Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank loan facilities of Hitachi Energy India Limited.

 

The ratings reflect the healthy business risk profile of the company, driven by its strong market position in the power grid segment, diversity in product portfolio and geographical reach, and a strong clientele. It also reflects the robust financial risk profile, as reflected in large networth of Rs 1,182 crore as on March 31, 2023, and comfortable debt in relation to its operations. The ratings factor in strong support from the ultimate parent - Hitachi Ltd (Hitachi) (rated ‘A/Stable/A-1’ by S&P), which holds ~100% stake in Hitachi Energy Ltd. (effective December 2022), which is the holding company of Hitachi Energy India Limited.

 

On February 21, 2023, S&P revised the outlook from ‘Negative’ to Stable’ on the ratings of Hitachi Ltd and reaffirmed the long term ‘A’ and short term ’A-1’ rating.

 

Operating income stood at Rs 4,469 crore for the fiscal 2023, while the operating margin was 5.6% as against 7.1% for 15 month ended March 2022. HEIL’s margins were impacted over past 5-6 quarters on account of semiconductor chip supply issues, high commodity prices like copper and aluminum and high freight charges. CRISIL expects the margins to improve in near to medium terms basis expected improvement in semiconductor supply in H2FY24 leading to better execution, benefit driven from cooling off of commodity prices from end of fiscal 2023 and better margins from execution of orders received over last year factoring in higher commodity prices. 

 

Despite economic and supply chain disruptions, the company has also maintained a strong business risk profile, driven by its established market position and improved order book of Rs 7,071 crore as on March 31, 2023 (March 31, 2022: Rs 4,672 crore). Liquidity too is adequate, marked by unencumbered cash equivalent of Rs 163 crore as on March 31, 2023, and access to fund-based bank limit of Rs 838 crore as on Jun 30, 2023, which remains moderately utilized.

 

These strengths are partially offset by susceptibility to capital investment cycles and project implementation risk, largely arising from structural issues in the power sector and intense competition in the capital goods industry.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of the company, and has applied its parent notch-up framework to factor in the extent of support available to the company from its parent, Hitachi Ltd.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position in the power grid segment: The strong market position of the company in the power grid equipment and automation solutions segments is backed by its established track record. The company has executed several large projects in India, over the years (as part of ABB India Ltd). Company’s the clientele comprises reputed players across utilities, industrial, transportation and infrastructure sectors. Furthermore, the company was instrumental in bringing the Hitachi patented HVDC technology to India.

 

The established market position, strong order book and favorable industry scenario, with higher investments envisaged in the power transmission and distribution (T&D) segment in India (RDSS, Green Energy corridors and expansion of Inter-state and Intra-state transmission lines), should continue to support the business over the medium term.

 

• Acquisition by Hitachi: In December 2022, Hitachi Ltd acquired remaining 19.9% stake in Hitachi Energy Ltd resulting in Hitachi Energy India Limited becoming a 100% Hitachi owned entity.  This further substantiates strategic importance of Indian market to ultimate parent Hitachi Limited. Hitachi Ltd sees India’s energy market strategically important with strong impetus for growth driven by significant investment being made by public sector towards Renewable Energy, electrification of Indian Railways, Metro expansion and improving ISTS and InSTS connectivity.

 

Further, HEIL uses the Hitachi brand for all external corporate communication and has access to all group-level resources of the parent.

 

• Strong operational, technological and management support from the parent: Hitachi views India as a high-growth market, and hence, operations of the company are strategically important to the group. The company not only manufactures an extensive range of products locally for the Indian market, but also exports to group entities globally. Post the acquisition, there has been an operational integration in manufacturing, global procurement, marketing, and sales functions, with the application of global best practices. As highlighted by management, the parent is also supporting entities globally in managing the semiconductor shortages. Furthermore, Hitachi also offers managerial support via delegates on the board of the company. Hence, CRISIL Ratings believes Hitachi will continue to extend support to the company over the long term.

 

• Robust financial risk profile: The company has a robust financial risk profile, marked by healthy networth of over Rs 1,182 crore and working capital debt of Rs 275 crore as on March 31, 2023. The financial risk profile should remain strong over the medium term, driven by healthy cash accrual, adequate liquidity, and absence of any large capital expenditure (capex).

 

Weaknesses:

• Susceptibility of profitability to volatility in raw material prices, capital investment cycles and structural issues in the power sector: Profitability remains susceptible to any downturn in demand and structural issues and volatility in the power sector. Any large-scale project deferrals can cause cost overruns for players, and adversely impact their margin, as they have limited scope to pass on the hike. Further over the past two fiscals, profitability was impacted by a mix of factors such as semiconductor supply issues, freight costs and peaking commodity prices. While such risks have been mitigated by diversification of the revenue profile, and efficient cost and resource management, profitability remains susceptible to these structural issues.

 

• Exposure to intense competition: The power T&D segment is intensely competitive, owing to the presence of several domestic and international players. Most large orders are procured through competitive bidding, which puts pressure on profitability. While cost optimisation measures have helped the company arrest the pressure on profitability to an extent, it will remain susceptible to intense competition over the medium term.

Liquidity: Superior

Liquidity remains adequate, as reflected in unencumbered cash equivalent of Rs 163 crore as on March 31, 2023, and expected annual cash accrual of Rs 170-240 crore per fiscal in 2024 and 2025 as per CRISIL estimate. As the bank limit of around Rs 838 crore has been moderately utilised, it can be used to cover the incremental working capital expenses over the medium term.

Outlook: Stable

CRISIL Ratings believes that the company will continue to benefit from its established market position, reputed clientele, and strong parental support; and will maintain its robust financial risk profile, given its conservative financial policy.

Rating Sensitivity factors

Downward factors:

• Slump in order inflow or decline in operating margin below 6% on a sustained basis
• Any large, debt-funded capex weakening liquidity
• Material weakening of the credit risk profile of Hitachi Ltd, leading to downward revision in its rating by S&P Global Ratings by one or more notches, or change in stance or support philosophy towards Hitachi Energy India Limited

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes that Hitachi’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The thermal power sector has a significant on environment impact owing to emission of Green House Gas (GHG) and high-water consumption. Also, the sector has a significant social impact because of its direct bearing on the health and well-being of its workers and customers. Hitachi’s focus on addressing these ESG risks supports its already strong credit risk profile.

 

Key ESG highlights:

1. Hitachi has set targets for its environmental parameters; it aims to achieve carbon neutrality in its operation by 2030. It also aims to achieve 25% reduction of freshwater consumption by 2030 from the baseline 2019. It also targets to reduce its waste disposed by 50% by 2030 form the baseline year 2019.
2. Goal to increase gender diversity to 8-10% by 2025, 16-18% by 2030.
3. The Company has continued to use 100% fossil-free electricity in its own operations, showing fast progress in achieving its Sustainability 2030 target.
4. To further reduce its carbon footprint, Hitachi Energy India has replaced diesel with Compressed Natural gas (CNG) and invested in solar installations.
5. Ensuring sustainable sourcing across value chains through Supplier Sustainability Development Program (SSDP), Responsible Mineral Sourcing and Produce Material compliance.
6. Strong governance profile supported by: 50% of the board is comprised of independent directors.

About the Company

Incorporated in February 2019, following the demerger of ABB India's power grid business unit, Hitachi Energy India Limited provides product, system, software, and service solutions across the entire power value chain. The portfolio includes an extensive range of high-voltage products, transformers, grid automation products, and power quality products and systems.

 

Hitachi Energy India Limited is a public limited company with 25% equity shares traded publicly. The balance 75% promoter shareholding is currently held by Hitachi Energy Ltd., based in Zurich, Switzerland. Hitachi Energy Ltd. In turn is a 100% subsidiary of ultimate parent Hitachi Ltd.

Key Financial Indicators (for financial year ending March 31)

Particulars	Unit	2023	2022^
Revenue	Rs crore	4,484	4,951
Profit after tax (PAT)	Rs crore	94	203
PAT margin	%	2.1	4.1
Adjusted debt/adjusted networth	Times	0.23	0.11
Interest coverage	Times	4.7	9.1

^ Reported financials (for the period, January 2021-March 2022)

Any other information: Not applicable