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ICRA has downgraded the ratings of Shapoorji Pallonji and Company to BBB+ from A- and placed it on rating watch with developing implications.

The downgrade in the ratings of Shapoorji Pallonji and Company Private Limited (SPCPL) factors in the delay in securing the requisite working capital limits, which has impacted the engineering, procurement and construction (EPC) operations in FY2023, resulting in modest profitability and muted debt coverage metrics compared to ICRA's earlier estimates.

The company's line of credit was put to restricted use as a part of the One Time Restructuring (OTR) plan in March 2022, which constrained order execution in FY2023. Timely sanction of adequate working capital limits remains critical to support the growth in core operations in the medium term. The ratings have been placed on 'Watch with Developing Implications' following the company's business restructuring plan.

ICRA is given to understand that the guiding principle is to have SPCPL operating only as the holdco-cum-operating company for the construction business, while the real estate as well as other business verticals will be carved out under separate companies, which will also be owned directly / indirectly by promoters.

The restructuring process is likely to release capital in these segments, as well as likely to limit incremental funding requirement in these businesses from SPCPL. This is expected to support SPCPL's credit quality owing to reduction in consolidated debt, corporate and DSRA guarantees. However, the ratings have been placed on Watch with Developing Implications given that the finalisation of the contours of the same is still underway. ICRA will continue to monitor developments in this regard and evaluate the impact once there is adequate clarity on the same, ICRA said.

The ratings remain constrained by the leveraged capital structure at the consolidated level. SPCPL, being an operating-cumholding company, has extended credit support to various subsidiaries and associate companies by way of corporate and DSRA guarantees for the debt availed by them.

The company (SPCPL) has debt repayment obligations (P+I of over Rs 650 crore in FY2024 and Rs 650 crore in FY2025), part of which are expected to be met by divesting SPCPL's stake in some of its group entities. ICRA notes that the promoter group is planning to raise capital in the near term. Going forward, its ability to improve its operating profitability along with monetising its asset and/or capital infusion by the promoter group remains important from the credit perspective.

As on December 31, 2022, SPCPL extended corporate guarantees of Rs 3,689 crore and DSRA guarantees of Rs 194 crore. The consolidated external debt declined by ~Rs 15,300 crore, to Rs 21,870 crore as on December 31, 2022 from Rs 37,170 crore as on August 31, 2020 and is expected to further reduce through asset divestment.