Fitch Ratings has today assigned India's Variegate Projects Private Limited (Variegate) a National Long-term rating of 'BBB-(ind)'. Fitch has also assigned ratings of 'BBB-(ind)'/'F3(ind)' to the company's fund based working capital limits of INR200.0m and non-fund based limits of INR640.0m. The Outlook is Stable.
The ratings reflect Variegate's track record of consistent growth over the past three years and its transition from being a sub-contractor to larger construction companies, such as IVRCL Infrastructures & Projects Limited ('AA-(ind)'/Stable) and Vijai Electricals Ltd., to being a direct contractor for power transmission and distribution utilities projects. Variegate has successfully executed projects relating to rural electrification and high voltage distribution systems, which have been the focus of government infrastructure development programmes. The ratings also draw comfort from the stable level of EBIDTA margins (maintained at around 11%-12%) over the past three years and the comfortable interest coverage of around 5x for the past three years.
The ratings are constrained by the company's relatively short track record of about six years in the industry and its more recent entry into the direct work orders segment. The ratings further reflect the risk of geographical concentration, as Variegate's operations have been restricted to the state of Andhra Pradesh. The ratings also take into account Fitch's concern over an increase in debtor days over the past two years to 120-days, from about 40-days at the end of FY07.
Recently, Variegate received five orders from the Maharasthra State Electricity Board (MSEB) for implementing rural electrification programmes, with a total order size amounting to INR9.3bn. The size of the order - which is significantly large as compared to the size of the orders executed to date - presents challenges such as raising funds for financing these projects and implementing the projects without time and cost overruns. Another challenge is the ability to overcome operational barriers that arise while implementing projects with considerable interaction with the local population. Furthermore, as a result of the substantial increases in the debt requirement for these new projects, debt metrics such as debt/EBIDTA and interest cover are projected to deteriorate from the current levels.
The successful execution of the new large-scale MSEB projects resulting in a significant increase in the turnover and improvement in the profitability and debt metrics, would be considered positive rating triggers. Meanwhile, cost and time overruns in the new projects impacting profitability and an increase in the working capital cycles from the current levels - resulting in sustained increase of debt/EBIDTA over 3x times and a sustained reduction in interest cover below 3.5x times - would be considered negative rating triggers.
Variegate is a Hyderabad-based company engaged in execution of electrical infrastructure projects and is promoted by the Managing Director, Mr Siva Reddy, in 2002 as a partnership concern. For FY08, Variegate reported revenues of INR624.67m and profit-after-tax of INR33.0m.
Contacts: Sudha Sundaram, Chennai, +91 44 4340 1705/ Sudha.sundaram@fitchratings.com; Sreenivasa Prasanna, Chennai, +91 44 4340 1711/ sreenivasa.prasanna@fitchratings.com.
Media Relations: Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: shivani.sundralingam@fitchratings.com.
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