Detailed Rationale

CRISIL Ratings has reaffirmed ‘CRISIL BBB+/Positive/CRISIL A2’ ratings to the bank facilities of HPL Electric and Power Limited (HPL, part of the HPL group).

 

The rating continues to reflect HPL's established presence in metering industry, operating efficiencies due to in-house research and development facilities, diversified product profile and healthy capital structure. These strengths are partially offset by working capital intensive operations and subdued return on capital employed, moderate debt protection metrics and susceptibility to tender-based operations and cyclicality in the electric meter segment.

 

CRISIL Ratings had assigned its ‘CRISIL BBB+/Positive/CRISIL A2’ ratings to the bank facilities of HPL on Aprill, 06, 2021.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of HPL and its subsidiary, Himachal Energy Private Limited (HEPL) and majority owned JVs, namely HPL -Shriji Designs (HPLSD) and HPL - Shriji Designs - Trimurthi Hitech Co. Private Limited (HPLTS). This is because all these entities, together referred as the HPL group, operate in the same industry and have operational and financial linkages.

 

Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established presence in the metering industry: The group is an established player in the market and has been present with the brand name ‘HPL’ for around 3 decades now. Mr. Lalit Seth (Chairman, HPL group) began importing meters from Europe in 1956 and has been involved in metering segment of business since then. The group commissioned its first manufacturing facility dedicated to metering in 1998 and currently manufactures 50-60 lakh meters on an annual basis. Also, notably all players in metering industry are supposed to provide a 5-year guarantee to the customer (usually state power utilities or private utilities) for the meters supplied and there has never been any invocation of any guarantee of HPL by its customers. This extensive experience of providing quality products has been possible because of complete backward integration and quality controls being followed by the group. CRISIL Ratings believes that experience of over 2 decades in the industry will continue to support business risk profile over the medium term.

 

Operating efficiencies due to in-house Research and Development: The group has 3 research and development (R&D) facilities (2 in Gurgaon and one in Kundli) with one having recently been inaugurated in October, 2020. Having in-house R&D has helped group in innovating and developing new products on a consistent basis. One of the major breakthrough has been in the form of smart meters. The group has bagged few initial orders and is expected to ride the smart meter installation wave over the next few years as Government of India has indicated installation of 25 crore smart meters in next 5 years. Apart from metering, group has also recently developed solar and agricultural switchgears which are expected to provide further boost to its business profile over the medium term.

 

Diversified product profile: Over the years the group has diversified its product portfolio by adding products at regular intervals in allied industries. The group has a diversified product portfolio which serves both the B2B (meters) and B2C (lighting, switchgears, wires & cables) segments. Both these segments have annually contributed around 50% to the total revenue in last 5 years. Group has an established pan India distribution network of over 900 authorised dealers and distributors and over 27000 retailers which provide significant reach. The diversification is reflective of strong understanding of market dynamics owing to long-standing presence of promoters in electronics industry and healthy relations with its customers and suppliers.

 

The group’s diversified product basket mitigates the risk of obsolescence in any single product as well as it protects revenues against downswing in any one product stream. CRISIL Ratings, thus, believes that a diversified product profile along with continuous investments in R&D should lead to sustainable growth in revenue in the medium to long term.

 

Healthy capital structure: Group’s gearing and total outside liabilities to tangible networth (TOLTNW) of 0.81 and 1.08 times, respectively, as on March 31, 2020 indicates healthy capital structure. The gearing is moderate because group went public in September, 2016 and raised Rs 361 crore which were largely utilized to pay off existing debt. Accordingly, networth improved and hence gearing dropped to 0.63 times as on March 31, 2017 from 1.76 times as on March 31, 2016. However, with stagnancy in revenue and stretch in working capital cycle largely because of lower than anticipated orders of smart meters from the Government since 2017 and drastic drop in prices of LED lights in 2017, group’s reliance on debt has been increasing since it went public in September, 2016. As a result, gearing was outstanding at 0.81 times as on March 31, 2020 compared to 0.63 times as on March 31, 2017. CRISIL Ratings expects gearing to reduce over the medium term because of higher profitability anticipated in smart metering orders and lower working capital cycle of B2C segment which would, in turn, lead to lower reliance on debt to fund working capital requirements. Further with no debt-funded capital expenditure plans in sight, long term debt is also not expected to increase from the existing levels.

 

Weakness:

Working capital intensive operations: The group operates in both B2B and B2C segments, wherein revenue contribution was 52% and 48% respectively by both the segments in fiscal 2020. Both these segments have different working capital cycle. The working capital cycle in B2C segment is shorter compared to B2B as group deals with power utilities in B2B segment wherein the manufacturing takes place over a period of 2-3 months and the customer being government entities the payments are released on milestone basis, therefore inventory and debtor days are high. In B2B segment, working capital cycle for an entire order can be over 365 days which is reflecting in gross current assets (GCA) of 367 days for the group as on March 31, 2020 (was 302 and 337 days as on March 31, 2019 and 2018 respectively). However, GCA should improve because of expectation of slightly shorter working capital cycle in smart metering orders.

 

For B2C segment, working capital cycle is shorter as the payments are received in 3-4 months from the dealer network and private parties and group keeps inventory equivalent to 3-4 months largely because of high number of stock keeping units (SKUs) and continuous supply of material. The inventory levels are expected to further reduce because of improving brand recognition and rationalization of SKUs of various products.

 

Despite reduction in inventory levels and expected improvement in working capital cycle in smart metering orders, CRISIL Ratings expects operation of the group to remain working capital intensive over the medium term.

 

Moderate debt protection metrics: The group’s debt protection measures have been moderate as reflected in adjusted interest coverage and net cash accrual to adjusted debt (NCAAD) ratio of 2.10 times and 0.1 times for fiscal 2020. The debt protection metrics are expected to deteriorate for fiscal 2021 owing to impact on profitability in first half of fiscal 2021 due to Covid-19 induced lockdown across the country and its subsequent impact on the overall economic environment. However, with expectation of higher proportion of smart metering orders in the total order book, CRISIL Ratings expects debt protection metrics to improve over medium term as higher profitability of the aforementioned orders should lead to improvement in debt protection metrics. Thus the proportion of smart metering orders in total order book and their operating profitability will be key monitorables over the medium term.

 

Susceptibility to tender-based operations: For the meter segment, revenue and profitability entirely depend on the ability to win tenders from PSU’s. Also, entities in this segment face intense competition, thus requiring to bid aggressively to get contracts, which restricts the operating margin to a moderate level.

 

Moderate return on capital employed: The scale of operations have moderated as is reflected in revenue ranging between Rs 910 crore to Rs 1160 crore in last 8 years ending March 31, 2020. In fiscal 2021, group is expected to achieve revenue of around Rs 900 crore supported by healthy recovery in second half of fiscal 2021.Group’s return on capital employed (RoCE) of 7.5% is moderate and is also well below the cost of capital for fiscal 2020. The moderation in RoCE has been happening since fiscal 2016 largely because of increasing deployment of capital in enhancing capacities and capabilities for producing 90 lakh smart meters annually and also in developing new generation of switchgears which involve agricultural and solar switchgears. Also, the end users residing in real estate and power sectors in B2B and B2C segments, respectively, have faced several headwinds in last few years owing which the order flow has remain impacted. With focus on smart metering and group’s enhanced product profile, CRISIL Ratings believes that the RoCE should improve from fiscal 2022 onwards. Any delay in recovery of RoCE will be a key monitorable over the medium term.

Liquidity: Adequate

Liquidity is adequate as reflected in fund based bank limit utilisation averaging at 88.6 percent for the past twelve months ending November 2020. Non-fund limits were utilized at an average of 68.8 percent for the past twelve months ending November 2020. Cash accrual are expected to be over Rs 45 crore and Rs 65 crore in fiscal 2021 and 2022 respectively which would be sufficient against term debt obligation of Rs 12.3 crore and Rs 28 crore respectively during the same period. Current ratio of 1.38 times on March 31, 2020 was also moderate.

Outlook: Positive

CRISIL Ratings believes that HPL group’s business profile will improve as execution of orders of smart meters follows the bids that are placed by HPL. The group has all necessary approvals and certifications in place to participate in government tenders and private orders for smart meters. CRISIL Ratings expects that ramp up in production of smart meters as HPL’s capacities of 90 lakh pieces per annum are ready for production.

Rating Sensitivity factors

Upward factor
* Significant improvement in operating income leading to return on capital employed improving to over 10% for fiscal 2022

* Improvement in adjusted interest coverage to over 2.8 times on a sustained basis
* Improvement in working capital cycle on a sustained basis

Downward factor
* Decline in net cash accruals below Rs 45 crore on account of decline in revenue or operating profits.

* Adjusted interest coverage ratio remaining below 2.5 times

* Large debt-funded capital expenditure weakens capital structure

* Witnesses a substantial increase in its working capital requirements thus weakening its liquidity & financial profile.

About the Group

Incorporated in 1992, HPL is engaged in the business of manufacturing electric meters, lighting equipment, switchgear, wires and cables. The company is promoted by Mr. Lalit Seth, Mr. Rishi Seth and Mr. Gautam Seth have 7 manufacturing facilities based out of Haryana and Himachal Pradesh. HPL is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

 

HEPL is engaged in the manufacturing of energy saving meters and other related products.

 

HPLSD is Joint Venture (JV), which undertakes lighting projects.
 

HPLTS is a JV, which undertakes lighting projects.

Key Financial Indicators

As on / for the period ended March 31		2020	2019
Operating income	Rs crore	976.60	1,158.48
Reported profit after tax	Rs crore	21.92	32.71
PAT margins	%	2.24	2.82
Adjusted Debt/Adjusted Net worth	Times	0.81	0.75
Adjusted interest coverage	Times	2.11	2.82

 

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 Levels	Rating Assigned with Outlook
NA	Fund-Based Facilities&	NA	NA	NA	40	NA	CRISIL BBB+/Positive
NA	Fund-Based Facilities^	NA	NA	NA	20	NA	CRISIL BBB+/Positive
NA	Fund-Based Facilities	NA	NA	NA	455	NA	CRISIL BBB+/Positive
NA	Term Loan	NA	NA	Nov-23	18.06	NA	CRISIL BBB+/Positive
NA	Term Loan	NA	NA	Jan-26	11.96	NA	CRISIL BBB+/Positive
NA	Non-fund Based Limit%	NA	NA	NA	110	NA	CRISIL A2
NA	Non-fund Based Limit	NA	NA	NA	575	NA	CRISIL A2
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	9.98	NA	CRISIL BBB+/Positive

& - One-way interchangeability to non-fund based working capital limits

^ - Upto 50% interchangeability to non-fund based facilities

% - One way interchangeability from non-fund based limit to fund based limit to the extent of 10% subject to availability of drawing power is allowed

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
HPL Electric and Power Limited	Full	Holding company
Himachal Energy Private Limited	Full	Subsidiary
HPL– Shriji Designs	Full	Joint Venture with majority shareholding
HPL – Shriji Designs - Trimurthi Hitech Company Private Limited	Full	Joint Venture with majority shareholding