careratings.com BENGALURU Unit No. 1101-1102, 11th Floor, Prestige Meridian II, No. 30, M.G. Road, Bangalore - 560 001. Cell: +91 98407 54521 Tel: +91-80-4115 0445, 4165 4529 CHANDIGARH Mr. Anand Jha SCF No. 54-55, First Floor, Phase 11, Sector 65, Mohali - 160062 Chandigarh Cell: +91 99888 05650 Tel: +91-172-5171 100 / 09 Email: anand.jha@careratings.com CHENNAI Unit No. O-509/C, Spencer Plaza, 5th Floor, No. 769, Anna Salai, Chennai - 600 002. Cell: +91 98407 54521 Tel: +91-44-2849 7812 / 0811 COIMBATORE T-3, 3rd Floor, Manchester Square Puliakulam Road, Coimbatore - 641 037. Tel: +91-422-4332399 / 4502399 JAIPUR Mr. Nikhil Soni 304, Pashupati Akshat Heights, Plot No. D-91, Madho Singh Road, Near Collectorate Circle, Bani Park, Jaipur - 302 016. Cell: +91 95490 33222 Tel: +91-141-402 0213 / 14 E-mail: nikhil.soni@careratings.com KOLKATA Ms. Priti Agarwal 3rd Floor, Prasad Chambers, (Shagun Mall Bldg.) 10A, Shakespeare Sarani, Kolkata - 700 071. Cell: +91-98319 67110 Tel: +91-33- 4018 1600 E-mail: priti.agarwal@careratings.com NEW DELHI Ms. Swati Agrawal 13th Floor, E-1 Block, Videocon Tower, Jhandewalan Extension, New Delhi - 110 055. Cell: +91-98117 45677 Tel: +91-11-4533 3200 E-mail: swati.agrawal@careratings.com PUNE Mr.Pratim Banerjee 9th Floor, Pride Kumar Senate, Plot No. 970, Bhamburda, Senapati Bapat Road, Shivaji Nagar, Pune - 411 015. Cell: +91-98361 07331 Tel: +91-20- 4000 9000 E-mail: pratim.banerjee@careratings.com CIN - L67190MH1993PLC071691 HYDERABAD Mr. Ramesh Bob 401, Ashoka Scintilla, 3-6-502, Himayat Nagar, Hyderabad - 500 029. Cell : + 91 90520 00521 Tel: +91-40-4010 2030 E-mail: ramesh.bob@careratings.com 5 CARE Ratings Limited