Fitch Ratings has today assigned a National Long-term issuer rating of ‘AA-(ind)’ (AA minus(ind)) with a Stable Outlook to India’s Greaves Cotton Ltd (GCL). Fitch has also affirmed the company’s INR300 million commercial paper programme, carved out of funded working capital limits, at ‘F1+(ind)’. At the same time, Fitch has assigned ‘AA-(ind)’ (AA minus(ind)) ratings to the company’s cash credit limits aggregating INR650m, its term loans aggregating INR524.1m, and to other limits of INR300m. Fitch has also rated GCL’s non-fund based limits totaling INR2,100m at ‘F1+(ind)’.

The ratings factor in the company’s strong operating performance thus far, in terms of margins and growth, its positive free cash flows despite capex outflows, and consequent improvement in debt protection measures. The rating also reflects GCL’s market leadership position in the three-wheeler engines business and its status as India’s largest independent engine maker. The ratings also take into account the company’s fast growing infrastructure division, which can partly offset the impact of a slowing automotive division. The company has constantly invested in new product development, and has recently developed a twin cylinder diesel engine which can be used in small four-wheelers and other non-automotive applications as well. The company’s debt levels are likely to increase over the medium term in order to finance its ongoing capex plan, in light of Fitch’s expectation of pressure on operating cash flows due to current economic conditions. Debt protection measures, although likely to deteriorate from current levels, will continue to remain comfortable. Fitch notes that currently, the majority of the capital expenditure is financed through internal cash accruals.

The ratings are constrained by the high dependency of the company on the three-wheeler market, exposing it to the inherent cyclicality of the industry. In addition, its high dependence on a single customer – Piaggio Vehicles India (PVI) – alone accounts for around 25% of total sales and adds to GCL’s business risk. PVI is currently planning to expand its existing three-wheeler and four-wheeler capacity. PVI is also in the process of setting up a 200,000 units p.a. in-house diesel engine plant which will meet its own requirements, as well as export to its plants abroad.

Fitch notes that GCL will continue to meet PVI’s existing requirements and will retain its 100% share of PVI’s three-wheeler engine requirements. However, Fitch will monitor the impact of PVI’s new engine plant on GCL’s sales when it comes on-stream in H210. The company continues to focus on expanding its product profile and customer base to reduce its customer concentration levels. Fitch has factored the anticipated benefit on the company’s business profile into the rating.

There was a substantial decline in the three-wheeler goods carrier segment in H108 and GCL experienced substantially slower growth for this period, which combined with cost pressures has resulted in a decline in margins. Fitch expects this current scenario to continue over the medium term. A greater-than-expected deterioration in the performance of GCL’s automotive engines division (either due to market declines or due to a decline in customer volumes) could adversely affect the rating. In addition, any major capex programme over and above what is currently envisaged could put downward pressure on the rating.

GCL, a part of the B M Thapar group, is a leading engine maker, operating through two major business divisions, i.e. engines and infrastructure equipment. Three-wheeler engines account for nearly 60% of the company’s total revenues, while the infrastructure division accounts for around 18.5% of revenues. Engines for non-automotive applications account for the remainder. In FY07, GCL reported revenues of INR10.9 billion, with an EBITDA margin of 15% and a net income of INR1.2bn. GCL’s debt protection measures remained comfortable with net debt/EBITDA remaining negative over FY06 and FY07. All figures are for consolidated results.

Sourced From: Sampark Public Relations Pvt Ltd

Tags: calls, daytrading, free calls, intraday, tips

Similar Posts:

• Fitch assigns AA-(ind) & F1+(ind) to IVRCL Infrastructures
• Fitch assigns A-(ind)’/’F1(ind) to Adhunik Metaliks
• Fitch assigns F1(ind) rtg to STD prog of Unitech Machines
• Fitch assigns F1(ind) to Bilcare working capital bk limits
• Fitch assigns AAA(ind) rating to SAIL