Rationale

 The assigned rating favourably factors in Patel Engineering Limited's (PEL) strong order book position (order book to OI ratio of 4.7 times after adjusting for slow moving orders), which provides medium-term revenue visibility. PEL has witnessed healthy order inflows in the last one year (Rs. 4,261 crore, including escalation in FY2022), which has improved its order book position. The rating favourably factors in PEL's diversified order book across segments, geography and clientele. In the past, PEL had faced financial challenges which had also impacted its operations; however, with the successful implementation of the resolution plan by lenders, the company's operational and financial performance has improved, which is expected to continue. PEL is one of the largest engineering company in India's hydropower sector – a segment which has seen healthy traction with increased Government's focus. The rating also draws comfort from the long track record of PEL's operations of over seven decades, supported by an experienced management and demonstrated capabilities in executing relatively complex hydro and tunnelling projects at geographically diverse locations. The rating, however, is constrained by PEL's elongated working capital cycle, primarily due to sizeable receivables/work in progress being stuck in arbitration or under claims pending with the clients, resulting in high NWC/OI of 62% as on March 31, 2022. However, the company has been able to manage the working capital requirements, partly by availing credit period from suppliers/sub-contractors and mobilisation advances from clients. This has resulted in relatively higher TOL/TNW, which stood at 2.4 times as on March 31, 2022. ICRA notes that the working capital intensity has improved over the last one year with the realisation of claims and monetisation of land bank, and the management expects this to improve further in FY2023. ICRA draws comfort from the cushion available in the form of unutilised arbitration BG/court BG that could be used to realise some of the awards pending in the higher courts. Going forward, any material deterioration in the working capital cycle from the anticipated levels over the medium term can impact PEL's liquidity position/credit profile and will be a key rating sensitivity. The ratings also note the stiff competition in the construction sector and the company's exposure to sizeable contingent liabilities in the form of bank guarantees, mainly for contractual performance, mobilisation advance and security deposits. The rating is also constrained by execution risks as about 52% of the order book as on March 31, 2022 is in preliminary/early stage of execution with less than 15% progress. ICRA has noted that PEL has sizeable claims awarded by arbitration tribunal/courts but pending in higher courts which can be realised in the interim by providing bank guarantees (BG). While the company's operating margin is expected to remain healthy at around 12-14% in the near to medium term, the coverage indicators are likely to remain modest on account of a leveraged capital structure. The company is planning to monetise some of its non-core investments to deleverage its capital structure and improve its liquidity position. Going forward, the timely monetisation of the non-core assets and improvement in the working capital intensity remains remain crucial to boost its financial performance and liquidity position. The Stable outlook reflects ICRA's opinion that the company will continue to benefit from its healthy order book position, strong execution capabilities, and improved liquidity position.