TEXT-Fitch release on Shriram EPC ltd

(The following statement was released by the ratings agency)

Nov 11 - Fitch Ratings has today assigned India's Shriram EPC Ltd (SHRI.BO: Quote, Profile, Research) (SEPC) a National Long-term rating of 'A-(ind)' (A minus(ind)) with Stable Outlook. At the same time, the agency has assigned SEPC's INR898m long-term fund-based limits and INR643m long-term loans National Long-term 'A-(ind)' (A minus(ind)) ratings. Its INR3,105m short-term non fund-based and INR500m short-term loans have been assigned National Short-term 'F1(ind)' ratings.

The ratings reflect SEPC's strong growth over the past five years, strong order book of INR20.6bn - which is 3.2x FY08 revenues - low leverage and improving profitability. The company's liquidity position is comfortable, following the INR1,500m raised through an IPO in FY ended March 08. As of 31 March 2008, the company had a cash balance of INR1,412m and total debt of INR1,115m. The company's credit metrics are comfortable, with negative debt levels in each of the past few five years.

Key rating concerns are project execution risk given the high concentration of key projects, and higher leverage at the subsidiary/associate level. In FY08, the top 10 customers contributed approximately 63% of the company's revenues, and this trend is expected to continue. The top three projects, contributed around 56% of the order book, and the top seven projects accounted for 73%. Margin pressures could arise as a result of raw material price increases, although this may, to a certain extent, be mitigated by the company's cost plus arrangement for most of its projects.

While debt in the Engineering, Procurement and Construction (EPC) business is expected to remain fairly comfortable, Fitch expects high leverage at the company's power generation venture, Orient Green Power Ltd (OGPL). OGPL plans to have a capacity of around 215MW through various small renewable energy power projects by 2009/10. Leverage is also expected to increase as a result of SEPC's foray into the megawatt class wind turbine generator business, in a joint venture with Leitner BV. Fitch notes that while the current leverage levels are comfortable with negative net debt, this is expected to deteriorate due to its exposure to the power and megawatt WTG business, the same is however, expected to remain consistent with the ratings assigned with downside financial risks being mitigated to an extent by its technology and financial partnerships. Any significant debt led capital expenditure leading to higher than anticipated financial leverage would act as a negative rating trigger.

Started in 2000, the company has grown to be a medium-sized EPC player - operating in the renewable energy projects, process and metallurgy, and municipal services segments. SEPC also has a 250KW wind turbine generation (WTG) unit. The company has partnered with Leitwind BV to manufacture and market 1.5MW class wind turbine generators. It has also entered into power generation by setting up OGPL - a 50%-50% joint venture with Bessemer Venture Partners. SEPC also has a majority shareholding in Hamon Shriram Cotrell Ltd, which manufactures cooling towers and air pollution control systems and a 32% equity stake in Ennore Coke Ltd (ENCK.BO: Quote, Profile, Research).

SEPC has grown rapidly over the last two years, with revenues doubling each year. This growth has been evident in both the EPC and the WTG divisions. The company provides EPC services for renewable energy power projects, process and metallurgy, and municipal services. In FY08, revenues increased 119% to INR6,463m, mainly due to a 177% growth in the EPC division. FY08 EBITDA stood at INR664m and net profit was INR354m (FY07: EBITDA - INR223m, Net profit - INR129m). EBITDA margins expanded to 10.3% in FY08 from 7.5% in FY07. Like most construction companies, SEPC has a high debtor day level (ratio of debtors to sales) of 120 days of revenues. In FY08, the increase in debtors was largely offset by an increase in customer advances and other creditors leading to a positive free cash flow position.