Detailed rationale

This rating rationale (RR) is being published in continuation to the RR dated December 31, 2024, which communicated that the rating on the bank facilities of HPL Electric and Power Ltd (HPL; part of HPL group) was under appeal. Upon due consideration of the additional information received, the ratings have been upgraded to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A-/Positive/CRISIL A2+’.

 

The upgrade reflects an improvement in the business risk profile of the HPL group, marked by sustained and healthy growth in revenue and better operational efficiency. Operating income is expected to grow by 18-20% year-on-year (y-o-y) in fiscal 2025 to over Rs 1,700 crore (Rs 1,461 crore in fiscal 2024), driven by increasing revenue share of the smart meters segment, which formed around 37% of overall revenue in the first half of fiscal 2025 (vis-à-vis around 3% in fiscal 2022). The segment is likely to see its revenue share improve to over 50% in the near term, led by increasing focus of the government on use of smart meters. 

 

The group is expected to achieve a revenue growth of 14-15% in fiscal 2026 driven by incremental sales through smart meters, and a healthy order book. The group has orders worth Rs 4,362 crore (2.9 times of revenue in fiscal 2024) as of November 2024, of which orders worth Rs 4,091 crore are for smart meters. 

 

Operating margin is expected to rise to 14.0-14.5% in fiscal 2025, from 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.

 

Operations are working capital intensive, given the inherent nature of the business. However, the working capital cycle has improved in the past three fiscals and has further improved in fiscal 2025, aided by efficient inventory management and focus on timely collection of receivables. Gross current assets stood at 336 days as on March 31, 2024, as against 434 days as on March 31, 2021.

 

GCAs are expected to be high in the range of 310-320 days in the near-to-medium term. Sustenance of working capital cycle, amid growth in scale of operations, will limit reliance on external debt. Return on capital employed (RoCE) is projected to improve to around 13% in fiscal 2025 (11.2% in fiscal 2024 vis-à-vis 6.1% in fiscal 2021) and to 14-15% over the medium term.

 

Improvement in the business risk profile has 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 and total outside liabilities to tangible networth (TOL/TNW) ratios are likely to be around is projected at around 0.75 time and 1.3 times, respectively, as on March 31, 2025 (0.76 time and 1.24 times, respectively, a year ago). Interest coverage ratio is expected to improve to around 2.6 times in fiscal 2025 (2.15 times in fiscal 2024; 2.6 times during the first half of fiscal 2025) and expected to improve to 2.8-3.0 times 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 the large working capital requirement, improving, yet moderate 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). 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 & detailed description

Strengths:

• Established position in the metering industry: The group is an established player in the metering industry, along with its brand HPL, for around three decades. Mr Lalit Seth (Chairman, HPL group) began importing meters from Europe in 1956. The group commissioned its first manufacturing facility dedicated to meters in 1998 and now has manufacturing capacity of 1.1 crore meters per annum. 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. There has never been an invocation of any guarantee by the group’s customers. The ability to provide quality products is backed by complete backward integration and quality controls in place. The group has a strong market position in the metering segment with ~20% market share. The share of the metering segment to overall revenue increased to 57% in the first half of fiscal 2025 from 42% in fiscal 2022 and is expected over 60% in the near term. The group is well-positioned to capitalise on smart meters. 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, aided by in-house R&D capabilities: The group has three R&D facilities (two in Gurugram and one in Kundli). These facilities have helped the group to consistently innovate and develop new products. A major breakthrough has been through the launch 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 orders worth Rs 4,091 crore are for smart meters.

 

• Diversified product profile: The group has diversified its product portfolio by adding products in allied industries at regular intervals. It serves 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) forms 60-65% of revenue and the balance comes from other segments.

 

The group has an established pan-India network of over 900 authorised dealers and distributors and over 80,000 retailers, offering a sizeable reach. Longstanding presence of the promoters in the electronics industry, strong understanding of market dynamics and healthy relationships with customers and suppliers, will continue to support the business risk profile. A diversified product basket mitigates risk of obsolescence in a product and also shields revenue against downswing in any product stream. This, along with continuous investment in R&D, should ensure 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 is expected to increase to Rs 900-910 crore as on March 31, 2025 (from Rs 830 crore, a year ago), with gearing and TOL/TNW ratios projected at around 0.75 time and 1.3 times, respectively, as on March 31, 2025 (0.76 time and 1.24 times, respectively, as on March 31, 2024).

 

Weaknesses:

• Large working capital requirement: Gross current assets (GCAs) are expected to be around 320 days as on March 31, 2025 (as compared to 336 days, a year ago), driven by receivables of 160-170 days and inventory of around 160 days. The group operates in both B2B and B2C segments. However,  working capital requirement is higher in the B2B segment manufacturing takes place over 60-90 days and payments are received on a 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 collection of payments is faster, will further improve the working capital cycle over the medium term. GCAs are likely to be in the range of 310-320 days in the near term. Sustenance of working capital cycle, amid growth in scale, will ensure controlled reliance on external debt.  RoCE is likely to improve to around 13% in fiscal 2025 and to 14-15% over the medium term (11.2% in fiscal 2024 vis-à-vis 6.1% in fiscal 2021).

 

• Improving, yet moderate, debt protection metrics: Interest coverage ratio is expected to 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 to be around 0.18 time in fiscal 2025 (0.12 time in fiscal 2024). Debt protection metrics may remain constrained owing to increasing debt to support capacity enhancement and bank charges. Improvement in metrics will remain a key rating sensitivity factor amid business growth and expansion plans.

 

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

Liquidity: Strong

The group has access to fund-based working capital limits of Rs 625 crore, which were utilised at 89% on an average, over the 12 months through October 2024. Projected net cash accrual of Rs 120-180 crore per annum, should more than suffice to cover the yearly debt obligation of Rs 35-55 crore over the medium term, and the surplus could be used to meet incremental working capital expenses and capex. Free cash and bank balance stood at Rs 26 crore and current ratio at 1.53 times as on March 31, 2024.

Outlook: Stable

The HPL group will continue to benefit from its strong market position and healthy financial risk profile over the medium term.

Rating sensitivity factors

Upward factors:

• Improvement in debt protection metrics (with interest cover increasing to over 3 times), through prudent capex funding and steady working capital cycle, amidst the growing scale of operations
• Healthy revenue growth (including from smart meters), along with stable operating margin and working capital cycle

 

Downward factors:

• Decline in revenue and/or operating margin (to 11% or below), leading to lower-than-expected cash accrual
• Stretch in working capital cycle or larger-than-expected, debt-funded capex resulting in interest coverage ratio falling below 2 times.

About the group

Incorporated in 1992, HPL manufactures electric meters, lighting equipment, switchgear, wires and cables. The company is promoted by Mr Lalit Seth, Mr Rishi Seth and Mr Gautam Seth. It has seven manufacturing facilities in Haryana and Himachal Pradesh. HPL is listed on the Bombay Stock Exchange and the National Stock Exchange.

 

Mr Lalit Seth, Mr Rishi Seth and Mr Gautam Seth are the promoters.

 

Incorporated in 2003, HEPL manufactures energy saving meters, including energy management equipment, energy meters, digital meters and power meters.

 

HPLSD is a joint venture (JV) between HPL and Shirji Designs. The entity, incorporated in 2010, undertakes lighting projects.
 

HPLTS is a JV between HPL and Trimurthi Hitech Company Pvt Ltd. The entity, incorporated in 2011, undertakes lighting projects.

Any other information: Not Applicable