Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities and non-convertible debentures of Force Motors Ltd (FML) to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Positive’. The rating on the short-term bank facilities have been reaffirmed at ‘CRISIL A1+’.

 

The rating action factors in sustained improvement in the company’s operating performance as reflected in sharp increase in the overall sales volume by ~25% which was driven by growth in small commercial vehicles (SCVs) and light commercial vehicles (LCVs). Better product mix also drove up realisations and along with steady growth in the automotive component business, this resulted in healthy revenue growth of 38% to Rs 7,031 crore in fiscal 2024. CRISIL Ratings expects healthy operating performance to be sustained in the near to medium term, due to strong traction for the company’s products in the domestic and export markets. Besides, operating margin also expanded sharply to ~13.5% in fiscal 2024, compared with 7.5% in the previous fiscal, supported by both operating leverage gains as well as improved product mix, while absolute operating profit improved to Rs 948 crore from Rs 381 crore. Going forward, operating profitability is expected to stabilise at 12-13%, supported by sustained healthy product mix, ensuring strong annual cash generation.

 

Total debt stood at Rs 525 crore as on March 31, 2024, compared to Rs 955 crore a year earlier, on account of scheduled repayments coupled with prepayments. The debt portion includes Rs 150 crore availed from its parent, Jaya Hind Industries Pvt Ltd (JHIPL, rating upgraded to ‘CRISIL AA+/Stable/CRISIL A1+’, from ‘CRISIL AA/Positive/CRISIL A1+’), which has no fixed repayment. Gearing improved to 0.23 time as on March 31, 2024, while interest coverage ratio remained healthy at ~15 times in fiscal 2024. FML undertook capital expenditure (capex) of ~Rs 208 crore in fiscal 2024 and has planned capex of Rs 600-700 crore per annum, over the medium term, which is expected to be funded largely by internal accrual, keeping debt protection metrics healthy. For instance, interest coverage ratio is expected to be over 20 times in the near to medium term.

 

The rating action also factors in improvement in the credit risk profile of JHIPL (part of the Abhay Firodia group) and FML’s major shareholder. JHIPL has large marketable securities of over Rs 31,000 crore and cash surplus of over Rs 450 crore as on March 31, 2024, which also supports FML’s financial flexibility.

 

The ratings continue to reflect FML’s leading position in the domestic LCV passenger segment, presence across multi-utility vehicles (MUVs) and sports utility vehicle (SUVs) segments, and well-established position in the automotive component business with long standing relationships with reputed original equipment manufacturers (OEMs) resulting in a diversified revenue stream. The ratings also factor in the company’s strong financial risk profile which is further supported by strong parentage in JHIPL and intent to offer support, if required. These strengths sufficiently offset the susceptibility to the cyclicality inherent in the auto industry and niche segments in which FML is present.

Analytical Approach

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

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leading position in the domestic LCV passenger segment and diversified revenue stream: FML focusses on the niche passenger segment of LCV. In the LCV school bus and ambulance segment, the company has a market share of 70-75%. FML will continue to benefit from its niche positioning in the automotive OEM market, supported by the steady launch of new products and variants and rise in demand in the LCV segment. The company’s recent product launch in the premium LCV segment, ‘Urbania’ has been received well in the domestic market and is witnessing strong demand traction. Other brands include ‘Traveller’ in the PV, school bus, ambulance and delivery van segments; ‘Trax’ in the UV, ambulance and delivery van segments; and ‘Gurkha’ and ‘Citiline’ in the UV segment.

 

FML also assembles engines on behalf of BMW India and Mercedes Benz India Pvt Ltd (MBIPL) premier passenger vehicles in India, through its automotive component plants near Chennai and Chakan respectively. The automotive component business adds diversity to revenue streams.

 

Besides, FML has a joint venture (JV), Force MTU Power Systems Pvt Ltd, with with Rolls-Royce Solutions Gmbh (erstwhile MTU Friedrichshafen GmbH) (FML owns 51% stake in the JV), to produce engines for powergen and railway applications supplied to a leading luxury PV OEM. The JV company manufactures and supplies 10 and 12-cylinder series 1,600 engines for power generation and under floor rail applications.

 

• Strong financial risk profile: The financial risk profile of FML remained robust, marked by strong net-worth of Rs.2,257 crores as on March 31 2024, and debt levels of Rs.525 crores, translating to strong leverage metrics. The debt portion includes Rs 150 crore availed from JHIPL, which has no fixed repayment. With improvement in operating profitability and reduction in overall external debt levels and prudently funded capex, the debt protection metrics of the company improved as reflected in interest coverage ratio of ~15 times during fiscal 2024 (5.58 times in fiscal 2023), while gearing stood at below 0.25 time as on March 31, 2024. Healthy cash generation and prudent funding of capex (~Rs 2,000 crore between fiscals 2025-2027) will ensure the debt protection metrics remain at healthy levels. FML intends to be external debt-free by the end of the current fiscal.

 

• Strong support from the promoters: The holding company of the Abhay Firodia group, JHIPL, owns 57.38% stake in FML, and has stakes of significant market value in the Bajaj group of companies. The market value of investments held was more than Rs 31,000 crore as on June 30, 2024. This provides strong financial flexibility to the group, including FML.

 

Weaknesses:

• Presence in niche segment susceptible to cyclicality in demand: FML is a leading player in the LCV (passenger) segment which is an extremely niche segment and susceptible to demand cyclicality. Same was witnessed during the pandemic owing to closure of schools and offices and downturn in travel segment which in turn impacted company’s volumes. Further, FML has low market share in the high-volume UV segment, where there is intense competition from Tata Motors Ltd (TML; ‘CRISIL AA+/Stable/CRISIL A1+’), Mahindra & Mahindra Ltd (M&M; 'CRISIL AAA/Stable/CRISIL A1+') and others.

 

The company also exited the tractor segment in fiscal 2024, as it could not ramp up and remained a minor player in the highly competitive tractor market.

 

The automobile industry is subject to macroeconomic headwinds emanating from inflationary pressure and economic slowdown. Economic downturns impact consumer spending on discretionary items, and slowdown in economic activity can impact industry sales. However, despite intense competition, overall volumes are staging good recovery, especially in the LCV segment where FML is present, in the current fiscal. Sustainability of recovery in LCV volumes will be critical going forward.

 

• Profitability susceptible to macroeconomic factors, industry cyclicality and raw material prices: While higher volumes and better product mix have enabled the company to report operating margins of over 13% in fiscal 2024, operating profitability has been volatile ranging between 2% and 13% over the past 4-5 years. Raw materials and components prices constituting more than 50% of revenues are directly influenced by international commodity prices, and have displayed cyclical trends depending on demand-supply situation.  Besides macro-economic factors and government policies also have a bearing on price movement of key inputs such as steel, tyres etc.

Liquidity: Strong

FML’s liquidity will remain strong, driven by healthy cash accrual of Rs 642 crore in fiscal 2024, and expectation of cash accrual of Rs 750-850 crore per annum over the medium term. The fund-based limit of Rs 515 crore was minimally utilised. Internal accrual, cash and cash equivalent, and unutilised bank lines will be sufficient to meet debt obligation of Rs ~115 crore in fiscal 2025 and Rs ~20 crore in fiscal 2026, incremental working capital requirement, as well as fund sizeable portion of capex of ~Rs 2,000 crore over the next three fiscals. Further, FML has prepaid long term debt to the extent of Rs.200 crore in current fiscal. Moreover, the Abhay Firodia group, through JHIPL has robust liquidity and is likely to provide need-based support to FML, besides enhancing its financial flexibility.

 

ESG profile

The environment, social and governance (ESG) profile of FML supports its adequate credit risk profile.

 

The auto sector has a significant impact on the environment because of the high greenhouse gas (GHG) emissions of its core operations as well as products. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners and focus on innovation and product development

 

The company’s increasing focus on addressing ESG risks supports its ESG profile.

 

Key ESG highlights of FML:

• The company’s ESG disclosures are in line with the guidelines framed by the Ministry of Corporate Affairs and publish Business Responsibility Report., and it is in the process of further strengthening the disclosures over the medium term.
• Increasing use of solar power has enabled the Company to reduce its dependence on normal power supply, utilising the large areas offered by factory roofing in various plants.
• All Tier-1 suppliers are ISO Certified Vendors and operates as per ESG Guidelines. The company sources 37% of its input material sustainably.
• The governance structure of FML is characterised by 63% of independent director, a split chairman and chief executive officer position, extensive financial disclosures, presence of an investor grievance committee.

 

CRISIL Ratings believes that as FML’s ESG strategy evolves over the medium term, more quantitative information on relevant parameters and goals is desirable.

 

There is growing importance of ESG among investors and lenders. The company’s commitment to ESG and embedding sustainability principles across the organisation and its value chain will play a key role in enhancing stakeholder confidence and access to capital markets.

Outlook: Stable

CRISIL Ratings believes FML will continue to benefit from its leadership position in niche LCV product segments, improving revenue diversity and good operating profitability. Furthermore, the company is expected to sustain its strong financial risk profile, due to healthy annual cash generation, which will buttress the impact of sizeable, proposed capex. Additionally, the ratings also factor in timely support, if necessary, from FML’s parent, JHIPL, a key holding company of the Abhay Firodia group.

Rating Sensitivity factors

Upward factors

• Substantial increase in market share or diversification into other related business verticals leading to significantly higher revenue while maintaining operating margin at current level and return on capital employed (ROCE) at around 25% on sustainable basis
• Sustenance of healthy financial risk profile with comfortable gearing and strong debt protection metrics

 

Downward factors

• Decline in operating margin to below 8-10% on sustained basis impacting cash generation
• Any large debt-funded capex or acquisition, leading to moderation in debt protection metrics
• Downward revision in the rating of the parent by one or more notches, or change in stance of support

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 and MUVs. Under the auto components division, engines are assembled for MBIPL and BMW. The primary brands in LCVs and MUVs include Traveller, Urbania, T3 Buses, Trax, Citiline and Gurkha. JHIPL holds 57.4% stake in FML.

About the Group

The Abhay Firodia group, based in Pune, Maharashtra, is headed by Mr Abhay Kumar Firodia (Chairman of FML) and Mr Prasan Firodia (Managing Director). The group includes JHIPL, which manufactures and supplies aluminum cylinder heads, blocks and other aluminum components for leading auto OEMs and primarily, FML.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Core)	Complexity	Rating assigned with outlook
INE451A07014	Unlisted Secured Redeemable NCD	15-Feb-2021	5.85%	15-Feb-2025	79.16	Simple	CRISIL AA+/Stable
NA	Cash Credit	NA	NA	NA	390	NA	CRISIL AA+/Stable
NA	Letter of credit & Bank Guarantee	NA	NA	NA	250	NA	CRISIL A1+
NA	Fund-Based Facilities*	NA	NA	NA	125	NA	CRISIL AA+/Stable
NA	Term Loan	NA	NA	Feb-2025	130	NA	CRISIL AA+/Stable
NA	Term Loan	NA	NA	Oct-2027	246	NA	CRISIL AA+/Stable
NA	Term Loan	NA	NA	Apr-2026	37	NA	CRISIL AA+/Stable
NA	Term Loan	NA	NA	Dec-2026	200	NA	CRISIL AA+/Stable

*Limits are interchangable with Non-fund based limits to the extent of Rs.50 crore