By Richa Bulani

India Ratings and Research (Ind-Ra) has affirmed Greaves Cotton Ltd.’s (GCL) Long-Term Issuer Rating at ‘IND AA’. Outlook is Stable. 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

-

-

-

INR1,630 (increased from INR480)

IND AA/Stable

Affirmed

Non-fund-based working capital facilities

-

-

-

INR763 (reduced from INR930)

IND A1+

Affirmed

Analytical Approach: Ind-Ra has taken a consolidated view of GCL and its 67% owned subsidiary (acquired in December 2018), Ampere Vehicles Pvt Ltd, while arriving at the rating. GCL has provided a shortfall undertaking for the working capital lines of Ampere Vehicles.

KEY RATING DRIVERS

Leadership Position in Niche Segment: GCL remains one of the leading companies in India’s three-wheeler (3W) engine market. According to the company, it has a market share of around 75% in the 3W diesel engine segment. It supplies engines to around 30 original equipment manufacturers in India, such as Piaggio Vehicle Limited, Tata Motors Limited, Mahindra & Mahindra Limited ('IND AAA'/Stable), Scooters India Limited and Atul Auto Limited. Given the regulatory scrutiny on emission norms, industry players have to continuously focus on research and development, which has helped GCL expand its engine portfolio in adherence to the latest emission norms. The company has already developed engines that meet the new BS-VI emission norms, which are currently under the testing phase. 

Diversification Towards Non-Auto Segments Continues: 
Amid expected weakening in diesel engine demand, GCL is proactively diverting its growth focus to non-auto segments such as farm equipment, diesel gensets and aftermarket. This has partly helped the company to report an 11.8% yoy and a 9.6% yoy revenue growth for 9MFY19 and FY18, respectively, post subdued revenue growth during FY14-FY17. 

GCL plans to continue its growth focus on developing fuel-agnostic last-mile transport solutions that will cover a range of fuels, from diesel, petrol and compressed natural gas (CNG) to electric. In line with its strategy to invest in advanced clean energy
  technologies, GCL recently acquired majority stake (67%) in Ampere Vehicles Pvt Ltd (for INR770 million), an electric two-three wheeler manufacturer. GCL may look for further such small acquisitions with a focus on greener energy solutions. The company also substantially progressed in the aftermarket segment; it registered double-digit aftermarket revenue growth for FY18 and has around 250 Greaves Care stores. 

In FY18, the automotive engine segment still contributed a substantial 50% to GCL’s revenue and around 60% to the company’s EBITDA. In Ind-Ra’s opinion, GCL will take two-three years more to show material results of diversification, which remains a key rating sensitivity. 

Robust Credit Metrics:
GCL’s credit metrics remain strong as company remains debt-free. EBITDA interest coverage stood healthy at 315.2x in FY18 and 72.9x in 1HFY19 (FY17: 300.5x), given there was only small interest outgo towards non-fund-based limit utilisation. Ind-Ra expects the credit metrics to remain strong in the absence of any debt-funded capex and on a stable operating performance.

Strong Liquidity: GCL’s cash flow from operations has been positive since FY09. Its cash and equivalents were strong at INR4,438 million at end-September 2018 (including all mutual fund investments). Given the strong liquidity, the company’s fund-based working capital limits remained unused during the most part of FY18 and 9MFY19, with their average utilisation standing at 12% for the 12 months ended December 2018. 

GCL’s net working capital cycle reduced to 18 days in FY18 and 21 days in 1HFY19 (FY17: 43 days; FY16: 29 days) as the company is using letter of credit to reduce its working capital cycle. The company’s free cash flow is likely to be negative in FY19 (FY18: positive INR691 million) in view of an ongoing BS-VI related capex; which is being entirely funded through internal accruals. Improved cash flow generation, along with a likely decline in capex, is likely to lead to a positive free cash flow from FY20. 

Moderation in Margin; Likely to Stay Range-Bound
: GCL’s EBITDA margin declined to 14.2% in FY18 and 14.0% in 9MFY19 (FY17: 14.9%) due to the inflationary effect of rising raw material prices. Although the company is expanding into the high-margin aftermarket segment, it is offset by relatively low margins in the farm pump and genset segments. Thus, the overall bended margin is likely to stay range bound between 13.5%-14%. 

M&As to Continue in Medium Term:
Given the management’s focus on diversifying into fuel-agnostic businesses, Ind-Ra expects the investments requirements of GCL, both organic and inorganic, to remain high in the medium term. As per the management, the requirements will be largely funded through available liquid funds. GCL’s investment into Ampere Vehicles is likely to increase in the next couple of years, as the business ramps up operations. Ind-Ra has factored in Ampere Vehicles’ sized additional investment outflow each year towards existing fuel-agnostic and new businesses over FY20-FY21 while arriving at the ratings. While GCL’s current rating headroom is substantial, Ind-Ra will assess the impact of M&As on a case-to-case basis and review the ratings accordingly. 

Cyclical Nature and Subdued Prospects of 3W Diesel Engine Industry
: The demand for GCL’s products remains linked to the capital spending of the cyclical 3W industry. There was double-digit in the 3W domestic volumes of GCL in FY18 and 9MFY19, after subdued volume growth in FY16 and FY17. The revival in industry demand was also reflected in GCL’s revenue growth. However, Ind-Ra believes the 3W diesel goods carrier demand in the industry is likely to remain weak due to increased competition from the light commercial vehicle segment and shifting of preferences towards petrol/CNG engine and battery-operated vehicles. The same was also visible in below 10% growth in domestic 3W goods carrier volumes in FY18 and 9MFY19 versus above 20% growth in 3W passenger carrier. Additionally, the company faces the threat of a potential decline in diesel engine vehicles in the medium to long term as they have a relatively high environmental impact. 


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 offtake from end-customers and/or a loss of a major customer could result in a negative rating action. Deterioration in GCL's financial profile due to substantial debt-led organic or inorganic expansion, leading to the net debt/EBITDA exceeding 1.0x, on a sustained basis, could also lead to a negative rating action.


COMPANY PROFILE

Formed in 1859, GCL manufactures diesel/petrol/CNG engines, gensets and farm equipment at six manufacturing units in India and has an extensive marketing and services network of over 3,500 dealers and 250 aftermarket stores throughout India. 

FINANCIAL SUMMARY
 

Particulars

FY18

FY17

Revenue (INR million)

17,921

16,344

EBITDA (INR million)

2,553

2,434

EBITDA margin (%)

14.2

14.9

Interest coverage (x)

315.2

300.5

Net adjusted leverage (x)

-2.1

-1.7

Source: GCL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

1 February 2018

23 December 2016

1 October 2015

Issuer rating

-

-

IND AA/Stable

IND AA/Stable

IND AA/Positive

IND AA/Stable

Fund-based working capital facilities

Long-term

INR1630

IND AA/Stable

IND AA/Stable

IND AA/Positive

IND AA/Stable

Non-fund-based working capital facilities

Short-term

INR763

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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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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121