By Tej Karan Singh

India Ratings and Research (Ind-Ra) has affirmed Olectra Greentech Ltd’s (OGL) Long-Term Issuer Rating at ‘IND BBB+’. The Outlook is Stable. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based working capital limit

-

-

-

INR400 (reduced from INR420)

IND BBB+/Stable/IND A2

Affirmed

Non-fund-based working capital limit

-

-

-

INR1,650

IND BBB+/Stable/ IND A2

Affirmed

Non-fund-based-working capital limit

-

-

-

INR94.6

IND BBB+/Stable/IND A2

Long-term rating assigned; short-term rating affirmed

Proposed non-fund-based working capital limit#

-

-

-

 INR835.4

IND BBB+/Stable/IND A2

Assigned

Proposed non-fund-based working capital limit*

-

-

-

 INR20

IND BBB+/Stable /IND A2

Assigned

 

#The provisional rating of the proposed bank facilities has been converted to final rating as per Ind-Ra’s updated policy. This is because the agency notes that debt seniority and general terms and conditions of working capital facilities tend to be uniform across banks, and are not a rating driver.

* Unallocated

Analytical Approach:  Ind-Ra continues to take a standalone view of OGL to arrive at the ratings. The ratings continue to factor in the financial support OGL receives from one of its promoters, MEIL Holdings Limited, a wholly-owned subsidiary of Megha Engineering & Infrastructures Ltd (MEIL; ‘IND AA-’/Stable).
    

KEY RATING DRIVERS

Strong Market Position, Order Book due to Technological Tie Up with BYD: OGL is a leading player in the Indian electric bus (e-bus) market. It had a healthy order book of over 900 buses as on 31 December 2020 (spread across 11 cities), to be supplied over the next 15-18 months. Of this, around 800 buses are under the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles phase II scheme and 100 buses are under the smart city scheme. The company is also the lowest bidder for another 203 buses. OGL has an advantageous position in the e-bus segment, driven by its long-term technology sourcing agreement with China-based manufacturer of electric vehicles BYD Co Ltd (BYD). OGL is working with BYD for the localisation of components, to comply with the phased manufacturing programme of the Department of Heavy Industries. OGL is also likely to benefit from BYD’s expertise while setting up its planned e-bus manufacturing facility. 

Moderate Credit Profile; Large Capex Expansion Plans: OGL’s net adjusted debt was INR267 million at FYE20 (FYE19: net cash), amid its increased working capital requirements of INR3,334 million (INR1,788 million). Therefore, its net adjusted leverage increased to 2.9x in FY20 (FY19: net cash), while the interest coverage stood at 0.7x (negative 0.9x).  

Driven by the cost saving initiatives undertaken by OGL in 1HFY21 and the improved gross margins from the insulator segment on the back of new orders, Ind-Ra expects OGL’s FY21 EBITDA to grow to INR100 million-140 million (FY20: INR91 million). Accordingly, its credit profile is likely to improve in FY21, with the gross interest coverage being 0.8x-1.3x and the net leverage being 2.0x-2.5x.

Furthermore, Ind-Ra expects the EBITDA to grow significantly in FY22 due to the ramp up in the e-bus operations. However, the company could incur capex of INR3,000 million in FY22, which could increase its net leverage to 2.5x-3.5x in FY22. The capex is a part of OGL’s plans for setting up a new e-bus manufacturing facility at Chandanvelly, near Hyderabad, over the next four-to-five years at a total spend of INR5,250 million. However, the interest coverage is likely to improve to 3x-4x in FY22 on increased profitability. Ind-Ra takes comfort from the fact that the capex is deferrable and the company plans to incur it only after witnessing a ramping up of the e-bus operations.

COVID-19-led deterioration in Operating Performance; likely to Recover in FY22: The ramp up in the operations of OGL’s e-bus segment has been deferred due to the delays by state transport undertakings (STU) in setting up the required e-bus infrastructure. During FY20, OGL’s revenue increased to INR3,955 million (FY19: INR2,903 million) due to the increased sales in the e-bus segment (FY20: 155 buses, FY19: 83 buses), and its EBITDA turned positive to INR91 million (negative INR138 million). However, the operational performance was significantly below Ind-Ra’s estimates. 

The e-bus segment’s ramp up has been further delayed in FY21, due to COVID-19-led disruptions and the resultant reduced demand for buses due to the decreased customer preference for public transportation. Accordingly, only seven e-buses were delivered in 1HFY21. OGL's revenues for 1HFY21 stood at INR723 million (1HFY20: INR2,234 million), while its EBITDA turned negative to INR10 million (INR98 million). Ind-Ra expects the revenues for FY21 to be INR3,000 million-3,500 million, driven by the recovery in the e-bus segment in 2HFY21 on the back of the loosening of lockdown restrictions and a recovery in demand for public mobility. Furthermore, on account of its large order book and an increased thrust on e-mobility, OGL’s e-bus operations are likely to ramp up in FY22. Accordingly, the company’s revenues for FY22 are likely to be INR8,000 million-10,000 million. The EBITDA margins could be 2%-4% in FY21 (FY20: 2.3%) before increasing to 9%-11% in FY22 on improving operating leverage.  

Operations of Insulator Division likely to Stabilise: The insulator division’s operations improved in FY20 due to the increased margins derived from the higher contribution of exports to the total revenues and the reduced cost of raw materials. Accordingly, while the revenues from the segment declined to INR1,168 million (FY19: INR1,455 million) the EBIT increased to INR72 million (INR14 million).

Ind-Ra expects the revenues from the insulator segment to remain steady at INR1,100 million-1,300 million over FY21-FY22; however, the margins from the segment can be volatile due to fluctuations in raw material costs as the prices of insulators are largely fixed through tenders.

Elongated Working Capital Cycle to Shorten in FY22: OGL’s working capital cycle elongated to 332 days in FY20 (FY19: 263 days), mainly due to an increase in receivables to INR3,582 million (INR1,856 million). This includes buses delivered to Pune Mahanagar Parivahan Mahamandal Limited (PMPML; 150 buses) and Telangana State Road Transport Corporation (TSRTC; 40 buses). The fixed assets related to PMPML are in the books of OGL’s sister concern Evey Trans Private Limited (Evey; OGL’s subsidiary till January 2020; sold to MEIL Holdings); however, as the buses are operated by OGL under gross cost contract (GCC) model, the transfer of these fixed assets to OGL’s books, which is likely to happen by 4QFY21-1QFY22, should reduce its receivables considerably. With respect to TSRTC (also under GCC model), Evey has already transferred the fixed assets to OGL’s special purpose vehicle (SPV). The receivables from the sale of buses will be realised from the SPV over 4QFY21-1QFY22. Accordingly, working capital requirements should decrease considerably by FYE21-1QFY22. The company has also billed PMPML and TSRTC for the assured kilometres during 1HFY21; the payments are due from the respective STUs. OGL also had a subsidy receivable of INR585 million at FYE20 (FYE19: INR125 million). Along with the timely ramping up of operations in the e-bus segment, the timely realisation of subsidies and receivables from Evey and STUs remains a key monitorable.

Liquidity Indicator - Adequate: OGL had cash and cash equivalents of INR28 million at end-September 2020. Its average utilisation of fund-based limit of INR400 million for its insulator division stood at 43% for 12 months ended November 2020 and that of the non-fund-based limits for both insulator and e-bus segments  stood at around 64%. The company has not raised any fund-based limits for its e-bus business.

OGL generated negative cash flow from operations over FY18-FY20 (FY20: negative INR1,737 million, FY19: negative INR2,016 million) primarily due to its increasing working capital requirements. Ind-Ra expects the working capital cycle to shorten over FY21-FY22, which, along with an improvement in operational performance in FY22, is likely to lead to positive cash flows from operations of INR300 million-500 million annually over FY21-FY22. Furthermore, the company has received a sanction letter for term loans of INR1,159 million.  

The term debt repayments due in FY21 and FY22 stand at INR14 million and INR10 million, respectively.  The cash and equivalents balance, along with operational cash flows, subsidies receivable and sanctioned loans may not be adequate for OGL's capex plans for FY22. However, Ind-Ra believes the company will be able to finance the remaining capex requirements with support from its group companies, an increased realisation of receivables from Evey, and due to its easy access to debt on account of being a group company of MEIL. The debt service coverage ratio is likely to be above 1.1x over the near term. The company did not avail the Reserve Bank of India-prescribed moratorium.

Evolving Business Model:  OGL plans to own and operate the buses proposed to be delivered to various STU under the GCC model  through Evey/Evey’s SPVs or through direct outright sales to third parties or STUs. However, OGL’s business model remains flexible to the condition of tenders and it can operate buses directly or form an SPV to operate any contract generating its targeted rate of return. OGL is operating 150 buses directly and 40 buses through its SPV under this model. Ind-Ra will continue to monitor the business being undertaken under the GCC model as this could change the company’s business profile considerably. 

Increasing Competition: The competition in the e-bus segment has increased with a rise in number of original equipment manufacturers in the segment. However, OGL is likely to continue to benefit from the competitive advantage it derives from its tie up with BYD and the increasing demand for e-buses. Ind-Ra continues to believe the penetration of electric vehicles will be faster in public transportation such as buses, three wheelers than two wheelers and passenger vehicles due to higher economic viability over medium term.


RATING SENSITIVITIES

Positive: A substantial improvement in the order book position for e-buses and the timely delivery of orders, leading to an increase in the revenue and operating EBITDA margin, while reducing the net adjusted leverage below 2.0x and/or a significant strengthening of OGL’s linkages with MEIL, all on a sustained basis, could lead to a positive rating action.

Negative: A continued delay in the ramp-up or the execution of the order book for e-buses leading to the erosion of the operating leverage and continued low operating EBITDA margins or significant deterioration in the credit profile of the counterparties leading to a build-up of receivables, individually or collectively, resulting in the net adjusted leverage increasing and sustaining above 3.0x, and/or any significant weakening of OGL’s linkages with MEIL could lead to a negative rating action.


COMPANY PROFILE

Incorporated in 2000, OGL manufactures silicon-based insulators since 2003. It ventured into the e-bus business in 2016 by entering into a technology tie-up with BYD. The company assembles and markets e-buses of various models, including 12m low-floor AC bus (eBuzz K9, C9), midi semi low floor AC and non-AC bus (eBuzz K7) and mini AC bus (eBuzz K6). 

 

FINANCIAL SUMMARY

 

Particulars

FY20

FY19

Revenue (INR million)

3,955

2,903

Operating EBITDA (INR million)

91

-138

EBITDA margin (%)

2.3

-4.7

EBITDA interest coverage (x)

0.7

-0.9

Total adjusted debt (INR million)

348

448

Cash and equivalents (including current investments)

81

1230

Net leverage (x)

2.9

Net cash

Source: OGL, Ind-Ra



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

16 October 2019

27 February 2019

Issuer rating

Long-term

-

IND BBB+/Stable

IND BBB+/Stable

IND BBB+/Stable

Fund-based working capital limit

Long-term/Short term

INR400

IND BBB+/Stable/IND A2

IND BBB+/Stable/IND A2

IND BBB+/Stable/IND A2

Non-fund-based working capital limit

Long-term/Short-term

INR2600

IND BBB+/Stable/ A2

IND BBB+/Stable/ A2

IND BBB+/Stable/ A2



COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level 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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: 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. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

Headquartered in Mumbai, Ind-Ra has seven branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Pune. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

India Ratings is a 100% owned subsidiary of the Fitch Group.

For more information, visit www.indiaratings.co.in.

DISCLAIMER

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.INDIARATINGS.CO.IN/RATING-DEFINITIONS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Analyst Names