Fitch: Essar projects affirmed at 8216;B8217;

Fitch Ratings' outlook on the Long-Term rating is stable.

Fitch Ratings has affirmed UAE-based Essar Projects Ltd8217;s EPL Long-Term and Short-Term Foreign Currency Issuer Default Ratings at 8216;B8217;. The Outlook on the Long-Term rating is Stable. The agency has also affirmed EPL8217;s USD100m working capital loans at 8216;B8217; and assigned it a recovery rating of 8216;RR48217;.

The affirmation reflects EPL8217;s sound financial performance in the financial year ended March 2011 FY11. The company8217;s revenue grew by 71 yoy in FY11 along with comfortable credit metrics with financial leverage total debt/EBITDA of 1.9x and interest coverage EBITDA/gross interest of 3.7x. The ratings also derive comfort from EPL8217;s strong order book position of USD6bn at end-March 2011 March 2010: USD4.3bn. Fitch notes that there is high order book diversity across project segments. Further,the proportion of non-Essar group projects in EPL8217;s order book increased to 31 in FY11 FY10: 22,FY09: 5.

The ratings continue to be constrained by Essar Global8217;s EG credit profile which is highly leveraged. In FY10,leverage was 12.6x versus an estimated 8x. Fitch expected the leverage to peak in FY10 and the company to deliver thereafter,as its 5mtpa steel plant expansion became operational in FY11 and the 6mtpa refinery expansion was commissioned in FY12. However,both these projects have been delayed and are expected to be commissioned in September 2011.

The management has not provided Essar Global8217;s EG FY11 financials. Fitch estimates that the delay of the steel plant would cause EG8217;s financial leverage to be fairly high in FY11 as well. The deleveraging would happen from FY13,when revenue and profitability of the two key projects come in for the full financial year. Fitch would review EG8217;s credit profile once its detailed financial position is provided by the management,and subsequently review EPL8217;s ratings.

The ratings also continue to be constrained by the volatility in cash flows and profitability which affects construction companies. Further,many construction companies suffer from temporary cash flow mismatches and high working capital requirements due to their high receivable days and the fact that cash flow receipts are linked to milestone completions. Fitch notes that while EPL8217;s exposure to the Essar group has been reducing,it still remains a significant proportion of its order book and will be a major contributor of revenues in future.

Negative rating guideline include a worsening of EG8217;s credit profile and/or a deterioration in EPL8217;s credit metrics with its financial leverage of above 5x and interest coverage of below 1.2x on a sustained basis. No positive rating action is envisaged over the next 18-24 months given the likely delay in EG8217;s deleveraging,as discussed above.

In FY11,EPL had revenues of USD1.7bn FY10: USD1.0bn,EBITDA of USD165m FY10: USD69m,and net profit of USD114m FY10: USD68m. Its total debt was USD311m and the cash balance was USD64m at end-March 2011. In FY11,Essar Projects India Ltd 8211; EPL8217;s key subsidiary 8211; had revenues of USD1.4bn FY10: USD933m,EBITDA of USD87m FY10: USD41m,and net profit of USD53m FY10: USD27m.