CARE assigned ‘CARE AA-’ (Double A Minus) rating to the long-term bank loans / facilities and ‘PR 1+’ (PR One Plus) rating to the short-term bank loans / facilities of Sadbhav Engineering Limited (SEL) for an aggregate amount of Rs 944.16 cr, including- outstanding term loan (as on Oct. 31, 2007) of Rs 19.16 crore, fund based working capital sanctioned limit of Rs 175 crore and non-fund based sanctioned limit of Rs 750 crore. Also, CARE assigned ‘PR1+’ (PR One Plus) rating to SEL’s STD/CP (short-term debt/commercial paper) issue for an amount up to Rs 50 cr and maturity up to twelve months. Instruments with this rating are considered to offer high safety for timely servicing of debt obligations and carry very low credit risk. The STD/CP issue would be carved out of the sanctioned working capital limits.

The ratings take into account SEL’s proven project execution capabilities, increasing presence in the BOT (build-operate-transfer) segment, strong order book position, good financial flexibility, growing geographical spread for the projects and shifting focus from project contractor to project developer.

The long-term rating is, however, constrained by fragmented industry with many players competing for infrastructure and urban development projects, lack of presence in high margin segments of infrastructure sector, lower bargaining power (as majority of the customers are government bodies), sensitivity of the raw material prices (due to lack of escalation clause in the BOT projects) and nascent in-house project designing capabilities.

Sadbhav Engineering Limited (SEL) was incorporated in 1988 as a private company. In 1989, it took over the business of a partnership firm, M/s. Bhavna Construction Co., which was engaged in construction business since 1968. The company came up with an IPO of Rs. 54 crore in FY06 which resulted in increase in the equity capital and networth. SEL is mainly driven under the leadership of Mr. Vishnubhai Patel who is CMD of the company and has 37 years of experience in the construction business.

SEL operates in three distinct business areas in the infrastructure sector viz. roads, irrigation and mining. During FY07, these segments constituted 86%, 10% and 4% of the total revenue respectively. However, SEL is yet to make a mark in the high end construction projects like power plants, air ports and port infrastructure. SEL had an order book backlog position of Rs 2244 crore, as on Jul. 31, 2007 which was about 4.5 times of its total income for FY07.

SEL posted low growth in total income up to FY05. However, from FY06 onwards, it reported improvement in revenue growth. The total income of SEL increased by 41% and 68%, in FY06 and FY07 respectively.

PBILDT margin remained around 13%, over the last three years. It declined to 12.83%, in FY07 from 13.19%, in FY06, due to increased raw material costs. However, with the decrease in interest costs, the PAT margin increased form 4.01%, in FY06 to 5.36%, in FY07. The interest coverage ratio improved from 2.20 times for FY06, to 4.68 times for FY07, due to the same reason.

The long-term debt equity ratio of 0.25 times and overall gearing of 0.57 times, as on Mar.31, 2007 were at comfortable levels. The liquidity ratios as on Mar.31, 2007 were satisfactory.

In the medium term, SEL’s prospects shall be governed by its ability to improve margins through better control over costs and execution of its ongoing contracts, especially those lacking an escalation clause, in a timely and cost effective manner. Its ability to augment its project designing skills so as to enter the high margin segments of infrastructure sector shall be crucial.

Sourced From: Careratings

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