Fitch Ratings has today assigned India's Escorts Limited (Escorts) a National Long-term rating of 'BB(ind)'. Fitch has also assigned a 'BB(ind)' rating to its term loans of INR1639.4m (including sanctioned amount of INR390m yet to be drawn), 'BB(ind)'/'F4(ind)' ratings to its fund based working capital limits amounting to INR2045m and 'BB(ind)'/'F4(ind)' ratings to its non-fund based working capital limits amounting to INR1085m. The Outlook is Stable.
The ratings factor in Escorts' long history in tractor manufacturing, its extensive product portfolio and efforts to focus on its core business of agri-farm and construction equipment. Escorts divested its stake in the telecom, healthcare and IT ventures in order to repay the terms loans it had taken for capex particularly in the telecom business during June 2004-March 2006. As a result consolidated leverage, Total Adjusted Debt/ Operating EBIDTAR, fell to about 10.7x in FY08 from 23.8x in FY04. Fitch has taken a consolidated view of the business and financial position of Escorts.
Escorts registered consolidated revenues of INR26893.4m during FYE September 2008, a decline of 3.5% yoy, due to lower tractor sales. EBIDTA margin at consolidated level fell to about 2.9% in FY08 (FY07: 4.7%), compared to an improvement to 5.0% in FY08 on a standalone basis (FY07: 4.3%). The drop at consolidated level was primarily due to losses incurred by subsidiary, Farmtrac North America LLC. Escorts has witnessed a short cash-conversion cycle. Fitch, however, notes that the cash-conversion cycle may increase in future as it transitions to in-house production of certain components and targets newer markets.
The ratings are constrained by the company's weak financial profile with significant accumulated losses, low profitability margins due to high cost of production, limited penetration on a pan-India basis resulting in lower capacity utilisation in the tractor business, and the poor performance of its subsidiaries.
Escort's market share has almost remained static at about 13%-14% during the last six years (except for a decline to about 9.7% in FY06). Thus, low capacity utilisation coupled with higher material cost and high wage bill has resulted in low profitability. Fitch expects that on-going cost rationalisation initiatives and marketing approach adopted by the new management team would help improve profitability margins and market share in the tractor business.
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Escorts had a total consolidated debt of INR8350m at FYE08, compared to standalone debt of INR4370.7m, thus resulting in a leverage of 10.7x and 4.4x, respectively. However, the consolidated debt includes channel financing to the tune of INR2050m with a partial recourse amounting to USD2.5m to the company. The debt-equity ratio has improved to 0.6x in FY08 (FY06: 1.12x) on a standalone basis. The company has significant debt repayments for each of the next three years beginning FY09 in relation to its potential operating cashflows. Fitch notes the company could be exposed to significant refinancing risk in the medium-term owing to debt repayments and the non-conversion of convertible debentures due for conversion/repayment in FY11.
Positive rating factors include improvement in EBIDTA and net profit resulting in the clearing off accumulated losses, and a decline in financial leverage on a consolidated basis owing to an improvement in the performance of its subsidiaries. An inability to improve profitability margins to anticipated levels or higher borrowings resulting in increase in leverage, and an inability to roll over the debt to longer maturity could act as negative triggers.
Escorts, incorporated in 1944, underwent a series of restructuring measures to reach its present state of manufacturing agri-machinery, components and railway equipments. Escorts is also present in construction equipment, IT and financial services through its subsidiaries. In Q1FY09 standalone revenues and profitability (EBIDTA) rose by 16.7% to INR4952m and 43.8% to INR296m, respectively, yoy.
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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