Rating Rationale
January 22, 2020 | Mumbai
Bharat Gears Limited
Ratings downgraded to 'CRISIL BB+/Stable/CRISIL A4+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.325 Crore
Long Term Rating CRISIL BB+/Stable (Downgraded from 'CRISIL BBB-/Stable')
Short Term Rating CRISIL A4+ (Downgraded from 'CRISIL A3')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities of Bharat Gears Limited (BGL) to 'CRISIL BB+/Stable/CRISIL A4+' from 'CRISIL BBB-/Stable/CRISIL A3'.
 
The downgrade reflects the deterioration in business risk profile on the back of expected decline in revenue by 15-16% in fiscal 2020 and significantly subdued profitability. Revenue fell by 16.9% in the first-half of fiscal 2020 and operating margin declined to 1.92% compared to 9.2% during the first-half of fiscal 2019. Given high leverage, the drop in revenue and operating margin is expected to lead to net loss, which is likely to be significantly higher than earlier expectations. The rating downgrade also reflects weakening of the financial risk profile on account of higher-than-expected leverage and moderate debt protection metrics. Total outside liabilities to adjusted networth (TOLANW) ratio is expected to remain high at 3.5-3.8 times over the medium term. Debt protection metrics are likely to weaken in fiscal 2020, with interest coverage and net cash accrual to adjusted debt ratios moderating to 1.3-1.5 times and 0.05 time, respectively (2.9 times and 0.21 time, respectively, in fiscal 2019).
 
The ratings continue to reflect BGL's established market position in the automotive component industry with strong client profile in the tractor segment, albeit high concentration of revenue from few clients and strong manufacturing capabilities and infrastructure. These strengths are partially offset by high leverage levels, weakened debt protection metrics and exposure to cyclicality in end user industries.

Key Rating Drivers & Detailed Description
Strengths:
* Established market position in the automotive component industry and strong client profile, albeit high customer concentration in revenue
BGL is a leading player in the Indian tractor gear market. By virtue of its established relationships with OEMs (original equipment manufacturers) and high quality, its products enjoy strong brand recognition. A major part of the company's revenue is derived from large OEMs such as the John Deere group, which constitutes around 35% of the turnover. While there is client concentration, these customers have been dealing with BGL for over two decades and the components supplied are critical to the end product, partially mitigating this risk.
 
* Strong manufacturing infrastructure
The company has, over the years, developed strong capabilities in gear manufacturing, enabling it to be a quality and reliable supplier to reputed OEMs in the domestic as well as international markets. Facilities in Mumbra, Satara (Maharashtra), and Faridabad (Haryana) are fitted with modern equipment and certified to ISO standards. BGL also has capable research and development facilities to support development of new product variants and evolvement of existing products to meet customer needs.
 
Weaknesses:
* Leveraged capital structure despite moderate networth
Networth remains moderate at Rs 88.5 crore as on March 31, 2019, TOLANW remained high at 3.8 times largely due to debt-funded capital expenditure (capex) carried out in the past. Capital structure is expected to remain leveraged over the medium term, despite scheduled repayments, given the increase in term debt on account of debt-funded capex and additional term loan of Rs 25 crore in fiscal 2020 for reimbursement of previous capex. Due to decline in profitability and high leverage, debt protection metrics is expected weaken in fiscal 2020 and likely to remain subdued over the medium term
 
* Exposure to cyclicality in end-user industries and volatile operating margin
Since BGL generates majority of its revenue from OEMs across the tractor, construction equipment, and commercial vehicle segments, it remains susceptible to cyclicality in these industries (especially tractors). Any downturn in these industries is likely to impact the company's revenue and profitability. Any significant reduction in revenue is also expected to have a material impact on profitability given the high fixed cost structure. Demand from OEMs has moderated in the current fiscal, leading to expected decline in income by 15-16% and hence large losses. Exposure to cyclicality in end user industries is expected to continue over the medium term.
Liquidity Stretched

Net cash accrual was Rs 34.3 crore in fiscal 2019 against term debt obligation of Rs 5.4 crore. Accrual is likely to be inadequate to meet debt obligation in fiscal 2020 and is expected to tightly match term loan repayment of Rs 21.25 crore in fiscal 2021. Term loan of Rs 35 crore (Rs 25 crore availed) and equity infusion of Rs 12.21 crore have supported liquidity in the current fiscal. Capex is expected to be modest at Rs 5-7 crore per annum over the medium term. Incremental working capital requirement is likely to remain marginal due to expected subdued revenue growth. Average bank limit utilisation was 70% (fund-based limit of Rs 45 crore) during the 12 months through December 2019. Liquidity is expected to remain stretched over the medium term.

Outlook: Stable

CRISIL expects the company to continue to benefit from the established market position in the auto-components industry, experience of its promoters and client base.

Rating Sensitivity factors
Upward factors:
* Growth in revenue and sustained improvement in cost structure strengthening operating margins to above 10%, leading to significant increase in net cash accruals, thus providing comfortable cushion against repayment obligations.
* Improvement in financial risk profile, especially leverage levels with TOLANW improving to below 3 times and interest coverage of above 2.5 times

Downward factors:
* Subdued revenue growth and operating margins leading to net cash accruals falling below Rs.25 crores
* Stretch in working capital cycle or large debt funded capital expenditure or significant losses weakens the financial risk profile of the company, especially liquidity.
About the Company

Established in 1971, BGL manufactures a range of gears for tractors, commercial vehicles, buses, and utility vehicles. Products include hypoid and spiral gears, differential gears and shafts, complete automotive transmissions, gearbox sub-assemblies, and differential assemblies.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 594 513
Profit after tax Rs crore 12.5 6.3
Profit margin % 2.1 1.2
Adjusted debt/adjusted networth Times 1.86 1.74
Interest coverage Times 2.90 2.69

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity
Date		 Issue Size
(Rs Cr)		 Rating Assigned
with Outlook
NA Bill Discounting NA NA NA 30 CRISIL A4+
NA Export Factoring NA NA NA 8 CRISIL A4+
NA Fund-Based Facilities NA NA NA 45 CRISIL BB+/Stable
NA Non-Fund Based Limit NA NA NA 65 CRISIL A4+
NA Proposed Fund-Based Bank Limits NA NA NA 5 CRISIL BB+/Stable
NA Proposed Non Fund based limits NA NA NA 20 CRISIL A4+
NA Term Loan NA NA Mar-24 110 CRISIL BB+/Stable
NA Term Loan NA NA Mar-20 7 CRISIL BB+/Stable
NA Term Loan NA NA Mar-27 25 CRISIL BB+/Stable
NA Term Loan NA NA Sanctioned but
not yet availed		 10 CRISIL BB+/Stable
 
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  240.00  CRISIL BB+/Stable/ CRISIL A4+      10-06-19  CRISIL BBB-/Stable/ CRISIL A3  29-08-18  CRISIL BBB-/Stable/ CRISIL A3  11-07-17  CRISIL BBB-/Stable  CRISIL BBB-/Negative 
                20-08-18  CRISIL BBB-/Stable/ CRISIL A3       
                03-08-18  CRISIL BBB-/Stable       
                03-01-18  CRISIL BBB-/Stable       
Non Fund-based Bank Facilities  LT/ST  85.00  CRISIL A4+      10-06-19  CRISIL A3  29-08-18  CRISIL A3  11-07-17  CRISIL A3  CRISIL A3 
                20-08-18  CRISIL A3       
                03-08-18  CRISIL A3       
                03-01-18  CRISIL A3       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bill Discounting 30 CRISIL A4+ Bill Discounting 30 CRISIL A3
Export Factoring 8 CRISIL A4+ Export Factoring 8 CRISIL A3
Fund-Based Facilities 45 CRISIL BB+/Stable Fund-Based Facilities 45 CRISIL BBB-/Stable
Non-Fund Based Limit 65 CRISIL A4+ Non-Fund Based Limit 65 CRISIL A3
Proposed Fund-Based Bank Limits 5 CRISIL BB+/Stable Proposed Fund-Based Bank Limits 5 CRISIL BBB-/Stable
Proposed Non Fund based limits 20 CRISIL A4+ Proposed Non Fund based limits 20 CRISIL A3
Term Loan 152 CRISIL BB+/Stable Term Loan 152 CRISIL BBB-/Stable
Total 325 -- Total 325 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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