| Godrej and Boyce Manufacturing Company Limited | ||||||
| Rated amount enhanced | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL AA/FAA+/Stable/CRISIL A1+' ratings on the bank facilities, fixed deposit programme and debt instruments of Godrej and Boyce Manufacturing Company Limited (G&B). |
| Analytical Approach |
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CRISIL has undertaken a standalone assessment of the business and financial risk profiles of G&B. CRISIL has also adjusted net worth to the extent of fair value of the investment in listed group companies. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Strong brand equity and diversified revenue streams Backed by longstanding presence of almost 120 years in the consumer durables segment, G&B enjoys a strong brand image and recall with customers. The company has successfully leveraged its brand equity to launch operations across various segments in the consumer and industrial domain. G&B is also a leading player in the refrigerator segment, with around 10% share in the domestic market, and manufactures air-conditioners, washing machines, and microwave ovens. The company derives steady lease income of over Rs 200 crore from its investment properties in addition to revenue from property development. In fiscal 2020, revenue was impacted by a slowdown in consumption and lost sales in the last 10 days of March 2020 due to the lockdown. The economic slowdown, caused by the pandemic, may further impact revenue performance in fiscal 2021, also given the discretionary nature of products. Though revenue for the first quarter of fiscal 2021, was lower at Rs 1000 crore, (Rs 3,160 crore reported in the same period of the previous fiscal), faster realization of outstanding receivables led to cash inflows of about Rs 1,800 crore. Given the company's established brand, and diversified product portfolio, revenue should bounce back once consumption revives. This will remain a key rating sensitivity factor. * Strong financial flexibility, with healthy equity investment portfolio and real estate assets G&B derives strong financial flexibility from its significant holding in listed group companies and sizeable real estate assets. Stakes in Godrej Consumer Products Ltd (GCPL; rated 'CRISIL A1+') and Godrej Properties Limited (GPL; rated 'CRISIL A1+'), were valued around Rs 6,000 crore as on July 22, 2020. Debt was about Rs 2960 crore as on March 31, 2020 (based on provisional financials). Financial flexibility is also aided by continuous ongoing monetization of large real estate holdings in Vikhroli, (Mumbai), and sizeable acres of developable land which can be further monetized. CRISIL believes G&B will continue to enjoy strong financial flexibility over the long term, given its portfolio of equity investments and real estate assets. Weaknesses: * Intense competition in the consumer appliances segment and high operating leverage G&B drew 31% of its revenue from the consumer appliances business in fiscal 2020. This segment is intensely competitive, marked by presence of large multinational corporations (MNCs). Intense price competition and fluctuating foreign exchange rates can lead to volatility in operating margin. Apart from consumer appliances, G&B has diversified its operations across consumer durables (interio, security solutions, locks and others; contributed ~40% revenue) and the industrial segment (process equipment, electrical and electronics, process equipment, aerospace and others; contributed 28% revenue). While margin in the consumer appliance business may remain modest, performance of the other consumer durables segments and the industrial segment (fetching comparatively higher margin), is a key monitorable. G&B has high operating leverage, which could hit profitability, in case of slowdown in the industry. Operating margin was impacted in fiscals 2019 and 2020, due to an overall slowdown in consumption, loss in security solutions and prima divisions, and lower gross margin in the interio division. Nevertheless, G&B has taken measures to control employee cost, by investing in low-cost automation. The company has also undertaken expansion plans to set up manufacturing facilities outside Vikhroli to reduce its cost. While these measures should yield benefits in the longer run, subdued demand is likely to dampen margin in fiscal 2021. * Modest financial profile marked by constrained profitability and outstanding receivables G&B's EBITDA margin was modest at 6-6.5% (adjusted for lease accounting as per IND AS 116) over the last two fiscals, largely owing to intense competition in the consumer segment and subdued performance of the industrial division. While EBITDA (earnings before interest tax depreciation and amortisation) has been impacted in first quarter of fiscal 2021 due to subdued demand, gradual demand recovery in the second half of fiscal 2021 is expected to support overall revenue and EBITDA. Also, cost optimization initiatives, along with softening of raw material prices, should help arrest the fall in margin. The extent of impact on profitability remains a key monitorable. The company also has moderately high financial leverage, driven by large receivables and sizable capital expenditure (capex). As per provisional financials for fiscal 2020, 29% of outstanding receivables have been due for over six months, pertaining to electrical and electronics, process equipment division and retention money for projects. CRISIL expects the company to exercise more prudence while bidding for projects going forward. This, along with focused efforts towards faster realization of receivables, could ease pressure on the working capital cycle. Debt rose to about Rs 2,970 crore as on March 31, 2020, from Rs 2,759 crore as on March 31, 2019, led by capex towards expansion planned in Khalapur, Dahej. However, adjusted gearing has been around 0.8 time as on March 31, 2020, and is likely to be comfortable below 1 time over medium term. While debt protection metrics may weaken in fiscal 2021, they should remain moderate, with interest cover and net cash accrual to adjusted debt ratios seen hovering at 4-4.5 times and around 0.18 time over the medium term, post fiscal 2021. Debt to EBITDA is expected to remain at elevated levels over medium term. |
| Liquidity Strong |
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Liquidity is supported by cash and cash equivalents of Rs 100 crore, unutilised working capital limit of Rs 900 crore and additional short-term loan of Rs 400 crore, sufficient to cover the fixed cost over the near term. Investments valued at Rs 6,000 crore, offer additional financial flexibility. Fixed deposit payment of Rs 102 crore and limited capex of about Rs 350 crore in fiscal 2021, are likely to be met from internal accrual, in the absence of any maturing debt. |
| Outlook: Stable |
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CRISIL believes G&B will continue to benefit from its strong brand, established presence and strong financial flexibility over the medium term. |
| Rating Sensitivity factors |
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Upward factor: * Significant and sustained improvement in cash accruals, supported by increase in market share and better profitability * Higher-than-expected reduction in debt resulting in adjusted gearing below 0.5 times on sustained basis Downward factor: * Steep decline in revenue and operating margin sustaining below 6.5%, due to increased competition * Decline in financial flexibility due to sharp decline in market value of investment portfolio, as against the outstanding debt or limited flexibility to monetize the land bank * Large debt-funded capex plan. |
| About the Company |
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G&B, set up in 1897, is one of the largest privately held industrial companies in India. It has a diversified product profile, with operations across the country. Key production facilities are in Vikhroli, Mohali, & Shirwal, where Vikhroli houses manufacturing units for both consumer and industrial products. |
| Key Financial Indicators# | ||||||||||||||||||||||||
#CRISIL adjusted numbers |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Interchangeable with post-shipment export packing credit facility; includes sub-limit of Rs 520 crore for letter of credit/bank guarantee |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*Interchangeable with post-shipment export packing credit facility; includes sub-limit of Rs 520 crore for letter of credit/bank guarantee | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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