By Amey Joshi

India Ratings and Research (Ind-Ra) has revised Greaves Cotton Ltd’s (GCL) Outlook to Positive from Stable while affirming its Long-Term Issuer Rating at ‘IND AA’. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

Improved Financial Metrics: The Positive Outlook reflects the significant improvement in GCL’s EBITDA margins to 16.6% in FY16 (FY15: 11.8%), mainly due to the discontinuation of its loss-making infrastructure equipment business in FY15 and cost reduction initiatives undertaken by the company. EBITDA margins for 1HFY17 decreased marginally to 15.3% (1HFY16: 16.5%). Ind-Ra expects GCL’s EBITDA margins for FY17-FY18 to further improve due to the various cost reduction initiatives. 

Strong Credit Metrics:
The affirmation reflects GCL’s ability to sustain strong credit metrics and strong liquidity in FY16. Net debt/EBITDA has remained negative since FY11 and EBITDA interest was 265.9x in FY16 (1HFY17: 297.9x; FY15: 84.3x). Ind-Ra expects the credit metrics to remain strong in the absence of debt-led capex and on stable operating profitability. 

Strong Liquidity:
The company’s use of the fund-based limits was zero and that of non-fund-based limits was 36% in October 2016. Cash flow from operations has been positive since FY09, while free cash flow has been positive since FY14. The net working capital cycle improved to 41 days in FY16 (FY15: 49 days; FY14: 75 days) as the company is constantly strengthening its credit policy. The company continues to be debt free since FY14. 

Leadership Position:
GCL is one of the leading companies in India’s three-wheeler engine market. According to the company, it had a market share of around 80% at FYE16. It supplies engines to around 50 original equipment manufacturers in the Indian market, such as Piaggio Vehicle Limited, Tata Motors Limited, Mahindra & Mahindra Limited (‘IND AAA’/Stable), Scooters India Limited and Atul Auto Limited. 

The ratings are also supported by GCL’s presence mainly in the less cyclical light commercial vehicle and three-wheeler segments of the domestic auto industry. The company continuously focuses on research and development, which has helped it to expand its engine portfolio. 

Cyclical Nature of Industry:
The ratings are constrained by the cyclical nature of commercial vehicles segment, which accounts for around 50% of GCL’s revenue.


RATING SENSITIVITIES

Positive: A sustained improvement in the EBITDA margins in FY17, leading to a sustained strong credit profile and liquidity coupled with improved or diversified scale of operations could lead to a positive rating action. 

Negative:
A decline in the operating profitability due to a significant drop in off-take from end-customers and/or a loss of a major customer will result in negative rating action. Deterioration of GCL's financial profile due to substantial debt-led capex and/or an increase in its working capital requirements leading to net debt/EBITDA being exceeding 1x on a sustained basis could be negative for the ratings. 


COMPANY PROFILE

Established in 1859, GCL manufactures diesel/petrol engines, generator sets and agro equipment. In FY16, the company reported revenue of INR16,162 million (FY1: INR16,887 million). Revenue was INR8,380 million in 1HFY17. 

GCL’s Ratings:

- Long-Term Issuer Rating: affirmed at ‘IND AA’; Outlook revised to Positive from Stable
- INR480 million fund-based limits (reduced from INR650 million): affirmed at ‘IND AA’; Outlook revised to Positive from Stable
- INR930 million non-fund-based limits (reduced from INR1,380 million): affirmed at ‘IND A1+'




SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.


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Applicable Criteria

Analyst Names

  • Primary Analyst

    Amey Joshi

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001794

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121