TEXT-Fitch affirms SEW Infrastructure's ratings at 'AA-(ind)'

(The following statement was released by the ratings agency)

Aug 26 - Fitch Ratings has today affirmed SEW Infrastructure Ltd's (SEW) National Long Term rating at 'AA-(ind)'. The Outlook is Stable. Fitch has also affirmed SEW's INR2.04bn fund- based working capital limits and INR0.29bn term loans at 'AA-(ind)', and its INR15.11bn non fund-based working capital limits at 'AA-(ind)' /'F1+(ind)'. Simultaneously, SEW's INR0.5bn non-convertible debenture programme has been assigned a 'AA-(ind)' rating and its INR0.5bn commercial paper programme a 'F1+(ind)' rating.

SEW's ratings continue to reflect its strong credit metrics, robust order book position (around 6.0x FY09 revenues), stable profit margins and efficient working capital management. In FY09, the company's leverage (debt/EBITDA) was 1.2x and interest coverage was 5.9x. Margins were stable due to the company's policy for including cost escalation clauses in most of its contracts. EBITDA margin was 11.3% in FY09 (FY08: 12.4%); SEW's order book increased to INR96.1bn at end-March 2009 (end March 2008: INR75.5bn).

The factors constraining the ratings include project concentration and a likely increase in leverage and execution risk given its entry into Build - Own - Operate - Transfer (BOOT) projects. Its top three projects account for 31%, and the top 10 projects for 57% of the order book. The largest irrigation project in Andhra Pradesh - Pranahita Lift Irrigation Scheme, (to be executed by the company through six packages) accounts for 39% of the order book. The company has commenced construction activity at its toll-road BOOT - SEW-Navyuga Barwani Tollways Private Ltd (SNBTPL, 'BBB-(ind)'/Stable). The company plans to undertake three hydro-power projects of 96MW each on a BOOT basis. Fitch notes that these projects will add stable cash flows to the company in the future; however, during the construction phase they will significantly increase consolidated leverage levels and carry large execution risk in the form of cost and time over runs.

Given the preliminary nature of the BOOT projects, Fitch has presently factored the impact of its ongoing SNBTPL project and one of the proposed hydro-power projects into the rating. This, in Fitch's opinion would keep the consolidated leverage below 3x level, and sustained leverage beyond this would be a negative trigger for the rating. Negative rating actions would also be triggered by cost overruns at the BOOT projects, decline in profitability or increased working capital requirements.

SEW was incorporated in 1960 and has grown to be a mid-sized construction company with expertise in irrigation and power segments. In FY09, SEW had revenues of INR15.9bn (FY08:INR11.6bn), EBITDA of INR1.8bn (FY08: INR1.4bn) and net profit of INR955m (FY08: INR736m). The company managed its working capital efficiently - an increase in debtor days (42 days in FY09 versus 33 days in FY08) was compensated by a corresponding increase in creditor days. SEW generated INR1.9bn operating cash before working capital and INR1.4bn net cash flow from operations. The company had total debt of INR2.1bn at end-March 2009, and enjoyed liquidity from its INR633m unutilised fund-based limits and INR881m cash balance.