Rationale

 The reaffirmation of ratings for ITD Cementation India Limited (ITD) favourably factors in the company’s strong performance in FY2024e with revenue likely to exceed Rs. 7,500 crore (over 50% growth YoY), expansion in operating margin by 200bps, as per ICRA estimates, and its strong order book position of Rs. 20,825 crore as on December 31, 2023, translating into order book (OB) to operating revenue (FY2023) ratio of 4.09 times, which provides medium-term revenue visibility. The company’s order book recorded a CAGR of 15.4% over the last four-year period ending March 2023, supported by healthy order inflows, with order inflows worth Rs. 14,187 crore during April 2022 to December 2023 period. ITD witnessed healthy increase in operating income (OI) at a CAGR of 12.8% during FY2019-FY2023 and the momentum was sustained in 9M FY2024, with 58% YoY growth, driven by healthy order book addition and timely execution of the same. It is expected to witness YoY growth of ~50% and ~15% in FY2024 and FY2025, respectively. The operating profit margin improved to 9.6% in 9M FY2024 (compared to 7.3% in 9M FY2023), supported by closure of legacy loss-making projects and operating leverage benefits. ICRA expects the operating margins to sustain at similar levels going forward. The ratings continue to draw comfort from diversified order book in terms of segments, geography and clientele and demonstrated track record in project execution. ITD has an established track record of operations of over four decades, supported by an experienced management and demonstrated capabilities in executing relatively complex marine and underground metro projects at geographically diverse locations. The company has a fleet of well-maintained specialised equipment in its portfolio and a strong technical team, which aids its project execution capabilities. The ratings, however, are constrained by the leveraged capital structure and moderate coverage metrics. The company’s total outside liabilities to tangible net worth (TOL/TNW) remained high at 3.1 times as on September 30, 2023 (March 2023: 3.0 times) due to significantly high mobilisation advance availed and extended trade creditors to support the working capital requirement. Its operations are working capital-intensive due to sizeable inventory (largely work-in-progress inventory) as most of the projects have milestone-based billing for certain types of work done. Its inventory days remained high at 160 days as on September 30, 2023 (136 days as on March 31, 2023). Owing to improved operating margins, there has been an improvement in debt coverage metrics with interest coverage at 3.1 times (FY2023: 2.6 times) and DSCR of 1.8 times in H1 FY2024. However, overall coverage and leverage metrics remains modest compared to peers at similar rating level. There has been an increase in the overall capex outlay during FY2023-FY2024e on account of a significant expansion in scale of operations, which has been largely funded by debt. The resultant higher repayment obligations in the medium term will keep the overall coverage metrics under pressure. The ratings factor in the exposure to execution risk, given that a large share of the order book (28% as on December 31, 2023) is in the nascent stages of execution (less than 10% executed). Any delay in work front availability/ design approvals could adversely affect the progress of the projects. However, these are largely new orders received in the last fifteen months ending December 2023 and as informed by the management, requisite approvals are in place for most of the orders. Any slippages on project execution or profitability front could have a bearing on its credit profile. Nonetheless, ICRA draws comfort from its execution track record and absence of invocation of guarantees in the past. The heightened competition in the construction sector, along with any volatility in input costs (steel, cement, etc) could exert pressure on ITD's profitability, despite the presence of price escalation clauses in these contracts. Given that the company has funded a sizeable share of its working capital requirement through extended credit period and relatively longer term (~2-3 years) advance from customers, thus any decline in either of these would have a bearing on its liquidity position and result in asset liability mismatch. In the backdrop of expected sizeable growth over the next three fiscals, which will entail increase in working capital requirement, the company’s ability to judiciously manage its working capital cycle and maintain adequate liquidity remains important from the credit perspective. ICRA notes that the parent - Italian-Thai Development PLC’s (ITD-Thai) credit profile has significantly weakened in the recent past. While ITD was dependent on ITD-Thai from a qualification/bidding perspective some years back, its Indian operations has requisite technical and financial qualification and has been able to bid for projects on its own over the last few years. Further, there are only two ongoing projects being undertaken by ITD with ITD-Thai, both of which are in advanced stages of completion. As confirmed by the management of ITD, there is no cashflow support expected to be extended to ITD Thai, except royalty (0.5% of contract revenue) and dividend. In the past, ITD has neither declared any exceptional dividend nor extended any loans/advances to ITD Thai. Nevertheless, any higher-than-envisaged support to ITD Thai will remain a key credit monitorable. The Stable outlook on the long-term rating reflects ICRA’s expectations that the company would continue to benefit from strong and well diversified order book position, strong execution capabilities and established relationship with its clientele.