Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Force Motors Limited (FML).

 

Revenue is expected to grow by 30-35% on year-on-year in fiscal 2022 on a low base of previous fiscal, however, it will remain about 5% lower than pre-covid revenue levels due to the impact on end user demand from schools, office and tour & travel industry on account of successive waves of covid-19. Automobile (auto) volumes, contributing around 60% to sales, are expected to improve in fiscal 2023 with gradual reopening of schools, offices and gradual recovery in travel industry. The auto components business, which contributes to the remaining about 40% of sales, has fared comparatively better on account of gradual recovery in volumes for original equipment manufacturers (OEMs). On the other hand, recovery in operating margin is expected to be more gradual due to increase in raw material costs, change in product mix and lower capacity utilisation. Operating margin is expected to recover to  6-6.5% in fiscal 2022 from 2.6% in fiscal 2021 due to recovery in sales volume however will remain lower than pre-covid levels of 8-9% level. CRISIL expects operating margin to recover to 8% in fiscal 2023 due to recovery in automobile sales volume, increase in exports and benefit of operating leverage. Lower than expected recovery will remain key rating sensitivity factor.

 

The financial profile is likely to moderate because of large, debt-funded capital expenditure (capex) of Rs 1,000 crore across the fiscal 2022-2024 mainly towards new product platform, face-lift in existing product lines, Electric variants of Traveller and New T1N Vehicles, and BS6 stage 2 implementation. As a result, gearing is expected to increase to 0.5-0.6 time for fiscal 2022 and 2023 from the 0.35 times as on March 31, 2021. Expected recovery in operating performance will lead to net cash accruals increasing to ~Rs 250 crore next fiscal from estimated Rs 130-150crore in current fiscal. As a result, dependence on external debt is likely to remain limited in the medium term. CRISIL expects total external debt to remain lower than Rs 1200-1250 crore in the medium term. Any sharp deviation to this will remain key monitorable.

 

Liquidity is adequate, backed by cash accrual of Rs.150-250 crore per annum. Average utilisation of bank limit of Rs 390 crore, has been low at 14% for the last nine months through December 2021. Furthermore, large capex/investment of ~Rs 850 crore in fiscal 2020 and 2021 and moderation in cash accrual resulted in reduction in cash surplus to Rs.37 crore as on March 31, 2021 from Rs 66.40 crore as on March 31, 2020.

 

However, large marketable securities of over Rs 20,000 crore and cash surplus of over Rs 300 crore at parent Jaya Hind Industries Private Ltd (JHI; ‘CRISIL AA/Stable/CRISIL A1+’), and support from the Abhay Firodia group, support the company’s financial flexibility.

 

The ratings continue to reflect FML’s leading position in the domestic light commercial vehicle (LCV) segment and diversified revenue. The ratings also factor in the company’s substantial and strong financial flexibility, provided by the promoters and their intent to offer additional support, if required. These strengths are offset by susceptibility to the cyclicality inherent in the auto industry.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has applied the parent notch-up criteria for FML’s principal shareholder from the Abhay Firodia group, JHI, because of FML's importance to the group and the group’s strong financial and managerial support to the company.

Key Rating Drivers & Detailed Description

Strengths:

• Leading position in the domestic LCV passenger segment and diversified revenue

FML focusses on the niche passenger segment of LCV (market share of 59% as on December 2021 which has increased from 52% as on December 2020). In the LCV school buses and ambulances segment, the company has a market share of over 70%. The company will continue to benefit from its niche positioning in the auto OEM market, supported by the steady launch of new products and variants and rise in demand in the LCV segment.

 

Decline in sales volume for key categories resulted in muted revenue CAGR of -17% over last 3 fiscals. Although sales are expected to grow by 30-35% in fiscal 2022, overall revenue is expected be constrained at Rs 2700-2900 crore due to Covid 19 impact during current fiscal. Recovery in fiscal 2023 will be led by improvement in key end use demand segments such as schools, office and tourism.  Extent of recovery in volumes as schools, offices and on prevailing normalcy in all sectors, particularly on revival of tourism Industry, will remain a key monitorable. Furthermore, FML plans to increase its presence in exports market for its flagship product Traveller. Introduction of the new product platform for exports is expected to happen in fiscal 2023 and will contribute about 5-10% of sales volume in next fiscal. As a result, revenues for next fiscal will achieve pre-covid levels of over Rs 3500 crore with normalisation of operating margin at 8-9% level.

 

FML has a joint venture (JV), Force MTU Power Systems Pvt. Ltd, with MTU Friedrichshafen GmbH (FML owns 51% stake in the JV), to produce engines for the power and railway sectors. The Joint Venture Company will manufacture and supply 10- and 12-cylinder, series 1,600 engines for power generation and under floor rail applications for Rolls-Royce Power Systems.

 

The start of production (SOP) is delayed by 2 years, due to Covid-19 pandemic. Revenue generation from this business has started from fiscal 2022 however the JV is expected to report losses in current fiscal due to initial stages of operation and will see gradual ramp up next fiscal onwards.

 

• Moderate financial risk profile

Cash accruals moderated in fiscal 2021 due to sharp decline in sales volume and one-off expenses. With recovery in sales volume, net cash accruals will increase to Rs.130-150 crore this fiscal. CRISIL expects net cash accruals of FML to increase to Rs 200-250crore next fiscal with expected recovery in performance.

 

FML has been incurring capital expenditure for new product platforms, face-lift in existing product lines, mainly T1N,T3, Multi Utility Modular Platform and BS VI stage 2 implementation. Total capex of Rs 1000 crore between fiscal 2022 to 2024 will be funded through long term debt and partly through net cash accruals. As a result, total external debt is likely to increase from Rs 642 crore as on March 31, 2021 to Rs 1100-1200 crore in the medium term. As a result, gearing will increase to 0.5 times in fiscal 2022 from 0.3 times in fiscal 2021. Debt metrics such as interest coverage is likely to remain moderate at 4 times in current fiscal due to moderate operating profitability and will gradually improve to 5-6 times over next two fiscals. Liquid surplus has moderated and high capex intensity will keep liquid surplus minimal over medium term. Improvement in sales owing to large capex undertaken will remain key rating sensitivity factor.

 

• Strong support from the promoters

The holding company of the Abhay Firodia group owns 57.38% stake in FML, and has stakes of significant market value in the Bajaj group of companies, Bajaj Auto Ltd, Bajaj Holdings & Investment Ltd and Bajaj Finserve Ltd. This provides strong financial flexibility to the group, including FML.

 

Weaknesses:

• Susceptibility to cyclicality in demand:

Despite its leading position in certain product categories, FML has low market share in the high-volume LCV goods carrier category, compared with the strong presence of its competitors, such as Tata Motors Ltd (‘CRISIL AA-/Stable/CRISIL A1+’), Mahindra and Mahindra Ltd (M&M; 'CRISIL AAA/Stable/CRISIL A1+') and Ashok Leyland Ltd. The company’s market share in the tractor market is modest on account of intense competition from large players, including M&M, Escorts Limited (‘CRISIL AA/Watch Positive/CRISIL A1+’) and Tractors and Farm Equipment Ltd (‘CRISIL AA+/Stable/CRISIL A1+’). In spite of the intense competition, the volume is on the track of growth. These factors will constrain FML’s scale of operations over the medium term.

 

• Susceptibility to the cyclicality inherent in the auto industry

The company is susceptible to cyclicality in the CV segment. Demand depends on industrial growth and consumer sentiment. Exposure to cyclicality inherent in the auto businesses will persist.

Liquidity: Strong

FML’s liquidity will remain adequate, driven by healthy cash accrual of Rs 130-150 crore in fiscal 2022. The fund-based limit of Rs 390 crore was utilised at 14% on average during the nine months through December 2021. Internal accrual, cash and cash equivalent and unutilised bank lines will be sufficient to meet debt obligation and working capital requirement. Furthermore FML Moreover, the Abhay Firodia group has robust liquidity and will provide need-based support to FML. The group will continue to provide strong financial flexibility and need-based financial support.

Outlook: Stable

CRISIL Ratings believes FML will continue to benefit from its leadership position in niche products segments, revenue diversity and stable operating profitability. Furthermore, the financial risk profile will improveover the medium term, with limited increase in total debt in future because of healthy cash accrual, and financial flexibility of the Abhay Firodia group.

Rating Sensitivity factors

Upward factors

• Substantial increase in scale of operations driven by improvement in product diversity, and market share gains while sustaining operating margin at 8-9%
• Upgrade in the rating of the parent by one notch
• Improvement in financial risk profile due to reduction in debt, leading to improvement in gearing to below 0.2-0.3 time

 

Downward factors

• Decline in operating margin to 4-5% on sustained basis in near term
• Larger-than-expected, debt-funded capex or acquisition leading to gearing increasing to 0.8-0.9 times or interest coverage remain below 4 times on sustained basis
• Delay in recovery of return metrics such as return on capital employed

About the Company

Established in 1958, FML is the flagship company of the Abhay Firodia group. The company is a fully vertically integrated manufacturer of small and light CVs, multiutility vehicles, and agricultural tractors. Under the auto components division, engines are assembled for Mercedes-Benz India Pvt Ltd and BMW India Pvt Ltd. The primary brands in LCVs and multiutility vehicles include Traveller, Trax, Gurkha and Shaktiman, while the brands in tractors are Balwan, Orchard, Abhiman and Sanman.

 

The Abhay Firodia group, based in Pune, Maharashtra, is headed by Mr Abhaykumar Firodia (chairman of FML) and Mr Prasan Firodia (managing director). The group includes JHI, which manufacture and supply aluminium cylinder heads, blocks and other aluminium components for leading auto OEMs.

 

For the six months ended September 30, 2021, net loss was Rs -5.4 crore on net sales of Rs 1581 crore, on a consolidated basis as against net loss of Rs 51 crore on net sales of Rs 880 crore in the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars for period ended March 31	Unit	2021	2020
Revenue	Rs crore	2000	3093
Profit after tax (PAT)	Rs crore	-124	50
PAT margin	%	-6.2	1.6
Adjusted debt / adjusted networth	Times	0.35	0.16
Interest coverage	Times	0.90	10.90

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity Level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	390.00	NA	CRISIL AA/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	250.00	NA	CRISIL A1+
NA	Term loan	NA	NA	Oct-23	150.00	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	Feb-25	346.00	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	Oct-27	500.00	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	Apr-26	61.5	NA	CRISIL AA/Stable
INE451A07014	Unlisted Secured Redeemable NCD	15-Feb-21	5.85%	Feb-25	190.00	Simple	CRISIL AA/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Tempo Finance (North) Pvt Ltd	100%	Business linkages
Force MTU Power Systems Private Limited	51%	Business linkages