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 continue to 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. The ratings also reflect the robust financial risk profile, as reflected in large adjusted tangible networth of Rs 1327 crore as on March 31, 2024, and comfortable debt levels in relation to its operations. The ratings additionally 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.

 

Operating income came in higher at Rs 5238 crore for fiscal 2024 (Rs 4,469 crore for fiscal 2023), meanwhile the operating margin was 6.7% as against 5.7% for fiscal 2023. HEIL’s margins were impacted over FY22 and FY23 on account of semiconductor chip supply issues, high commodity prices like copper and aluminum and high freight charges.  CRISIL Ratings expects the margins to further improve in near to medium terms basis improved order execution at the back of healthy order inflow, better operating leverage and higher input price pass through abilities. 

 

The company has also maintained a strong business risk profile, driven by its established market position and highest ever order book of Rs 8539 crore as on June 30, 2024 (March 31, 2024: Rs 7230 crore). Liquidity is strong, marked by unencumbered cash equivalent of Rs 128 crore as on March 31, 2024, and access to fund-based bank limit of Rs 952 crore as on June 30, 2024, 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.

 

Additionally, CRISIL Ratings has taken note of the corporate announcement by the company to invest around INR 2,000 crore in expanding capacity and product portfolio across the Large and Small Power Transformers, Dry and Traction, High-voltage direct current (HVDC) & components and Network control solutions offering. Along with the development & manufacturing of localized Grid eXpand and Grid eMotion Transformers. This is expected to be taken up over the next 4-5 years to further enhance the facilities across the India and add to its existing product portfolio to drive a ‘sustainable energy future in India’. The capital expenditure (capex) will be funded through a mix of internal accruals and borrowings. Given its early stages, finalization of the scope of capex and funding mix will remain a key monitorable.

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). The company’s 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.

 

• 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. With the acquisition of 19.9% stake by Hitachi Ltd in Hitachi Energy Ltd in December 2022, 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. Post the acquisition, there has been an operational integration in manufacturing, global procurement, marketing, and sales functions, with the application of global best practices. 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 1327 crore and working capital debt of Rs 150 crore as on March 31, 2024. The financial risk profile should remain strong over the medium term, driven by healthy cash accrual, adequate liquidity, despite the large planned capex. The funding mix of the capex will remain a key monitorable.

 

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 the company has tried to mitigate 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 superior, as reflected in unencumbered cash equivalent of Rs 128 crore as on March 31, 2024, and expected annual cash accrual of Rs 300-400 crore each in fiscal 2025 and 2026 as per CRISIL Ratings estimates. As the bank limit of around Rs 952 crore has been moderately utilized, it can be used to cover the incremental working capital expenses over the medium term. The company has planned large capex over the medium term. However, a heathy mix of borrowings and a growing annual cash accrual is expected to suffice to fund the capex requirement.

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

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.