This Rating Rationale (RR) is being published in line with regulatory timelines, while the rated entity has appealed against the rating post communication of ratings. CRISIL Ratings is awaiting the additional information and will evaluate the appeal along-with additional information shared and shall publish a separate RR after the same is completed.

 

Detailed rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of HPL Electric and Power Ltd (HPL; a part of the HPL group) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A-’. Further, CRISIL Ratings has reaffirmed its ‘CRISIL A2+’ rating on the short-term bank facilities of the company.

 

The outlook revision reflects a belief that the financial risk profile of the group will continue to improve, backed by the strong business risk profile. Operating income is expected to grow 18-20% in fiscal 2025 to over Rs 1,700 crore (Rs 1,461 crore in fiscal 2024), driven by increasing revenue share from the smart meters segment (primarily smart meters), which contributed around 37% of the overall revenue during the first half of fiscal 2025 (compared to ~3% of overall revenue in fiscal 2022). Thus, revenue growth of 14-15% per annum is projected for the medium term. Efficient working capital management amidst increasing scale of operations will remain monitorable.

 

The group has an order book of Rs 4,362 crore (2.9 times of revenue in fiscal 2024) as of November 2024, of which the major order book (Rs 4,091 crore) is for smart meters. Revenue from smart meters is expected to grow aided by the government’s focus on the segment. The operating margin of the group may rise to 14.0-14.5% in fiscal 2025 compared to 13.2% in fiscal 2024 (12.4% in fiscal 2023); this trend is likely to continue as the group aims to increase its revenue share from smart meters over the medium term.

 

Improvement in the business risk profile also strengthened the financial risk profile. Networth is expected to be robust at Rs 900-910 crore as on March 31, 2025 (against Rs 830 crore a year ago), backed by healthy accretion to reserve. Gearing is projected at 0.75 time and total outside liabilities to tangible networth (TOL/TNW) ratio at 1.3 times as on March 31, 2025 (0.76 time and 1.24 times). Interest coverage ratio may improve to around 2.6 times yet remain average in fiscal 2025 (2.15 times in fiscal 2024; 2.6 times during the first half of fiscal 2025) owing to better operating margin through the smart meters segment.

 

The ratings continue to reflect the established presence of the group in the metering industry, its sound operating efficiency owing to in-house research and development (R&D) facilities, diversified product profile and robust networth and healthy capital structure. These strengths are partially offset by large working capital requirement, average debt protection metrics and susceptibility to risks inherent in the tender-based business.

Analytical approach

CRISIL Ratings has combined the business and financial risk profiles of HPL and its subsidiary, Himachal Energy Pvt Ltd (HEPL), and majority-owned joint ventures (JVs), namely HPL-Shriji Designs (HPLSD) and HPL-Shriji Designs-Trimurthi Hitech Co Pvt Ltd (HPLTS). This is because all these entities, collectively referred to as the HPL group, are in the same industry and have operational and financial linkages.

 

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

Key rating drivers and detailed description

Strengths:

• Established position in the metering industry: The group has been an established player in the market, along with its brand HPL, for around three decades. Mr Lalit Seth (chairman of the HPL group) began importing meters from Europe in 1956. The group commissioned its first manufacturing facility dedicated to meters in 1998 and has a manufacturing capacity of 1.1 crore meters on an annual basis. Also, all players in the metering industry have to provide a five-year guarantee to customers (usually state power utilities or private utilities) for the meters supplied, and there has never been an invocation of any guarantee by customers. The ability to provide quality products is backed by complete backward integration and quality controls being followed by the group. The group has a strong market position in the metering segment, with ~20% of the market share. It is well positioned to capitalise on the smart meter opportunity. The three-decade-long experience of the promoters in the metering industry and backward integrated operations will continue to support the business.

 

• Sound operating efficiency owing to in-house R&D capabilities: The group has three R&D facilities (two in Gurugram and one in Kundli). The in-house R&D capability has helped the group in innovating and developing new products on a consistent basis. One of the major breakthroughs has been in the form of smart meters. The group has bagged orders for smart meters and is expected to ride the smart meter installation wave during the next few years as the government has indicated installation of 25 crore smart meters over the medium term. The group has an order book of Rs 4,362 crore (2.9 times of revenue in fiscal 2024) as of November 2024, of which the major order book (Rs 4,091 crore) is for smart meters.

 

• Diversified product profile: The group has diversified its product portfolio by adding products at regular intervals in allied industries. It serves both the business-to-business (B2B; meters) and business-to-customer (B2C; lighting, switchgears, wires and cables) segments. The metering segment (including smart meters and conventional meters) contributes to 60-65% of total revenue and the remaining comes from other segments. The group has an established pan-India distribution network of over 900 authorised dealers and distributors and more than 80,000 retailers, which provide significant reach. Such diversification is reflective of a strong understanding of market dynamics owing to the longstanding presence of the promoters in the electronics industry and healthy relationships with customers and suppliers. The group’s varied product basket mitigates the risk of obsolescence in a product as well as protects revenue against downswing in any product stream. A diversified product profile along with continuous investment in R&D should lead to sustainable growth in sales in the long term.

 

• Robust networth and healthy capital structure: Networth and capital structure may remain strong, despite the debt-funded capital expenditure (capex) to be undertaken for capacity enhancement in the near term, owing to healthy accretion to reserve. Networth may increase to Rs 900-910 crore as on March 31, 2025 (from Rs 830 crore a year ago), with gearing projected at 0.75 time (0.76 time as on 31st March 2024) and TOL/TNW ratio at 1.3 times (1.24 times as on 31st March 2024).

 

Weaknesses:

• Large working capital requirement: Gross current assets (GCA) are expected at around 320 days as on March 31, 2025 (as compared to 336 days a year ago), driven by receivables of about 165 days and inventory of 160-165 days. The group operates in both B2B and B2C segments. However, the working capital requirement in the B2C segment is smaller than that in the B2B segment as the B2B segment consists of power utilities wherein manufacturing takes place over 60-90 days and payments are received on milestone basis from customers (government entities). GCAs will improve, driven by efficient management of inventory and monitoring of receivables collection. Also, increasing revenue contribution from smart meters, where debtor collection is faster, will further improve the working capital cycle over the medium term and the same will remain a key monitorable.

 

• Improving, yet average, debt protection metrics: Interest coverage ratio may improve to around 2.6 times yet remain average in fiscal 2025 (from 2.15 times in fiscal 2024; 2.6 times in the first half of fiscal 2025), driven by better operating margin in the smart meters segment. Net cash accrual to adjusted debt ratio is expected at around 0.18 time in fiscal 2025 (0.12 time in fiscal 2024). Debt protection metrics may remain constrained by increasing debt to support the capacity enhancement and bank charges. Improvement in the metrics will remain a key rating sensitivity factor amid business growth and expansion plans.

 

• Susceptibility to risks inherent in tender-based business: For the smart meters segment, sales and profitability entirely depend on the ability to win tenders from public sector undertakings. Also, entities in this segment face intense competition, requiring them to bid aggressively to get contracts, which restricts the operating margin.

Liquidity: Strong

The group has access to a fund-based working capital limit worth Rs 625 crore, which has been utilised at 89% on average over the 12 months through October 2024. Net cash accrual is projected at Rs 120-180 crore per annum, against yearly debt obligation of Rs 35-55 crore over the medium term, providing adequate cushion to meet incremental working capital requirement and capex. Cash and bank balance stood at Rs 59 crore and current ratio at 1.53 times as on March 31, 2024.

Outlook: Positive

The HPL group’s operating income will continue to improve, driven by timely execution of higher-margin orders of smart meters, thereby strengthening the overall credit risk profile.

Rating sensitivity factors

Upward factors:

• Sustained revenue growth (including from smart meters) and operating margin of around 14%, resulting in higher-than-expected cash accrual
• Improvement in debt protection metrics (with interest cover increasing to 2.6-2.7 times), through prudent funding of capex and sustenance of working capital cycle amidst the growing scale

 

Downward factors:

• Sustained decline in revenue and operating margin dropping below 10%, leading to lower-than-expected cash accrual
• Larger-than-expected, debt-funded capex

About the HPL group

Incorporated in 1992, HPL manufactures electric meters, lighting equipment, switchgear, wires and cables. The company has a total of seven manufacturing facilities across Haryana and Himachal Pradesh. HPL is listed in the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Mr Lalit Seth, Mr Rishi Seth and Mr Gautam Seth are the promoters.

 

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.

Any other information: Not Applicable