TEXT-Fitch affirmed IOT Engineering Projects at 'Fitch A-(ind)'

(The following statement was released by the rating agency)

July 31 - Fitch Ratings has affirmed India-based IOT Engineering Projects Limited's (IOTEP) National Long-Term rating at 'Fitch A-(ind)'. The Outlook is Stable. A list of additional rating actions is provided at the end of this commentary.

The affirmation factors in IOTEP's robust order book of INR6,951m as on 30 June 2012 (1.7x FY12 (year end March) revenue). The ratings continue to reflect the company's strong top-line growth, comfortable credit metrics and its presence across diverse industry segments.

In FY12, sales grew 34% yoy to INR4,117m, EBITDA margin increased 390bps to 12.7%, and interest coverage (EBITDA/gross interest) improved to 4.2x from 3.1x. However, net financial leverage (net debt/EBITDA) deteriorated to 2.0x from 1.4x due to an increase in overall debt to INR1,078m from INR430m. The higher debt levels are a result of negative cash flow from operations of INR450m (FY11: positive INR34m) as the company made significant investments (FY12: INR757m, FY11: INR83m) in working capital.

The ratings also reflect IOTEP's moderate operational and strategic linkages with IOT Infrastructure & Energy Services Ltd (IOT IES), which is one of India's leading engineering, procurement and construction companies. IOT IES owns 100% of IOTEP's shares and is one of its customers. IOTEP mainly has fixed-price contracts from IOT IES and other private companies, where customers provide construction materials and thus prevent it from cost-escalation risks.

The ratings are constrained by IOTEP's small size of operations, customer concentration and likely margin pressures from any delays in project completion. The company's top two projects account for 55% of its order book. Thus, any time or cost overruns at these projects would severely impact IOTEP's revenue and profitability. However unlike other projects of lesser duration, these two projects will be executed over two to three years and hence the impact will be limited.

The company is also exposed to sector concentration risk as 75% of the orders are from the power sector.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- financial leverage beyond 3x on a sustained basis, due to margin contraction or working capital cycle lengthening

- any deterioration in IOTEP's linkages with IOT IES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- an increase in the size and scope of projects while maintaining profitability and credit metrics

Incorporated in 2007, IOTEP specialises in structural erections, piping and associated facilities for refineries, terminals, power and cement plants. IOT IES is a 50:50 JV between Oil Tanking Gmbh and Indian Oil Corporation Ltd ('Fitch AAA(ind)'/Stable). It was created in 1996 to build and operate terminalling services for petroleum products.

Fitch has also affirmed the ratings of IOTEP's following instruments:

- INR240m long-term loan (enhanced from INR140m): National Long-Term 'Fitch A-(ind)'

- INR1,450m* fund-based limits (enhanced from INR1,000m): National Long-Term 'Fitch A-(ind)' and National Short-Term 'Fitch A1(ind)'

- INR3,620m non-fund-based limits (enhanced from INR2,370m): National Short-Term 'Fitch A1(ind)'

* Fungible with non-fund based limits up to INR500m.