By Richa Bulani

India Ratings and Research (Ind-Ra) has revised Greaves Cotton Ltd.’s (GCL) Outlook to Stable from Positive while affirming the Long-Term Issuer Rating at ‘IND AA’. The instrument-wise rating actions are given below:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital facilities

-

-

-

INR480

IND AA/Stable

Rating affirmed, Outlook revised to Stable

Non-fund-based working capital facilities

-

-

-

INR930

IND A1+

Affirmed

The Outlook revision reflects a decline in GCL’s operating profitability in FY17 as against Ind-Ra’s expectation of a continued improvement, muted growth in the company’s core three-wheeler (3W) goods carrier diesel engine segment and the likelihood that the product diversification efforts would take longer to show material results.

KEY RATING DRIVERS

Margins to Moderate: EBITDA margin declined to 14.9% in FY17 and 14.3% in 1HFY18 (FY16: 16.6%; FY15: 11.8%) due to the inflationary effect of rising raw material prices and implementation of BS IV norms. The impact was also contributed by demonetisation and Goods and Service Tax implementation. Although Ind-Ra expects an improvement in 2HFY18 as the company would pass on some price rise to the customers. The overall EBITDA will grow but margin is likely to remain around 14.5% as the growth will be largely driven by the non-auto engine segment. The agency expects expansion of the high-margin aftermarket segment to provide some upside to overall margins. 

Diversification towards Non-auto Segments:
Amid the slowdown in the 3W diesel engine segment, GCL has diverted its growth focus towards farm equipment, diesel gensets and aftermarket segments. This helped the company to report marginal revenue growth of 1.3% yoy in FY17 to INR16,343 million and 2.3% yoy in 1HFY18, post a consistent decline during FY14-FY16, although the EBITDA contribution was limited. To diversify further, GCL also plans to expand its aftermarket segment over medium term. It is also working on developing fuel agnostic last mile transport solutions which will cover a range of fuels from diesel, petrol, compressed natural gas (CNG) to electric. However, Ind-Ra believes GCL will take around two years or more to show material results of diversification, which also remains a key rating sensitivity. 

Strong Credit Metrics:
GCL’s credit metrics remained strong in FY17 as the company remained debt free. EBITDA interest coverage was at 300.5x in FY17 (1HFY18: 6160x; FY16: 264.5x). Ind-Ra expects the credit metrics to remain strong in the absence of debt-led capex and on stable operating profitability. 

Strong Liquidity:
Cash flow from operations has been positive since FY09. Also, cash and equivalents were strong at INR4,386 million at FYE17 (including all mutual fund investments). Given strong liquidity, the company did not utilise its fund-based working capital limits. While free cash flow has been positive between FY14-FY16, it turned negative INR687 million in FY17 due to a high working capital tie-up at year end. This was the result of increased inventory due to the implementation of new BS IV norms. Thus, net working capital cycle elongated in FY17 to 43 days, after significantly reducing in FY16 to 29 days (FY15: 49 days), and is likely to remain so. 

Leadership Position in Niche Segment
: GCL is one of the leading companies in India’s 3W engine market. According to the company, it has a market share of around 80% in the 3W diesel engine segment. 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. Given regulatory scrutiny on emission norms, industry players have to continuously focus on research and development, which has helped GCL expand its engine portfolio adhering to the latest emission norms. The company has already signed up with its major customers for developing the engines meeting the new BS-VI emission norms. 

Cyclical Nature of End-user Industry
: The demand for GCL's products remains linked to the capital spending of the cyclical 3W industry. The 3W segment was severely impacted in FY17, with domestic sales volume falling 4.9% yoy in FY17 and further 21.8% yoy in 1QFY18, on account of regulatory actions such as demonetisation, delay in issuing of licenses, changes in emission norm and pre-GST de-stocking. This also led to a 9.7% yoy decline in GCL’s 3W engine volume FY17, which accounts for around 50% of the total revenue. 

The industry segment has recovered from August 2017 with overall volume growth of 7.9% yoy in 9MFY18, attributed to the release of pent-up demand and low base effect. However, Ind-Ra believes the 3W diesel goods carrier demand in the industry to remain muted due to increased competition from light commercial vehicle segment and shifting of preferences towards petrol / CNG engine and battery-operated vehicles.


RATING SENSITIVITIES

Positive: Sustained growth in the scale of operations and further revenue diversification, along with maintaining strong credit metrics and liquidity 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 could result in a negative rating action. Deterioration of GCL's financial profile due to substantial debt-led capex (organic or inorganic) leading to net debt/EBITDA exceeding 1x on a sustained basis could also lead to a negative rating action.


COMPANY PROFILE

Established in 1859, GCL manufactures diesel/petrol engines, generator sets and farm equipment. GCL has six manufacturing units in India and has an extensive marketing and services network with over 3,500 dealers throughout India.

FINANCIAL SUMMARY

 

Particulars

FY17

FY16

Revenue (INR million)

16,343

16,134

EBITDA (INR million)

2,434

2,671

EBITDA margin (%)

14.9

16.6

Interest coverage (x)

300.5

264.5

Net leverage (x)

-1.8

-1.7

Source: GCL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

23 December 2016

1 October 2015

13 May 2014

Issuer rating

Long-term

-

IND AA/Stable

IND AA/Positive

IND AA/Stable

IND AA/Stable

Fund-based working capital facilities

Long-term

INR480

IND AA/Stable

IND AA/Positive

IND AA/Stable

IND AA

Non-fund-based working capital facilities

Short-term

INR930

IND A1+

IND A1+

IND A1+

IND A1+


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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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India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Richa Bulani

    Senior Analyst
    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 40001712

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121