| Highway Industries Limited | ||||
| Rated amount enhanced | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its rating on the bank facilities of Highway Industries Limited (HIL) at 'CRISIL A+/Stable'
The rating reflects HIL's healthy business risk profile driven by increasing share of business with existing customers and addition of new customers, especially in the export markets. Diversified product portfolio, presence across vehicle segments and long-standing relationship with clients provide sustainability to the company's business performance.
Revenue in the fiscal 2023 is estimated to be at Rs. 950-1000 crore with yoy growth of over 15% driven by healthy offtake from export and domestic customers. Export sales have grown steadily, contributing to 55% of total sales in fiscal 2022 as against 25% in fiscal 2018. In the domestic market also, company has successfully strengthened its market position by addition of new customers outside two wheeler segment. Operating margin is expected to rise to 12-12.5% in fiscal 2023 from 11.5% in fiscal 2022 due to improving operational efficiency and cost cutting initiatives. Also, the company has price variation clause with its customers and passes on the prices with a lag of 2-3 months and company is taking steps to increase operating efficiency which is expected to increase margins to 14-15% in the medium term.
HIL is expected to continue to show healthy performance over the medium term, driven by increased contribution from exports, addition of new customers and increasing share of wallet from existing customers. Additionally, the export client's onboarded in the past few years are likely to gradually increase their offtake. Healthy segmental diversity should limit impact of demand slowdown in any one particular segment. Revenue growth is expected to remain healthy at 10%-15% over the medium term and operating profitability should remain healthy between 14-15% supported by growing exports.
While company is expected to continue to focus on exports over the medium term, leading to higher working capital requirement, given the improving cash generation, part of the requirement will be funded out of internal accruals reducing dependence on external debt going forward.
The ratings continue to reflect HIL's strong business linkage with leading players such as Hero MotoCorp Ltd (HMCL; formerly, Hero Honda Motors Ltd; rated 'CRISIL AAA/Stable/CRISIL A1+'), LG Electronics India Pvt Ltd (LG, 'CRISIL AAA/Stable/CRISIL A1+'), and Magna International Inc, Mexico (Magna), improving product and geographic diversity, and improving financial risk profile. These rating strengths are partially offset by exposure to pricing pressures from original equipment manufacturers and cyclicality in the automotive components industry |
Key Rating Drivers & Detailed Description Strengths: Healthy business risk profile, supported by established business linkages in the automotive industry: HIL should continue to benefit from strong business linkages with HMCL and addition of customers both in the domestic as well as export markets. HIL meets the entire requirement of HMCL's Haridwar plant and 80% of requirement for crankshafts and kick start spindles, at the Gurgaon plant. Proximity between HIL's units and HMCL's plants, ensure uninterrupted supply. Benefits from their mutual dependency and sharing of production plans, will continue to drive business synergies over the medium term. Further, increasing contribution from new customers added in the domestic as well as export markets should support business growth. HIL mainly supplies to two-wheeler and four-wheeler companies with Hero Motor Corp Ltd, Magna Powertrain De being some key customers. HIL is expected to benefit from the growth in end user industries with domestic two-wheeler sales expected to grow at a compound annual growth rate (CAGR) of 9-11% from fiscal 2022 to fiscal 2027 and passenger vehicles expected to grow at rate of 7-9% in fiscal 2024.
Improving revenue and geographic diversity: Business prospects have historically been linked to performance of the domestic two-wheeler industry, given HIL's strong business linkages with HMCL. However, with new customers being added outside the two wheeler segment, especially in the export market, revenue concentration with HMCL has been steadily reducing. HMCL contributed about 24% of HIL's revenue in fiscal 2022 as against 80% in fiscal 2012. During the same period contribution from export business has increased to over 55% from 10%, helping the company offset fluctuations in domestic demand. Further, HIL has also successfully diversified its revenue mix and increased contribution from passenger vehicle and white goods segment. Over the medium term while HMCL is likely to remain HIL's largest customer, improving revenue and geographic diversity should minimize the risk of demand slowdown in any particular segment or geography, further strengthening HIL's business risk profile.
Improving financial risk profile: Despite a fall in profitability margins in the last two fiscals, the financial risk profile of the company remains comfortable. In the absence of any large capital expenditure plan, the company should be able to part-fund its increasing working capital requirements through accruals and thereby improve its capital structure and debt protection metrics over the medium term. Gearing is estimated at around 1.2-1.3 times as on March 31, 2022, vis-a-vis 1.46 times a year before.
Going forward, net cash accruals expected at Rs 100-130 Cr per annum, driven by healthy growth and recovery in op margin to 14-15%. Further, company has capex plan of Rs 35-40 crore per annum. As a result of low capex intensity, total long term debt is expected to reduce further from around Rs 95 crore estimated as of Oct 2022. As GCA days have increased from 148 days in 2018 to 189 days in 2022 due to increasing exports, short term debt has also increased. With exports increasing further, working capital intensity is expected to increase. Timely enhancements of limits will be a key monitorable. Bank limit Utilization is currently 85% and 15- @0% cushion is expected to remain. CRISIL expects gearing and NCA/TD to be in the range of 0.9-1 times and to 0.30-0.50 times respectively over next 2 years. Also, interest coverage will improve to over 5 times. Continued high working capital intensity resulting in higher than expected external borrowings will remain key rating sensitivity factor.
Weakness: Exposure to pricing pressure from OEMs: HIL has limited pricing power with its key customers, mainly HMCL and other OEMs. Though the price variation clause with HMCL protects HIL from any significant movement in input cost, there is limited flexibility to pass on increase in overheads and other costs. Like its peers, HMCL announces frequent price revisions, due to intense competition, and this adversely impacts the operating margin of vendors. Nevertheless, the impact of these pressures on margins are likely to be mitigated by benefits of increasing volumes and increasing contribution from higher margin export business.
Cyclicality in the automotive components industry: Revenue is largely dependent on demand from OEMs in the two-wheeler and passenger vehicle industry, which in turn depends on a number of factors, such as disposable income levels, consumer preferences, credit availability and fuel prices. In the absence of aftermarket revenue, dependence on the OEMs for its business poses a risk to revenue and profitability, in case this segment witnesses any significant slowdown as seen in previous fiscals. |
Liquidity: Adequate HIL has adequate liquidity. Expected annual cash accruals of Rs 80-90 crore in fiscal 2023 should comfortably cover planned annual capex of Rs. 35-40 crore and maturing debt obligations of around Rs. 25-30 crore. Operations are however working capital intensive in nature, however BLU remains comfortable with BLU of 48% on an average in the past 6 months ended October 2022. While working capital requirements will continue to remain high, the same will be part funded by improving cash accruals thereby limiting incremental debt funding over the medium term. Surplus cash remained at Rs. 10 crore as on March 31, 2022. |
Outlook: Stable CRISIL Ratings expects HIL to gradually improve its business risk profile, supported by increasing share of business with existing customers, as well as diversification of its revenue streams through addition of new customers including in the export markets. Financial risk profile is expected to improve further over the medium term, supported by steady increase in cash generation. |
Rating Sensitivity Factors Upward Factors
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About the Company Highway Industries Limited manufactures pistons for automobiles, and consumer durables. It has three units in Ludhiana, Punjab. Apart from HMCL, HIL also supplies to Magna Powertrain, LG Electronics India Pvt Ltd, Sona Koyo Steering Systems Ltd, ZF Steering Systems Ltd, and Arcelor Mittal Woodstock Tubular Products. The company is managed by Mr Umesh Munjal, representing the Satyanand Munjal group. Currently, he holds the entire equity in HIL through UM Holdings, an investment entity.
For the six months ended 30th September 2022, HI posted revenue of Rs 490 crore and operating profit of Rs 61.01 crore. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable with exports packing credit |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 06-Dec-2022 in line with the lender-wise facility details as on 18-Aug-2021 received from the rated entity.
Criteria Details
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