Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL A1+' rating to the Rs 1200 crore commercial papers of Crompton Greaves Consumer Electricals Limited (Crompton) and has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the company's existing debt instruments and bank facilities.

 

CRISIL Ratings has also withdrawn its rating on the Rs 180 crore of NCDs as these have been redeemed. Refer the 'Annexure - Details of Rating Withdrawn' for the same. The withdrawal is line in with CRISIL Ratings policy on withdrawing the ratings.

 

On February 22, 2022, Crompton Greaves Consumer Electrical Ltd (CGECL) announced that it has signed definitive agreements to acquire 55% stake in Butterfly Gandhimathi Appliances Ltd (BGAL, rated ‘CRISIL A-/CRISIL A2+/Rating Watch with positive implications), which will trigger open offer to acquire additional 26% stake for a total consideration of up to 2076.63 crores. Upto 55% stake is proposed to be acquired from BGAL’s promoters for Rs.1380 crores, while patents are sought to be purchased for Rs.30 crore. Besides, an open offer for upto 26% stake will be made entitling an outgo of ~Rs.666 crore.

 

BGAL is one of the largest manufacturers of domestic kitchen and electrical appliances in India and sells its products under brand of ‘BUTTERFLY’ across wide categories such as LPG stoves, mixer grinders, tabletop wet grinders, pressure cookers, and non-stick cookware. BGAL has integrated operations and has pan India presence with a strong distribution and channel network. This acquisition will bolster CGECL’s business position and product portfolio in the kitchen appliances segment, with BGAL enjoying strong market positions in certain products such as LPG Stoves (leading market position in South), Mixer Grinders (second largest in South), Tabletop Wet Grinders (leading market position in South) and Pressure Cookers (third largest in South). During fiscal 2021,  BGAL reported revenue of Rs. 870 crore with operating margin of 9.2%.

 

CGECL will fund the acquisition through a mix of external borrowings (upto Rs.1200-1400 crores), cash surpluses (~Rs.1200 crores at September 30, 2021, of which about half will be retained in the business) and accruals, resulting in moderation of debt metrics. Initially, the company is expected to raise short term funds to close the transaction, and then replace the same with long term funds. Nevertheless, while the acquisition will be EBITDA accretive with immediate effect, the sizeable debt that will be raised will lead to temporary moderation in CGECL’s debt metrics in the near term; gross debt to EBITDA is likely to rise to close to 2 times in fiscal 2022, and then gradually improve to 1.2-1.4 times by fiscal 2023, supported by healthy cash generating ability.

 

CRISIL Ratings will continue to monitor the progress on the transaction, which is subject to customary closing conditions, and synergy benefits arising out of the same.

 

The ratings continue to reflect CGECL’s diversified business risk profile, backed by its established brand, leading position in multiple consumer durable segments; and strong growth prospects, fueled by better focus on brand building and consumer sentiments. The ratings also factor in the healthy financial risk profile, aided by steady cash accruals and prudent working capital management. These strengths are partially offset by exposure to intense competition in the domestic consumer durables sector, and evolving impact of government policies on use of energy-efficient products.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has amortised goodwill of Rs 779 crore generated at the time of demerger of CGECL from Crompton Greaves Ltd (CGL), over 10 years, from the date of the demerger and expected goodwill of Rs 1500 crores generated from acquisition of Butterfly Gandhimathi Appliances Ltd has been amortized over a period of 10 years from fiscal 2022 onwards.

Key Rating Drivers & Detailed Description

Strengths:

• Strong business risk profile, supported by revenue diversity and established brand: The company operates in four key business segments - fans, lighting, pumps, and appliances. The ECD (Electric Consumer Durables) segment, comprising fans, pumps and appliances, accounted for 79.4% of revenue in fiscal 2021, and lighting constituted the balance 20.6%. Proposed acquisition of BGAL will further strengthen CGECL’s product portfolio, especially in the kitchen appliances segment. Diverse value offering in each segment has helped the company register consistent growth over the years.

 

• A stronger distribution network, and steady pace of product launches have led to sustained increase in market share across categories during the last two years – Fans: 27%, Pumps: 28%, LED bulbs segment is 9.5% and Water Heaters 10%. Further, the premium portfolio and cost-reduction initiatives have helped the company report sustained profitability and revenue growth leading the industry. Strong focus on innovation, ability to come up with regular new product variants and devise new product categories, will continue to benefit the business.

 

• Healthy growth prospects, backed by focus on brand strengthening, and pan-India distribution network: The company has a robust distribution network. Significant focus on reach expansion in GTM strategy has improved the numeric distribution for fans (58%) and lighting (21%) from 35% and 9%, respectively, over the last three-four years. Established brand, wide product portfolio, and strong distribution reach has helped CGECL enjoy leading position in the domestic fans and residential pumps segments and gain significant share in water heaters. It is also the third largest lighting company in India. Recent acquisition of BGAL would help to achieve its long-term strategic goal of becoming a leading player in appliances segment through a complete small kitchen appliances portfolio.

 

• Healthy financial risk profile: CGECL’s financial risk profile, while being heathy, due to strong annual cash generation, will witness a temporary moderation in the near term, due to the sizeable debt proposed to be raised for acquisition of majority stake in BGAL. Debt/EBITDA ratio is expected to moderate to just under 2 times in fiscal 2022, but supported by healthy cash generation, including from BGAL, correct to ~1.2-1.4 times by fiscal 2023, while interest cover is expected at 24.0 times (7.35 times in fiscal 2023). Part reduction in cash surpluses is also expected, though the company is expected to retain at least Rs.500 crores. Unused working capital lines of Rs.75 crore, further add to the liquidity. Given the sizeable debt raising proposed and moderation in debt metrics, any further material acquisition will be a rating monitorable.

 

Weaknesses:  

• Exposure to intense competition in the domestic consumer durables sector: Competition has intensified in the consumer durables sector in India, over the past few years, with players such as Havells India Ltd establishing a strong consumer connect and brand recall. CGECL faces competition from players in the organised and unorganised segments, though the price differential enjoyed by the unorganized sector has gradually reduced post implementation of GST.

 

• Evolving impact of government policies on the use of energy-efficient products: The central government's initiative to replace incandescent and compact fluorescent lamp bulbs with energy-efficient LEDs, has helped players such as CGECL gain market share over the past years. Nevertheless, intense bidding for tenders and pricing pressure will restrict improvement in profitability of players in the lighting segment. The impact of new BEE norms in July 2022 will also a key monitorable.

Liquidity: Strong

CGECL has robust liquidity, supported by cash surplus of Rs.1359 crore as on December 2021, and unused fund-based working capital bank limit of Rs.75 crore. The company also generates annual accruals of over Rs.500 crores. It intends to raise short term bridge financing of Rs.1200-1400 crores through multiple maturities of 90-180 days for funding the stake acquisition in BGAL, and subsequently replace the same with long term debt. Cash accruals will suffice to service annual obligations, and modest capital spending plans. Besides, the company intends to maintain cash surpluses of ~Rs.500 crore, post part funding of the stake in BGAL.

Outlook: Stable

CRISIL Ratings believes CGECL’s credit risk profile will continue to benefit from its strong market position across product categories, established brand, healthy annual cash generation and unencumbered liquid surplus, and adequate financial flexibility. Its financial risk profile will also strengthen and recover gradually, driven by healthy annual cash generation, and progressive debt repayment.

Rating Sensitivity factors

Upward factors

• Revenue growth in double-digit with cash accruals of over Rs 700 crores, market leadership across multiple large product segments, enhanced product diversity and expansion of market share, strengthening the business risk profile
• Sustenance of robust financial risk profile and improvement in debt metrics; with steady state debt/EBITDA below 0.3-0.5 times
• Sustenance of healthy cash surpluses

 

Downward factors

• Significant drop in revenues and operating margin to below 7%, marked by lower market shares in key product segments and commodity price impacting inputs costs
• Sizeable debt-funded capex or acquisition, leading to moderation in debt metrics; gross debt to EBITDA exceeding 2.25-2.50 times
• Substantial dividend payout or share buyback, weakening liquidity to less than Rs 200-250 crores

About the Company

CCECL was demerged from CGL with effect from October 1, 2015. Earlier, CGECL operated as the consumer products business unit of CGL. The company manufactures and trades in products such as fans, lighting systems, domestic pumps, and appliances, primarily in India. It also exports to South Asia, the Middle East, and Africa on a small scale. Its manufacturing facilities are at Bethora and Kundaim in Goa; Baddi in Himachal Pradesh; Ahmednagar in Maharashtra; and Vadodara in Gujarat.

The company is the absolute owner of the brands, Crompton and Crompton Greaves. Post demerger, CGL’s shareholding in CGECL was nullified, and the shareholding pattern of CGECL mirrored that of CGL (34.4% held by promoters; 65.6% by the public). Subsequently, erstwhile promoter Avantha Holdings Ltd exited the consumer business through stake sale to two private equity firms, Advent International and Temasek Holdings (Pvt) Ltd for Rs 2,000 crore. CGECL is listed on the Bombay Stock Exchange and National Stock Exchange.

For the nine months ended December 31, 2021, net profit was Rs 402 crore on sales of Rs 3846 crore, as against Rs 368 crore and Rs 3281 crore, respectively, for the corresponding period of the previous fiscal.

Key Financial Indicators (CRISIL Ratings adjusted)

Particulars	Unit	2021	2020
Revenue	Rs crore	4804	4514
Adjusted profit after tax	Rs crore	538	417
PAT margin	%	11.2	9.2
Adjusted debt/Adjusted networth	Times	0.35	0.33
Interest coverage	Times	18.56	15.29

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue Size (Rs Cr)	Complexity level	Rating assigned with outlook
Series A INE299U07049	Non-convertible debentures^	29-May-20	7.25%	29-May-23	300	Simple	CRISIL AA+/Stable
Series B INE299U07056
NA	Cash Credit#	NA	NA	NA	50.00	NA	CRISIL AA+/Stable
NA	Letter of Credit*	NA	NA	NA	280.00	NA	CRISIL A1+
NA	Commercial Papers	NA	NA	7-365 days	1200.00	Simple	CRISIL A1+

^prepaid Rs 150 crore on 29th Nov 2021

#Interchangeable with non-fund-based limits
*Interchangeable with Buyers Credit and Bank Guarantee

 

Annexure – Details of Rating withdrawn

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue Size (Rs.Cr)	Complexity Level
INE299U07031	Non-convertible debentures	24-Jun-16	8.95%	24-Jun-21	180	Simple