India Ratings and Research (Ind-Ra) has upgraded NCC's Long-Term Issuer Rating and its non-convertible debentures (NCDs) to 'IND BBB' from 'IND BBB-'. The outlook is stable.
The upgrade reflects NCC's better-than-expected operating performance during 2HFY15, leading to improved credit metrics. Revenue grew 34% yoy in 2HFY15, aided by an improvement in liquidity resulting from the rights issue during October 2014 and the brisk execution of the company’s power project which contributed over 35% to its total revenue. The higher revenue also resulted in the better absorption of overheads resulting in an increase in EBITDA margins to 7.8% in FY15 from 6.6% in FY14. Receivable holding reduced to 60 days in FY15 from 80 days in FY14 and inventory holding to 92 days from 111 days, resulting in lower working capital debt. As a result, net adjusted leverage improved to 3.43x in FY15 (FY14: 6.47x) as against the earlier expectation of around 5x.
The revenue however is likely to fall in FY16, as the contribution from the power project will reduce significantly with its completion. This will not be compensated by the company's moderate order book of Rs 193.23 billion (2.3x of FY15 revenue). However, the margins are likely to improve, as the company starts executing projects awarded during the previous year. Also, the working capital debt is likely to increase with a longer working capital cycle, leading to deterioration in net adjusted leverage. However, the levels will still be better than Ind-Ra's previous expectations. The government’s focus on infrastructure creation will aid order inflow and consequently, drive revenue growth FY17 onwards.
NCC is likely to receive Rs 1.72 billion from Sembcorp Utilities Pte as balance consideration (net of repayment of mobilisation advance of Rs 3 billion) for the sale of NCC Power Projects (NCCPPL) over the next three months. The company entered into definitive agreements with Sembcorp Utilities for the stake sale of NCCPPL in February 2014; however, the balance payment was contingent on the receipt of government approval for the transfer of coal linkage. This approval process has now been delegated to the board of Mahanadi Coalfields Limited, which is likely to decide on the matter in the next couple of months. The receipt of such an amount and its use to reduce long-term debt may result in a positive rating action.
NCC is also selling some other road projects and land assets, which may result in proceeds of over Rs 3 billion. However, the likelihood and timing of such receipts is uncertain, as the company is yet to conclude any agreement for the sale of these assets. The receipt of such asset sales proceeds would be further positive for the ratings if it is used to reduce debt.
