India Rating downgrades Sadbhav Engineering, Sadbhav Infra over liquidity

Project execution capabilities could be impacted; delay in the monetisation of assets could add to liquidity stress

India Ratings has downgraded Sadhbhav Engineering Ltd (SEL) and its subsidiary Sadbhav Infrastructure Projects Ltd (SIPL) long term rating from “A-" from “BBB+” on stretched liquidity conditions. This could impact the companies' project execution capabilities.

The outlook on ratings is negative and the stretched liquidity conditions are driven by the high gross working capital levels. SEL is facing the tight liquidity position despite an inflow of Rs 990 crore via the Indinfravit Trust unit sales and non-convertible debentures (NCDs) issuances at SIPL’s level.

The delay in the monetisation of assets could exert further stress on the company’s ability to manage its obligations, the rating agency said.

SEL holds 69.7 per cent stake in Sadbhav Infrastructure. Ind-Ra continues to take a consolidated view of SIPL and its parent SEL due to the strong legal and operational linkages between them. SIPL had announced a scheme of merger with SEL in Q3FY20. The merger is likely to be completed by H1FYE22, subject to the receipt of various statutory and regulatory approvals.

SEL has been extending financial support to SIPL by way of a corporate guarantee (unconditional, irrevocable and absolute) for the debt facilities of SIPL. Furthermore, SEL had been extending short-term loans/advances to SIPL (FY20 outstanding loans from SEL: Rs 350 crore, FY19: Rs 630 crore). These loans were used for the equity commitments for the under-construction Hybrid Annuity Model (HAM) projects and also meet the shortfalls faced by operational BOT projects, it added.

SEL’s standalone revenue declined by 27.7 per cent yoy to Rs 1,620 crore in FY21 due to Covid-19-induced execution challenges in H1FY21. Furthermore, in Q4FY21, the revenue fell by about 23 per cent, as SEL’s ability to mobilise its resources was adversely affected by the continued stretched liquidity position.

The execution is expected to pick pace in FY22 following the equity infusion in HAM projects (which constitute about 30 per cent of the order book) from Q2FY22. Similarly, the consolidated revenue declined to Rs 1,820 crore in FY21 (FY20: Rs 2,430 crore) in line with SEL’s performance.

At FYE21, SEL had a strong order book of Rs 930 crore (4.9x of FY21 revenue), spread across HAM (26.3 per cent), engineering, procurement and construction (EPC: 49.8 per cent) and irrigation and mining (23.9 per cent).