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.
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