Ketan Construction Limited

Ratings CARE has assigned ‘CARE BBB’ (Triple B) rating to long-term bank facilities and PR3 (PR Three) rating to short-term bank facilities of Ketan Construction Limited (KCL) for an aggregate amount of Rs. 174. 81 crore, including outstanding working capital demand loan as on May 15, 2009 of Rs. 11. 81 crore, sanctioned fund based working capital limits of Rs. 23. 00 crore and sanctioned non fund based working capital limits of Rs. 140 crore. Facilities with ‘CARE BBB’ rating are considered to offer moderate safety for timely servicing of debt obligations.

Such facilities carry moderate credit risk. Facilities with ‘PR3’ rating would have moderate capacity for timely payment of short-term debt obligations and carry higher credit risk as compared to instruments rated higher. Ratings take into account established track record of KCL in the construction sector with good presence in irrigation segment, presence of price escalation clause in majority of projects in order book which protect margins to a certain extent and good order book position with sector & geographical diversity.

Ratings are constrained by delay in execution of some of projects resulting in low efficiency & modest growth in revenue, moderate financial risk profile and fragmented nature of industry with many players competing for infrastructure and urban development projects. Improvement in efficiency and coverage ratios with timely execution of orders are the key rating sensitivity. Maintaining current financial flexibility and growth in income would also be crucial. Background Founded in 1981& incorporated in 1999, KCL is a closely held public limited company promoted by Barad family.

Shri Vijay Barad (Chairman& Managing Director) and Shri Ramesh Barad (Joint Managing Director) have wide experience in the construction industry. Board of directors is also supported by team of experienced professionals. Operations of the Company KCL operates in three distinct area of construction of infrastructure projects viz. irrigation, roads & highways and mining. During FY08, these segments contributed 67%, 26% and 7% respectively. KCL has track record of executing more than 45 infrastructure projects in various sectors since inception with good presence in irrigation sector.

Brief of projects executed in the past is tabulated below. Segment Roads & Highways Irrigation Mining Building No. of projects 13 28 1 4 46 Amount Rs. crore 432. 89 402. 00 64. 58 2. 14 901. 61 KCL prefers self execution of projects to job work basis. Subcontracting expenses remained between 13-22% of contract receipt during FY06 to FY08 which help in maintain good profit margins. KCL's road construction project includes construction of Ahmedabad Vaodara expressway for a stretch of 43. 4 km. (Contract value: Rs. 192 cr).

During FY09, KCL has almost completed most of work for Sarangkheda barrage and Khadakpurna dam projects which required hydro mechanical work of erection and installation of radial gate including other work. Most of the projects of the company under execution have built-in price variation clause. This largely mitigates the risk arising out of adverse movement in raw material prices, in absence of any annual price/volume contracts with any of its raw material suppliers. Price escalation clause is available CREDIT ANALYSIS & RESEARCH LIMITED 1 for movement in diesel prices in the mining projects.

However, it does not protect KCL from overhead costs in case of delay in projects for more than stipulated time frame. As on Dec. 31, 2008, KCL has healthy order book of Rs. 783 crore considering share of KCL in JV. Proportion of mining, irrigation and road segment in order book is 48%, 47% and 5% respectively. Orders are geographically diversified including Gujarat (57%), Maharastrsa (25%), Andhra Pradesh (13%), Madhya Pradesh (4%) and Goa (1%). Order book in Gujarat is mainly constituted by three mining projects, two of Gujarat Industrial Power Corporation Limited (GIPCL) for Rs.

247 crore and one of Gujarat Mineral Development Corporation (GMDC) for Rs. 129. 60 crore. These projects are mainly towards overburden removal and hence expected to provide stable revenue stream spread over three to five years with low operational risk. During FY09, KCL obtained two irrigation projects of Rs. 184 crore in Maharastra for which obtaining forest clearance is the responsibility of KCL. Order book position, operating efficiency and growth in total income for last three years is tabulated below: Particulars Order Book (Rs.

crore) * Contract receipt (Rs. crore) Order book to sales (times) Growth in total income (%) PBILDT Margin (%) Capital turnover ratio(times) FY07 550 145 3. 79 10. 97 16. 26 1. 58 FY08 640 168 3. 81 15. 82 15. 67 1. 48 9MFY09 783 112 6. 98 -10. 94 19. 63 1. 10 Financial Results (Rs. crore) Working Results 2006 Aud. 2007 Aud. 2008 9M2009 Aud. Prov. 168. 06 26. 34 7. 44 6. 67 13. 88 13. 26 20. 08 17. 18 67. 28 126. 39 112. 26 22. 03 9. 55 5. 26 8. 51 8. 51# 18. 06 17. 18 75. 79 144. 81 Income from Operations 130. 76 145. 10 PBILDT 22. 26 23. 60 Depreciation 7.

50 8. 18 Interest and Finance charges 3. 29 5. 40 PBT 13. 61 11. 32 PAT 12. 72 10. 88 Gross Cash Accruals 19. 41 18. 42 Financial Position Equity Share capital Net Worth Total Capital Employed Key Ratios 17. 18 17. 18 47. 10 56. 03 81. 93 101. 48 Growth &Profitability (%) Growth in total income PBILDT / Total Income PAT / Total Income ROCE 23. 63 17. 02 9. 72 17. 36 10. 97 16. 26 7. 50 16. 81 15. 82 15. 67 7. 89 16. 59 -10. 94 19. 63 7. 58 12. 27 Solvency Long Term Debt Equity Ratio * 0. 28 Overall Gearing 0. 74 Total debt to gross cash accrual1.

11 Interest coverage (times) 4. 48 Short term Current ratio* Quick ratio* 1. 15 0. 96 1. 15 0. 92 83 71 85 3. 19 1. 58 1. 28 1. 03 80 78 106 2. 54 1. 48 1. 49 1. 18 90 97 184 1. 84 1. 10 0. 16 0. 81 1. 99 2. 85 0. 25 0. 88 2. 10 2. 83 0. 44 0. 91 1. 98 2. 37 * considering share of KCL in JV. Out of total order book of Rs. 783 crore, order backlog of projects under execution and awarded before 2005 are Rs. 135. 08 crore (17% of order book). This is mainly on account of delay in execution of irrigation projects in Andhra Pradesh.

On the one hand, presence of price escalation clause largely protects the profitability while on the other hand, efficiency ratio and growth in total income remained modest for KCL due to tied up of resources. During FY09, the company has completed the most of the work of Sarangkheda irrigation project (year of award: 1999) and Vidisha road project (year of award: 2005). Completion of both of above projects would enable deployment of the said resources to other new sites Turnover Average Collection (days) 67 Average Inventory (days) 44 Average creditor(days) 85 Working Capital Turnover Ratio 3.

32 Capital Turnover ratio 1. 54 * includes current portion of long-term debt # Tax provision is to be provided at the year end. During FY08, income form rendering services with Joint Venture (JV) was 43. 2% of contract receipt. KCL generally bids in JV mainly for meeting qualifying criteria. However, in majority of projects, work is done solely by KCL under back to back arrangement. All JVs 2 CAREVIEW are Association of Person (AOP) by constitution and operations of JV are treated as Jointly Controlled Operations. Considering this fact accounting related to JV operations is crucial for KCL.

As explained by the management, the difference between revenue of KCL on behalf of JV and expense mentioned in books of JV on behalf of KCL is on account of cash based invoicing. KCL has changed auditor from FY08 mainly for operational convenience. As per the accounting policies for revenue recognition reported in audit reports for FY08, "Foreseeable losses are accounted for when they are determined except to the extent they are expected to be recovered through claims presented or to be presented to the customer or in arbitration".

Thus, accounting policy does not recognise foreseeable losses in the projects where company has raised / likely to raise claims for losses due to project delays or for any other reason. However, as informed by the statutory auditor, foreseeable losses during FY08 were nil. Average collection days increased during 9MFY09 mainly on account of delay in payment received in irrigation projects at Andhra Pradesh. Besides, average creditor days were high during FY08 and 9MFY09 mainly on account of clubbing of payment to be made for sub contractor and retention money for the some of the projects.

For Further details please contact at : The Company enjoys fund based working capital limits of Rs. 23 crore in the multiple banking arrangements with Oriental Bank of Commerce and AXIS Bank. Average working capital limits were utilized approx. 90% from Jan. 08 to Dec. 08. Besides, KCL has availed adhoc limits from Sep. 08 to Dec. 08 which reflect stress on liquidity. Working capital turnover ratio had shown a declining trend. Considering above facts, overall, liquidity position is moderate. Industry Indian construction industry which is ranked 12th in the world, accounts for 1.

75 percent of the estimated USD 3,400 billion worldwide annual output. The industry is the second highest employer after agriculture and provides employment, both directly and indirectly, to about 32 million people. The Eleventh Five Year Plan (2007-2012) has proposed a capital expenditure of Rs. 11,700 billion for developing and refurbishing of infrastructure in India. However, intense competition in this sector on account of fragmented nature of industry coupled with bid driven nature of business put pressure on margins.

Prospects In the medium-term, KCL's prospects shall be governed by its ability to improve operating efficiency and liquidity. Its ability to augment its size with maintaining prudent capital structure is also crucial. May 2009 CREDIT ANALYSIS & RESEARCH LIMITED 4th floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (E), Mumbai - 400 022. Tel. : (022) 6754 3456 Fax : (022) 6754 3457 E-mail : [email protected] com 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. CREDIT ANALYSIS & RESEARCH LIMITED 3