January 29, 2024

Shree Shakti Construction: Ratings reaffirmed

Summary of rating action

Previous Rated Amount Current Rated Amount

Instrument* Rating Action
(Rs. crore) (Rs. crore)
Fund based – Cash credit 4.00 4.00 [ICRA]BB-(Stable); reaffirmed

Non-Fund based – Bank guarantee 7.00 7.00 [ICRA]A4; reaffirmed

Total 11.00 11.00

*Instrument details are provided in Annexure-I

Rationale

The reaffirmed ratings factor in Shree Shakti Construction’s (SSC) weak financial risk profile, which is characterised by its
modest scale of operations, thin profitability, weak debt coverage indicators and stretched liquidity position with almost full
utilisation of working capital limits. Operating revenues declined by ~50% in FY2023 to Rs. 16.9 crore, as the entity’s primary
focus in FY2023 was to complete all slow-moving orders that were stuck due to the Covid-19 pandemic. While the revenue in
H1 FY2023 was Rs. 10 crore, it was only Rs. 6 crore for H2 FY2023. This decline in the second half was mainly due to a strike
by the firm to receive the differential amount in the GST rate. In January 2021, the GST rate was increased to 18% from the
earlier 12%. ICRA also notes the high geographical and client concentration risks for the company, and along with intense
competition and tender-based contract system keep SSC’s margin under check. The ratings also factor in the entity’s
vulnerability to raw material price fluctuation risks as most orders are fixed price in nature with the absence of price-escalation
clauses. Further, SSC is a partnership concern and thus its capital structure remains vulnerable to capital withdrawals, as has
been witnessed in the past.

The ratings, however, favourably factor in the past experience of the promoters in the civil construction industry and low
counter-party credit risks owing to its reputed clientele comprising the government and semi-government bodies.

The Stable outlook reflects ICRA’s opinion that SSC will continue to benefit from the extensive experience of its partners in the
civil construction industry.

Key rating drivers and their description

Credit strengths

Extensive track record and expertise of partners in civil construction projects - SSC was set up in 1997 as a proprietorship
concern and later converted into a partnership firm in May 2015. The entity is promoted by the Thacker family, undertaking
civil construction work, primarily in Gujarat. Mr. Deepak Thacker has over two decades of experience in the civil construction
industry.

Reputed clientele limits counter-party credit risks - SSC’s client profile includes various reputed Government and semi-
Government agencies/local authorities in Gujarat, such as Gujarat State Police Housing Corporation Limited, Gujarat Project
Implementation Unit and Western Railways, resulting in a relatively low counter-party credit risk.

Credit challenges

Weak financial risk profile - The firm’s operating revenues declined by ~50% in FY2023 to Rs. 16.9 crore, as the firm’s primary
focus in FY2023 was to complete all slow-moving orders that were stuck due to the Covid-19 pandemic. While the revenue in

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 H1 FY2023 was Rs. 10 crore, it was only Rs. 6 crore for H2 FY2023. This decline in the second half was mainly due to a strike by
the firm to receive the differential amount in GST rate, which in January 2021, was increased to 18% from the earlier 12%.
Further, the profitability, though improved, remained modest with an operating margin of 7.6% in FY2023 (4.4% in FY2022)
and net profit margin remained stable at 1.7% in FY2023. The capital structure continued to remain weak as reflected in total
debt/OPBDITA of 4.3 times in FY2023 (FY2022: 5 times) and TOL/TNW of 1.7 times as of the FY2023-end (FY2022: 1.8 times).

Vulnerability to raw material price fluctuation risks - SSC executes work orders with an execution time of 12-18 months, which
are generally fixed-price contracts. Given the high share of raw material costs in its cost structure, any steep fluctuation in raw
material prices could severely impact the profitability of the firm in the absence of any price-escalation clauses in the majority
of its contracts.

High client and geographical concentration risks; intense competition - The firm's client concentration risk remains high, as
its top three clients account for more than 95% of the outstanding order book as on December 31, 2023. All the outstanding
orders are in Gujarat, exposing it to geographical concentration risk as well. However, counter-party credit risk is relatively low
since the clients are mostly Government departments. Further, the firm faces intense competition from numerous players in
the organised and the unorganised segments. With tenders mainly awarded based on competitive pricing, SSC's profitability
stands exposed to stiff competition.

Risks inherent in partnership firm - Given the partnership nature of the firm, any significant capital withdrawal could adversely
impact the capital structure.

Liquidity – Stretched
SSC’s liquidity is stretched with almost full utilisation of working capital limits, given the high working capital requirement
stemming from the sizeable cash lock-up in business in the form of retention money and security deposits. The unencumbered
cash balance as on December 31, 2023 was Rs. 0.04 crore. With current bank guarantee limits being ~93% utilised, there may
be limitations in meeting fresh bank guarantee requirements for securing new work orders, in case of delay in release of BG.
However, some comfort can be drawn as the company has no major debt-led capex plans in the near to medium term.

Proposed Rating sensitivities

Positive factors – The ratings could be upgraded with sustained improvement in scale and profitability along with a substantial
improvement in net worth and liquidity position.

Negative factors – Negative pressure on the ratings may arise if the firm’s scale of operations declines adversely impacting its
financial performance and liquidity position or material reduction in the order book.

Analytical approach

Analytical Approach Comments

Corporate Credit Rating Methodology

Applicable rating methodologies
Rating Methodology for Construction Entities

Parent/Group support Not applicable

Consolidation/Standalone Standalone approach

About the company

Established in 1997 as a proprietorship concern by Mr. Deepak Thacker, Shree Shakti Construction executes civil construction
contracts, mainly building construction works for the government and semi-government departments in Gujarat. SSC was
converted into a partnership firm in May 2015. The firm is registered as a Class-AA contractor with the Road and Building
Department, state government of Gujarat.

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 Key financial indicators (audited)

SSC FY2022 FY2023

Operating income 33.1 16.9
PAT 0.6 0.3
OPBDIT/OI 4.4% 7.6%
PAT/OI 1.7% 1.7%
Total outside liabilities/Tangible net worth (times) 1.8 1.7
Total debt/OPBDIT (times) 5.0 4.3
Interest coverage (times) 1.7 1.3
Source: Company, ICRA Research; Amount in Rs. crore
PAT: Profit after tax; OPBDIT: Operating profit before depreciation, interest, taxes and amortisation

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years

Chronology of rating history

Current rating (FY2024)
for the past 3 years
Amount Date & Date &
outstanding Date & rating
Instrument Amount Date & rating in FY2023 rating in rating in
as of Dec 31, in FY2024
Type rated FY2022 FY2021
2023
(Rs. crore) Oct 28, 2022 April 28, 7-Jan- 13- Sep-
(Rs. crore) Jan 29, 2024
2022 2021 2019
[ICRA]BB-
(Stable);
Long [ICRA]BB- [ICRA]BB- [ICRA]BB-
1 Cash Credit 4.0 - [ICRA]BB-(Stable) ISSUER NOT
term (Stable) (Stable) (Stable)
COOPERATI
NG
[ICRA]A4;
Bank Short ISSUER NOT
2 7.0 - [ICRA]A4 [ICRA]A4 [ICRA]A4 [ICRA]A4
Guarantee term COOPERATI
NG

Complexity level of the rated instruments

Instrument Complexity Indicator

Fund based – Cash Credit Simple
Non-Fund based – Bank Guarantee Very simple

The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated.
It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's
credit rating. It also does not indicate the complexity associated with analysing an entity's financial, business, industry risks or
complexity related to the structural, transactional or legal aspects. Details on the complexity levels of the instruments are
available on ICRA’s website: Click Here

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 Annexure I: Instrument details

Instrument Coupon Amount Rated

ISIN Date of Issuance Maturity Current Rating and Outlook
Name Rate (Rs. crore)
NA Cash credit NA NA NA 4.00 [ICRA]BB-(Stable)
NA Bank guarantee NA NA NA 7.00 [ICRA]A4

Source: Company

Annexure II: List of entities considered for consolidated analysis – Not Applicable

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 ANALYST CONTACTS
Rajeshwar Burla Ashish Modani
+91 040 6939 6443 +91 22 6114 3414
[email protected] [email protected]

Chintan Dilip Lakhani Ayush Porwal

+91 22 6169 3345 +91 22 6169 3352
[email protected] [email protected]

RELATIONSHIP CONTACT
L. Shivakumar
+91 22 6114 3406
[email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
[email protected]

Helpline for business queries

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

[email protected]

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ICRA Limited was set up in 1991 by leading financial/investment institutions, commercial banks and financial services
companies as an independent and professional investment Information and Credit Rating Agency.

Today, ICRA and its subsidiaries together form the ICRA Group of Companies (Group ICRA). ICRA is a Public Limited Company,
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For more information, visit www.icra.in

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