Rationale

 The assigned ratings for Gypsum Structural India Private Limited (GSIPL) takes comfort from the extensive experience of its promoters in the engineering procurement and construction (EPC) segment, its established track record in executing water and sewerage projects in metropolitan cities, oil and gas pipeline projects for hydrocarbon, and a comfortable order book (OB) of 4.9 times of operating income (OI) in FY2024 (as of March 2024). The ratings consider the healthy revenue visibility and financial profile with low leverage (TOL/TNW of 0.6 times) and robust coverage metrics with interest coverage of over 17 times. The company majorly deals in niche segments like microtunneling and rehabilitation projects where the competition is relatively moderate (compared to road/railway projects), thereby supporting its profitability. Given the in-house survey team, technicians, consultants and engineers for execution of the projects, the company’s operating margins have remained healthy at ~30% level over the last two years. While operating margins are expected to moderate over the medium to long-term with likely increase in competition, the leverage and coverage metrics are expected to remain strong with TOL/TNW likely to remain below 1.0 times and interest cover above 10.0 times. The ratings are also supported by GSIPL’s established relationships with a reputed customer base, which includes Municipal Corporation of Greater Mumbai, Ahmedabad Municipal Corporation, etc. The ratings are, however, constrained by the company’s modest scale of operations, high working capital intensity of 41.9%, and project concentration risk with top-three orders contributing to ~45% of the unexecuted order book as on March 31, 2024. Given the company’s presence in niche segments, the scale of operations remains modest and segment concentration remains high with water and sewerage projects contributing ~86% of the order book as on March 31, 2024. Moreover, the working capital intensity remains high at ~40%, primarily on account of milestone billing and sizeable unbilled revenue. Any major delay or a dispute related to the unbilled revenue could adversely impact the company’s revenue and working capital cycle. The promoters have up-streamed cash to the tune of Rs. 46.9 crore in FY2022 and FY2023 through share buyback, which has restricted improvement in net worth and necessitated reliance on promoter funding to support its increasing working capital requirement in the interim. Any large dividend outflow or share buyback, which could adversely impact liquidity of the company will be a credit negative and remains a key monitorable. Given the expected increase in scale of operations over the medium term, the company’s ability to judiciously manage its working capital cycle remains crucial from the credit perspective. Also, GSIPL’s ability to enhance its working capital lines, especially non fund-based limits, remains crucial to bid for new orders. About 40% of the outstanding order book is related to overseas projects, in Iraq and Bangladesh, thereby exposing the company to geopolitical and price exchange risks. ICRA notes that GSIPL participates only in those overseas projects which are funded by multilateral/bilateral funding agencies, and hence the working capital cycle is expected to remain lean in those projects, though the execution risk will remain high due to a challenging operating environment. The ratings are constrained by the absence of price-variation clause in a few contracts, which exposes its operating margin to cost escalation risk. Moreover, given the complexity of the projects, timely completion of the project within time and stipulated cost remains crucial to sustain margins. The ratings note the competition in the construction sector, which could put pressure on the new order inflows and the company’s exposure to sizeable contingent liabilities in the form of bank guarantees, mainly for contractual performance, mobilisation advance and retention money. Nonetheless, ICRA draws comfort from its execution track record and absence of invocation of guarantees in the past. The Stable outlook on the ratings reflect ICRA’s expectations that GSIPL would likely sustain its low leverage and comfortable coverage metrics, driven by healthy ramp-up in execution and continued strong order inflows.