TEXT-Fitch release on Era Infra Engineering Limited

(The following statement was released by the ratings agency)

Oct 7 - Fitch Ratings has today downgraded the rating of India-based Era Infra Engineering Limited's (ERCI.BO: Quote, Profile, Research) (EIEL) INR500m commercial paper (CP) program and INR500m short-term debt program to 'F2+(ind)' from 'F1(ind)'.

The rating downgrade reflects the sustained weak financial profile of EIEL on account of its high financial leverage (Total Adjusted Debt /Operating EBITDAR of 6.6x and Total Adjusted Debt/ Capitalisation of 82.3% in FY08). EIEL's financial leverage is expected to remain high in the short-medium term as it continues to have significant capital expenditure and working capital requirements. Moreover, the company has substantial short-term debt and current portion of long-term debt, thus exposing it to refinancing risk. Although the company has strong EBITDA due to its relatively high profitability, cash from operations and free cash flow are considerably lower due to the high interest outgo, working capital requirements and capital expenditure. The latter two, coupled with substantial corporate guarantees, have led to an increase in total adjusted debt levels to INR25.8bn at FYE08 from INR914m at FYE06.

Meanwhile, EIEL's rating continues to reflect its expanding operations, strong order book position and high profitability. The same is supported by the diversified presence of the company across various sectors in the construction business. The order book of company has grown to over INR50bn in August 2008 from INR38bn in August 2007 on the back of projects primarily in the power, highway and industrial segments. The revenues of the company have also grown to INR16.8bn in FY08 from INR1.1bn in FY04, thus recording a CAGR of 98%. The EBITDA margin during the same period has improved to 23.4% from 6.8%. The CP program forms part of the fund-based working capital banking lines of the company.

The company has announced plans to enter the power sector through a subsidiary to set up a 1,200 MW power plant in Madhya Pradesh. This plan is not yet finalised and is therefore not factored in the rating; Fitch will take a view on this as and when it is finalised.

Positive rating drivers include an improvement in financial leverage due to conversion of foreign currency convertible bonds (FCCBs) and/or reduction in borrowings while maintaining profitability. On the other hand, deterioration in financial leverage due to increased borrowings, substantial debt-led capex, time/cost overrun on outstanding projects and a reduction in profitability would be viewed negatively for its ratings.

The total debt to capitalisation ratio of the company has increased to 82.3% in FY08 from 78.6% in FY07; total debt also includes off-balance sheet liabilities of INR8.5bn. The interest coverage ratio has also deteriorated to 3.7x in FY08 from 7.4x in FY07.

Founded in 1990, EIEL operates in the construction space of sectors such as railways, roadways, power, industrial construction and residential and commercial construction. Two companies - Era Landmarks (India) Limited and Era building Systems (India) Limited, have ceased to be subsidiaries of EIEL with effect from 28 and 29 March 2008, respectively.