Fitch assigns F1(ind) rtg to STD prog of Unitech Machines

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Fitch assigns F1(ind) rtg to STD prog of Unitech Machines

This article was posted on Jan 16, 2008 and is filed under Press Releases

Fitch Ratings today assigned a National Short-term rating of ‘F1(ind)’ to the INR250 million short term debt/commercial paper programme of Unitech Machines Limited (UML).The rating assigned to UML reflects its stable revenues from the auto component division, as well as growth and diversification benefits accruing from the Engineering and Infrastructure Division (EID). The EID generated significantly higher margins for the company, resulting in improved consolidated margins to 14.5% in FY07 compared to 9.8% in FY06. Fitch notes that during FY07, approximately 67% of the revenues came from the auto component division. This proportion is likely to reduce in future and, in turn, would mitigate some of the impact of margin pressure expected in the auto component sector during the next financial year. With limited capex for the auto component business and the EID requiring primarily working capital, UML’s leverage (Total Debt/EBITDA) stood at 1.9x in FY07 compared to 2.3x in FY06. The free cash flow has been negative and is expected to follow the trend throughout 2008 due to high capex and working capital demand.

The rating remains constrained on account of the high level of concentration risk to Hero Honda Motors Limited (HHML), which contributed approximately 90% of its auto division revenues in FY07. The overall risks are mitigated to an extent by the increasing contribution of the EID to the overall revenues and profitability. Reduction in concentration risks coupled with growth in the high margin EID business on a sustained basis could potentially act as positive trigger for the rating. On the other hand, large debt-led expansion plans impacting financial leverage may potentially act as a negative rating trigger.

Unitech Machines Limited, promoted by V K Chabbra, is a closely held company engaged in the manufacture of automobile, lighting and signaling equipment, heavy engineering items and fire fighting systems. UML’s present facility is located at Saharanpur UP (capacity: 55m units/annum), with the new facility expected to come up at Bhagwanpur Uttaranchal (capacity 3 m units/annum). UML is also in the process of finalising a joint venture for a new plant in Manesar, Haryana.

UML recorded revenues of INR3.1 billion in FY07 with EBITDA margins improving significantly, driven primarily by the high margin contributions from the EID segment. The net profit increased from 75m in FY06 to 198m in FY07, with net margins doubling to 6% from 3% over the same period. While the EID business contributed higher margins than the auto business, the working requirements for the former have also increased sharply during FY07, reflecting the nature of the business.

Sourced From: Fitch Ratings India Pvt Ltd

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