Fitch Ratings has today affirmed India's Greaves Cotton Limited's (GCL) National Long-term rating at 'AA-(ind)'. The Outlook is Stable. Fitch has also affirmed the ratings of the company's following instruments:
Term Loans of INR46.08m (INR524.1m earlier) affirmed at 'AA-(ind)';
Fund-based cash credit limits of INR650m 'AA-(ind)';
Non fund-based limits of INR2,306.3m (fungible between letters of credit and bank guarantees) 'AA-(ind)'/'F1+(ind)' as applicable; and INR300m commercial paper programme carved out of funded working capital limits at 'F1+(ind)'.
The affirmations reflect the company's ability to maintain comfortable liquidity and leverage metrics despite a challenging economic environment; GCL had a positive net debt of around INR200m in FY09 resulting in a net debt/EBITDA of around 0.25x for the period. The ratings continue to reflect the conservative growth plans of the management, and the agency's expectation that the company will maintain its conservative financial profile over the medium term. The company registered revenue declines and lower-than-anticipated margins during FY09 due to substantial demand pressures faced in the high-margin auto engines and infrastructure divisions.
In the 12 month ending March 2009, the overall domestic three-wheeler goods carrier industry declined by 37.5%, a trend which has continued over April and May 2009, although to a lesser extent. These declines were due to lower availability and higher cost of financing, lower freight volumes, and increased competition from new 1-MT capacity light commercial vehicles. Fitch expects these pressures to continue for much of 2009, before starting to show sequential improvement in 2010.
The pressures from the smaller LCV products are likely to remain over the long-term, and could prolong the adverse impact on the three-wheeler market. In FY08, the company attempted to mitigate these risks by developing a new twin-cylinder BSIII compliant engine; over FY09, it received orders from Piaggio Vehicles and Tata Motors. During FY09, GCL extended its engines supply contract with Piaggio for supplies of existing products, which will support stability of the company's existing three-wheeler engines business. This partly offsets the client concentration risks, although the performance of the auto engines division will continue to be driven largely by Piaggio's production volumes over the near term. Fitch notes that the company's longer term business remains dependent on its ability to successfully supply engines to the newly emerging 1MT LCV market. Any major faster-than-expected shift in the domestic market towards small LCVs impacting three-wheelers would severely impact the company.
The revenue of infrastructure equipments division was significantly lower due to a slowdown in construction and investment activity in infrastructure in India. For the nine month period ending 31 March 2009, this segment made EBITDA losses of about INR48m. Fitch believes this sector will remain under pressure for the next six to eight months and will continue to pull the overall margins down. Fitch notes that with increased availability of finance in rural India the agriculture equipments performed better-than-expected and nullified the impact of losses in the genset business.
The agency views that a more-than-anticipated decline in the volumes of auto engines, and/or an increase in losses in the infrastructure and gensets segments materially impacting credit metrics could act as a negative rating factor. In any case, a material increase in net leverage beyond 1.25x on a sustained basis could act as a negative trigger. Fitch will continue to monitor the utilisation levels of its auto engines plant, as well as the company's ability to materially widen the customer base for the auto engines division. The successful increase in auto engine volumes, coupled with a more diversified customer profile materially benefiting revenues and margins could act as a positive rating factor over the medium-term.
In 9M09 the revenues were down by 10% YoY to INR8,884.4m. EBITDA margins declined to 10%, down from 12% yoy due to higher raw material cost and lower volumes. The EBITDA/Interest, despite declining to 6.7x from 8.6x, remains comfortable.
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(ind)' for National ratings in India. Specific letter grades are not therefore internationally comparable.
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