ICRA Rating of Spray Engineering

Document Summary

Spray Engineering Devices Limited (SEDL) has been assigned a rating of [ICRA]BBB+ (Stable)/[ICRA]A2 as of March 26, 2025. This rating applies to long-term fund-based term loans and cash credit totaling Rs. 87.47 crore, and short-term non-fund based bank guarantees/LC of Rs. 57.53 crore, summing to a total of Rs. 145 crore.

Rationale: The rating reflects SEDL's established operational track record in manufacturing energy-efficient products and solutions for the sugar, jaggery, biofuel (ethanol), and water recycling sectors. A healthy financial risk profile and significant growth in operations, reaching Rs. 547 crore in FY2024 with a CAGR of approximately 75% in the last four years, also contributed to the rating. The company's capital structure has remained healthy due to low reliance on long-term debt, and debt protection metrics, such as the interest coverage ratio, have improved in FY2024 and YTDFY2025 due to better OPBITDA and reduced debt. An equity infusion of Rs. 72 crore in H1 FY2025 further strengthened SEDL's capital structure and coverage metrics. The strong orderbook position of Rs. 840 crore as of January 31, 2025, indicates healthy revenue visibility in the near to medium term.

The ratings are constrained by the susceptibility of operating margins to fluctuating input prices, a high average collection period, and long outstanding debtors. Steel, the primary raw material, is subject to price volatility, impacting profitability. The company issues performance bank guarantees (PBG) or agrees to cash retention, which are released by customers upon the performance period's expiry.

The stable outlook reflects ICRA's expectation that SEDL will sustain its operating metrics and fund incremental capex in a manner that preserves its debt protection metrics.

Key Rating Drivers - Credit Strengths:

• Established Track Record & R&D Capabilities: Promoters Vivek Verma and Prateek Verma possess approximately 33 years of experience in the core engineering and sugar industry. SEDL, founded in 2004, manufactures and sells spray nozzles for sugar mills and supplies energy-efficient equipment for the sugar, jaggery, water recycling, and biofuel sectors in India and abroad. The company has comprehensive in-house R&D capabilities, holding over 100 patents in the sugar and allied sectors, with a focus on increasing energy efficiency. A team of around 60 research and design engineers works in the R&D department. SEDL has recently partnered with Lanza Tech, a US-based microbiology company, for R&D initiatives.
• Healthy Financial Risk Profile: SEDL has experienced healthy growth in recent years, driven by the sugar industry's upswing and diversified product segments, particularly in water treatment, ethanol, and biofuels. The company has a large number of patents for superior steam efficiency, leading to repeat orders and revenue growth. Revenue reached approximately Rs. 547 crore in FY2024, up from Rs. 392.6 crore in FY2023. Revenue in 9M FY2025 was approximately Rs. 380 crore. Capital structure has been healthy, with low reliance on long-term debt. The overall gearing improved to 0.6x as of March 31, 2024, from 0.8x as of March 31, 2023. Interest coverage improved to 8.9x in FY2024 from 7.2x in FY2023. An equity infusion of Rs. 72 crore in H1 FY2025 further strengthened the capital structure and coverage metrics.
• Strong Orderbook: The current orderbook stands at approximately Rs. 840 crore, with around 75% of the orders from the sugar, jaggery, and biofuel segments and the remaining 25% from water treatment. The order sizes from the sugar, jaggery, and biofuel segments are larger (Rs. 35-40 crore) compared to water treatment orders (Rs. 5-6 crore). However, the number of water treatment orders are higher. The execution time is around 60 days for water treatment and 5-6 months for sugar, jaggery, and biofuel segments.

Key Rating Drivers - Credit Challenges:

• Profitability & Raw Material Price Volatility: Profitability is susceptible to fluctuations in the price of steel, which constitutes 70-75% of raw material procurement. Fixed-price orders without price variation clauses expose the company to volatile input costs.
• Working Capital Intensive: The business is working capital-intensive, with stretched receivables; approximately 45% of the overall debtors are outstanding for more than 6 months. These are largely retention money.

Liquidity: SEDL's liquidity is adequate, supported by expected healthy cash flow from operations in FY2025, cash balances/liquid investments of approximately Rs. 3.66 crore, and undrawn fund-based limits of approximately Rs. 26.77 crore as of September 30, 2024. Debt repayment obligations are Rs. 4.71 crore in FY2025 and Rs. 4.52 crore in FY2026. The average limit utilization was 56% in the last 12 months ended December 2024. SEDL has moderate capex plans over the next three years, which will be funded from internal accruals.

Rating Sensitivities:

• Positive Factors: The ratings can be upgraded if SEDL demonstrates sustained improvements in its scale of operations, profitability, working capital cycle, and liquidity position.
• Negative Factors: The ratings can be downgraded if there is a sustained moderation in revenue and/or profitability along with an elongation in the working capital cycle due to a stretch in the receivables, thereby adversely impacting the liquidity. Specifically, a total debt/OPBDITA of more than 2.5 times on a sustained basis could trigger a downgrade.

Analytical Approach: The rating is based on the consolidated financials of Spray Engineering Devices Limited, and the "Corporate Credit Rating Methodology" is applied. Parent/Group support is not applicable.

Company Overview: Spray Engineering Devices Limited (SEDL), established in 2004 by Vivek Verma and Prateek Verma, specializes in manufacturing and delivering energy-efficient products & solutions to the biofuel, chemical, sugar, water and other processing sectors. SEDL has corporate offices in Chandigarh (UT) and Mohali (Punjab) and three manufacturing units in Baddi (Himachal Pradesh).

Key Financial Indicators (Audited): | Indicator | FY2023 | FY2024 | H1FY2025* | | --------------------------------- | ------ | ------ | --------- | | Operating Income (Rs. Crore) | 392.6 | 547.3 | 301.8 | | PAT (Rs. Crore) | 34.7 | 53.2 | 28.3 | | OPBDIT/OI | 14.7% | 16.2% | 14.4% | | PAT/OI | 8.8% | 9.7% | 9.4% | | Total outside liabilities/TNW (x) | 2.7 | 1.5 | 0.8 | | Total debt/OPBDIT (x) | 1.0 | 0.9 | 0.6 | | Interest coverage (x) | 7.2 | 8.9 | 8.7 |

Non-Cooperation with Previous CRA: Not applicable.

Rating History:

| Instrument | Type | Amount Rated (Rs. crore) | Mar 26, 2025 | FY2024 | FY2023 | FY2022 | | -------------------- | ----------- | -------------------------- | -------------------- | ------ | ------ | ------ | | Term Loan | Long Term | 20.74 | [ICRA]BBB+ (Stable) | - | - | - | | Cash Credit | Long Term | 66.73 | [ICRA]BBB+ (Stable) | - | - | - | | Bank Guarantee / LC | Short Term | 57.53 | [ICRA]A2 | - | - | - |

Complexity Level of Instruments: The complexity indicator for the instruments is simple or very simple.

Instrument Details: | ISIN | Instrument Name | Date of Issuance | Coupon Rate | Maturity | Amount Rated (Rs. Crore) | Current Rating and Outlook | | ---- | --------------- | ---------------- | ----------- | -------- | -------------------------- | -------------------------- | | NA | Term Loan | Sep 2023 | NA | Sep 2030 | 20.74 | [ICRA]BBB+ (Stable) | | NA | Cash Credit | NA | NA | NA | 66.73 | [ICRA]BBB+ (Stable) | | NA | Bank Guarantee/LC | NA | NA | NA | 57.53 | [ICRA]A2 |

Entities Considered for Consolidation: | Company Name | Ownership | Consolidation Approach | | --------------------------------------------- | --------- | ---------------------- | | SED Engineers & Fabricators Private Limited | 100% | Full Consolidation | | Sustainable Environment Developers Limited | 100% | Full Consolidation |