Dharthi Dredging

CREDIT ANALYSIS & RESEARCH LIMITED

DHARTI DREDGING AND INFRASTRUCTURE LIMITED

Long-term Bank Facilities CARE BBB-

Rating

CARE has assigned a ‘CARE BBB-’ (Triple B Minus) rating to the Long-term Bank

Facilities of Dharti Dredging and Infrastructure Limited (DDIL). This rating is applicable

for facilities having tenure of over one year. Facilities with this rating are considered to

offer moderate safety for timely servicing of debt obligations. Such facilities carry

moderate credit risk. CARE assigns ‘+’ or ‘-’ signs to be shown after the assigned rating

(wherever necessary) to indicate the relative position within the band covered by the

rating symbol. These ratings are assigned to the long-term bank facilities aggregating

Rs.42 crore.

The rating factors in the company’s experience in the capital dredging, healthy order

book position, diversification into allied activities, improved profitability margins and

lower gearing ratios. The rating is, however, constrained by devolvement of Letter of

Credit (LCs) in the recent past, stressed liquidity scenario of the company, increasing

debtors position and high fixed costs towards dredgers.

The ability of the company to successfully bid and carry out capital dredging projects in

the future, uncertainties in infrastructure projects and improvement in its liquidity

scenario are the key rating sensitivities.

Background

Dharti Dredging and Infrastructure Ltd. (DDIL), the second-largest dredging company in

India, after Dredging Corporation of India (DCI), is engaged in capital dredging

activities. DDIL commenced its operations with one dredging unit at Paradeep

Fishing Harbor in 1993. Over the years, the company has diversified into trenching

and back filling works for the oil and gas industry for domestic as well as international

clients.

The company experienced a slowdown in its operations during the years FY2003-04 and

FY2004-05 due to inadequate capital dredging projects in India. In March 2005, Tebma

Shipyard Ltd., which owned over 83% of the share capital, disinvested its entire share

holding in favor of SKH Impex Ltd., promoted by Mr. A. Rajendra, a technocrat. Further,

in FY06, Mr. Rajesh Jhunjhunwala and associates invested Rs.50 crore in the company,

making available the much-needed own capital to ease the pressure on the capital

structure of the company. Mr. A Rajendra has worked with Punj Lloyd for about 15 years

in different areas including dredging-related work.


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The Managing Director looks after the day-to-day operations of the company and is ably

assisted by the qualified professionals heading different departments. Although most of

the senior management team has joined the company in recent times, the average

industry experience of the management in dredging and oil exploration is about 28

years. As on March 31, 2008, the company had two subsidiaries, PT Dharti Offshore,

Indonesia (PTDO) (WOS) and Dharti Dredging and Construction Partners LLC, Oman

(DDCP) (70% holding). DDIL has taken a dredger on hire from PTDO. DDCP, at present,

does not have any operations.

Operations

DIL executes various types of projects like, capital dredging, trenching and back filling

works related to offshore pipeline installation, road embankment projects, de-weeding of

lakes, land reclamation, flood control and various other civil projects. However, revenue

from the dredging activity comprises the major portion (around 84% in FY08) of the

total revenue of the company.

The company secures orders by way of tenders invited by Government

Companies/Agencies as well as from the private companies. The company undertakes

pre-bidding survey of the site to determine the complexities involved in the capital

dredging activity. Most of the orders of the company are fixed-price contracts wherein

any adverse impact of the cost of the project directly affects the profitability of the

company. However, the company also receives about 10% of the contract value as

advance for the mobilisation of all the necessary equipment to undertake the project.

The company has a fleet of ten owned and six hired dredgers. Most of the dredgers are

cutter suction dredgers. The company hires the required dredgers on a case-by-case

basis for a particular project.

The company had taken two dredgers - Ta-Lung and Ta-Hsing with an annual dredging

capacity of 62.55 lakh cubic meter, on hire from Hung Hua Construction Co. Ltd.

(Taiwan) in October 2007 at USD7.9 lakh per month per dredger on yearly contract.

However, due to shortage of such large-sized dredgers, the company purchased the

same on a suppliers’ credit basis. The company took a supplier’s credit of Rs.346.41

crore from Hung Hua Construction Ltd., for a 14-year period with monthly repayment

installment equaling the monthly hire charges. However, in FY09 the company reversed

the purchase transaction for these two dredgers and took them on hire till October 2009

with the same terms and conditions. This contract would be renewed every year for a

period of one year.

As on March 31, 2008, the company had un-executed orders of Rs.535 crore which is

about 2.44 times of the total income achieved in FY08. The order book is to be

completed by October 2009.


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Financial Results

(Rs. crore)

For the year / As on March 31, June-05 June-06 Mar-07 Mar-08 Working Results Total Income 22.90 83.93 105.43 219.21 PBILDT 4.91 10.72 12.90 60.98 Interest and Finance Charges 1.66 3.48 2.78 13.81 Depreciation 2.52 2.49 2.51 32.18 PAT (After Deferred Tax) 0.77 5.20 7.26 14.73 Net Cash Accruals 3.29 7.69 9.77 46.92 Financial Position Share Capital 6.55 14.84 19.68 20.04 Net worth 9.70 30.82 87.80 103.17 Total Capital Employed 32.03 55.58 104.04 566.84 Net Fixed Assets 14.53 12.46 35.30 520.70 Net Working Capital 12.39 28.73 37.36 13.92 Ratios Profitability (%) PBILDT / Total Income 21.46 12.77 12.23 27.82 PAT / Total Income 3.36 6.16 6.84 6.67 ROCE (Average Total Capital Employed) - 20.06 18.56 9.10

Solvency (times)

Long Term Debt Equity Ratio 2.10 0.60 0.01 4.13

Overall Gearing Ratio 2.30 0.80 0.19 4.49 Interest Coverage 1.44 2.37 3.73 2.08 Total Debt / Net Cash Accruals 6.78 3.22 1.66 9.88 Liquidity Current Ratio 1.78 1.08 1.35 0.82 Quick Ratio 1.67 0.70 0.88 0.64 Turnover Average Collection Period (Days) - 85 75 93 Average Creditors (Days) - 70 86 105 Average Inventory (Days) - 61 76 73 Total income for DDIL had shown a Compounded Annual Growth Rate (CAGR) of

112.33% over the past four years on the back of new orders, mainly for capital

dredging, trenching and back filling. For FY08, total income stood at Rs.219.21 crore, a

y-o-y growth of 56%. In line with the growing revenue, PBILDT also showed a consistent

increase from FY05 to FY08. However, the PBILDT margin had been volatile over the

period, mainly due to company’s strategy of taking dredgers on hire, as and when


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required. The company had taken dredgers on hire during FY06 and FY07 which resulted

in dip in the PBILDT margin, due to fixed operating lease charges. However, as a result

of dip in the hire charges during FY08, the PBILDT margin improved to 27.82%

compared to 12.23% in FY07. The addition of five dredgers and the loan taken for the

same, resulted in significant increase in the interest and depreciation cost for the

company in FY08, which kept the PAT margin low at 6.67%, despite improvement in the

PBILDT margin. Although, the interest coverage has shown an improvement over the

period from FY05 to FY08, in line with increase in revenues, on y-o-y basis the same

declined to 2.08x in FY08 from 3.73x in FY07, on account of increase in interest

expenses. The company’s net fixed assets have shown a steady increase from FY06 to

FY08, on the back of augmentation of new dredgers over the years, to cater to the

increasing order book of the company. The company’s net fixed assets have shown a

sudden increase as on March 31, 2008 to Rs.521 crore from Rs.35 crore on March 31,

2007 mainly due to procurement of five dredgers and procurement of various other

equipment, including floating crafts.

Infusion of equity in FY06 and FY07 enabled the company improve its debt-equity ratio

from 2.10x as on June 30, 2005 to 0.60x and 0.01x as on June 30, 2006 and March 31,

2007, respectively. However, the additional debt of Rs.426 crore, mainly due to long-

term supplier’s credit, during FY08 resulted in drastic increase in the long-term debt-

equity and the overall gearing ratio to 4.13x and 4.49x, respectively, as on March 31,

2008, compared to 0.01x and 0.19x, respectively, as on March 31, 2007. Additional

debt, combined with increased interest expenses resulted in an increase in total debt to

net cash accruals to 9.88x in FY08.

The current ratio of the company was fairly comfortable till FY07; however, as on March

31, 2008 the same had shown a decline to 0.82x on account of increase in working

capital borrowings to fund the increased debtors due to non-payment of dues by various

parties as a result of technical differences on the amount of work done and increase in

the current portion of the long-term debt. The liquidity situation further deteriorated in

April 2009, with devolvement of part amount of two L/Cs (for 2-3 days) due to late

payments received from parties. Thus, the liquidity scenario of the company appears to

be stressed.

As per the audited results for 9MFY09, DDIL had outperformed its previous full year

results of FY08. The company reported a turnover of Rs.224.69 crore in 9MFY09 as

against a turnover of Rs.219.21 crore in FY08. The increased turnover was on account of

improved execution capability of the company backed by increased dredging orders.

PBILDT margin in 9MFY09 increased to 30.42% as against 27.82% in FY08 on account of

reduced operational expenditure, related to equipment hire and mobilisation expenses.

There was a decline in the PAT margin for 9MFY09, on account of increased depreciation


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cost, related to purchase of dredgers and other equipment. However, interest coverage

improved marginally to 2.13x for 9MFY09 compared to 2.08x for FY08, due to improved

PBILDT margin. Further, there was a major decline in the debt to equity and overall

gearing ratios as on December 31, 2008 to 0.61x and 1.07x, respectively, on account of

reduction of suppliers’ credit of Rs.346.41 crore due to cancellation of orders for two new

dredgers.

Industry

The main objective of capital dredging is the creation of deeper and/or wider waterways

to improve navigation of ships. Capital dredging is a sub-activity to the main civil

construction work in developing new ports and harbors and is often subcontracted to a

specialist dredging contractor. Maintenance dredging is the process of excavating or

removing soil from below water using dredgers. Capital dredging project involves

thorough analysis of the soil conditions before the bidding. The dredging activity is

largely dependent on port development, maintenance and expansion programme. The

growth in the dredging market is largely affected by the growth in world trade, deeper

draught requirements of ports, land reclamation and environmental aspects and

regulations.

As per industry sources, India offers huge market potential for dredging companies,

estimated at 1 billion cubic meters in the next five years. Large capital dredging projects

include those being finalised at Nhava Sheva (estimated at USD177.77 million),

Tuticorin, Paradeep, (USD55.55 million) and Ennore (USD31.77 million), as well as the

projects under way at Haldia, Mangalore and Kochi. Dredging activity in India is

expected to grow by two to three times in the next few years as the existing main ports

are expanded and new private ports and additional terminals are built to service larger

and more vessels. The next couple of years are expected to see implementation of

dredging projects worth USD444.44 million at various ports across India.

In India, the domestic dredging companies enjoy preference over foreign competition, if

they meet the technical requirement. This is designed to protect domestic players from

foreign dredging competition. Under this policy, if a foreign company emerges as the

lowest bidder, the Indian company is given a chance to match the bid, given that Indian

player’s bid is within the 10% of lowest bid.

April 2009

Disclaimer CARE’s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities.


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Dharthi Dredging