Rationale

 The rating reaffirmation for Som Projects Pvt. Ltd. (SPPL) favourably factors in its comfortable order book position of Rs. 1,644.30 crore as on August 31, 2024 (translates to ~3.7 times of the operating income (OI) of FY2024) providing medium-term revenue visibility and its adequate leverage (TOL/TNW of 1.1 times) and coverage metrics (interest cover ratio of 4.6 times) as on March 31, 2024, which are expected to sustain over the medium term. The company reported a 31% YoY growth in revenue in FY2024 and has achieved revenue Rs. 250 crore in H1 FY2025 (provisional data) and is expected to close the year with revenue growth in the range of over 15%, supported by ramp-up in execution of the current order book. SPPL’s operating profitability margins (OPM) improved to 11.1% in FY2024 (+190 bps YoY) and are likely to remain range-bound (at around 9- 10%), which along with increased scale will support the cash accruals. This apart, the ratings draw comfort from the extensive experience of the promoters in the construction sector and the company’s reputed clientele, comprising public sector entities, which mitigates the counterparty credit risk to an extent. The ratings, however, remain constrained by the moderate scale of operations (despite the YoY growth) and high debt repayment obligations on account of incremental borrowing related to order inflow in FY2024 , which is expected to keep the debt service coverage ratio (DSCR) subdued in FY2025 (DSCR moderated to 1.2 times as on March 31, 2024 from 2.0 times as on March 31, 2023) and improve from FY2026 onwards . The ratings factor in the execution risk associated with the current order book, with ~66% of orders in the nascent stages of execution (less than 20% progress). Nevertheless, the company’s successful track record in executing such orders, for same clients, provide comfort. SPPL had been extending significant loans and advances to Group companies/related parties in the past (outstanding ~Rs. 32 crore as on March 31, 2024) to support ramp-up of these businesses. However, the company now anticipates recovery of these loans/advances over FY2025 and FY2026. Any divergence from this guidance by way of additional outgo or significant delay in recovery of these advances, may impact SPPL’s liquidity and would remain crucial from the credit perspective. The ratings factor in the cyclicality inherent in the construction industry and intense competition in the tender-based contract award system, which could put pressure on its ability to secure new contracts, while maintaining the profitability. The ratings note the company’s exposure to sizeable contingent liabilities, in the form of bank guarantees (BGs), mainly for contractual performance, retention money, mobilisation advance and security deposits. Nonetheless, ICRA draws comfort from SPPL’s execution track record and absence of invocation of guarantees in the past. The Stable outlook on the long-term rating reflects ICRA’s expectation that SPPL will sustain its revenue growth with a steady profitability margin in FY2025, despite a marginal moderation in DSCR, its incremental working capital requirements and capex will be funded in a manner that it is able to maintain a leverage profile, commensurate with the rating levels.