Detailed Rationale

Crisil Ratings has reaffirmed its ‘Crisil AA/Stable/Crisil A1+’ ratings on the bank loan facilities of Ingersoll Rand India Ltd (IRIL).

 

The ratings continue to reflect the established position of IRIL, with strong brands, in the domestic compressor manufacturing segment, with technological and operational support from its ultimate parent, Ingersoll Rand Inc (IR Inc; rated ‘BBB/Stable’ by S&P Global Ratings). The ratings also factor in the healthy financial risk profile of IRIL, supported by a debt-free balance sheet. These strengths are partially offset by exposure to risks related to cyclical demand from the end-user segments, susceptibility of the operating profitability to volatile raw material prices and high dividend payouts leading to moderation in the networth and liquidity.

 

After reporting 26% on-year revenue growth in fiscal 2023 backed by stronger volume and realisation growth, IRIL saw its revenue increase 5.7% on-year in fiscal 2024 led by stabilisation in orders owing to moderation in industrial activity. IRIL witnessed strong 23% on-year growth from its high margin services business (which accounted for 7% of its total revenue in fiscal 2024), while sales of its finished products (accounted for ~91% of total revenue) grew 5% on-year. The operating margin rose ~230 basis points to ~24.0%, led by moderation in key commodity prices like steel and iron in fiscal 2024 and various cost reduction measures undertaken by the company. In the first half of fiscal 2025, the revenue grew 10.2% on-year to Rs 640 crore led by strong growth witnessed from the second quarter of fiscal 2025, post the resolution of a supplier related issue, and the operating margin came in at 25.3%. The margin is projected at 20-22% over the medium term, which remains susceptible to volatility in raw material prices.

 

The company is in the middle of setting up a new manufacturing plant at a total cost of Rs 170 crore in Gujarat to increase its manufacturing capacity (of air compressors) by 5,000 units per month (to 15,000 units per month). The plant is expected to be commissioned by the end of the first quarter of fiscal 2026 and will be entirely funded through cash accrual and existing liquidity. The company has incurred ~Rs 100 crore as of December 2024 towards the same.

 

The financial risk profile of the company remains strong, with its debt-free balance sheet and gearing at 0.01 time as on March 31, 2024. Net cash accrual declined in the last two fiscals, to Rs 19 crore in fiscal 2024 from Rs 41 crore in fiscal 2023 and Rs 115 crore in fiscal 2022, due to high dividend payouts of Rs 221 crore in fiscal 2024 and Rs 158 crore in fiscal 2023. Despite the high dividend payouts, the net cash accrual is expected to be Rs 40-60 crore over the medium term and will be sufficient for medium-term capital expenditure (capex) and working capital requirement. Furthermore, cash surplus of Rs 288 crore as of September 2024 will aid liquidity.

Analytical Approach

Crisil Ratings has considered the standalone business and financial risk profiles of IRIL.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position and strong brand presence in the compressor manufacturing segment: IRIL has a strong brand presence in the Indian compressor market. The company has a dominant market share of ~50% in the centrifugal compressor segment. However, it faces competition from prominent players such as Atlas Copco India Ltd (rated ‘Crisil AAA/Stable/Crisil A1+’), Elgi Equipments Ltd (rated ‘Crisil AA/Stable/Crisil A1+’) and Kirloskar Pneumatic Company Ltd (rated ‘Crisil AA-/Stable/Crisil A1+’).

 

• Strong operational and technological support from the parent, IR Inc: IR Inc, with revenue of over $ 6.8 billion for the year ended December 2023, holds 75% stake in IRIL (directly holds 1% and 74% through its wholly owned subsidiary—Ingersoll-Rand Industrial U S Inc). IR Inc provides mission-critical air, fluid, energy, speciality vehicles and medical technologies; with services and solutions to increase industrial productivity and efficiency. The parent provides requisite technological support to IRIL and procures a part of its global small compressor requirement from India. Exports (sales to affiliates) accounted for around 22% of IRIL’s revenue in fiscal 2024 (23% in fiscal 2023). Furthermore, IRIL meets a part of its input material requirement from its affiliates. Support of IR Inc, by way of close interaction with the management and access to a global product portfolio, should continue to support the business risk profile of IRIL.

 

• Healthy financial risk profile: The financial risk profile should remain supported by a debt-free balance sheet. Networth stood adequate at over Rs 580 crore as on March 31, 2024; however, it has moderated from over Rs 1,100 crore in fiscal 2018 due to continued material dividend payout over the past few fiscals. On December 22, 2022, the Board of Directors approved the establishment of a new manufacturing plant in Gujarat to increase the manufacturing capacity of the existing products and to, additionally, manufacture new products (from 10,000 units per month to 15,000 units per month) at a total cost of Rs 170 crore spread over fiscal 2023 to the first half of fiscal 2026. Till December 2024, a capex of Rs 100 crore has been incurred, funded entirely through internal accrual. The healthy capital structure, with total outside liabilities to tangible networth (TOLTNW) ratio below 0.5 time since fiscal 2017, will likely sustain over the medium term backed by IRIL’s conservative financial policy. The debt protection metrics continue to be strong, with interest coverage ratio of ~193 times and net cash accrual to total debt (NCATD) ratio of ~3 times, for fiscal 2024. IRIL is also expected to sustain its strong balance sheet over the medium term, enhancing its flexibility to raise funds.

 

Weaknesses:

• Exposure to risks related to cyclical demand in the end-user industries and to volatility in raw material prices: Revenue of IRIL was restricted at Rs 600-1,200 crore over the past five fiscals due to intense competitive pressure. Customers in the industrial segment are largely based in capital-intensive sectors such as automotive, metals, pharmaceuticals and textiles. Barring pharmaceuticals, demand from other sectors depends on the macro-economic environment and is therefore, cyclical. Vulnerability to cyclicality in the end-user industries and competitive intensity may persist.

 

Furthermore, the operating profitability is susceptible to fluctuations in foreign exchange rates and to volatility in prices of raw materials and key components (castings made of pig iron and steel). Material costs were 54-62% of the operating income over the four fiscals through 2024, reflecting its impact on the cost structure and operating margin. Nevertheless, the operating margin increased to 13-24% between fiscals 2018 and 2024, owing to better product mix, decline in key commodity prices and cost optimisation measures undertaken by the company.

 

• High dividend payouts leading to moderation in liquidity: The company paid special dividends of Rs 792 crore in fiscal 2019, Rs 106 crore in fiscal 2020 and Rs 95 crore in fiscal 2023. In fiscal 2023, the special dividend was due to IRIL completing 100 years. Furthermore, in fiscal 2024, dividend payout was high at Rs 221 crore. Consequently, networth moderated to Rs 580 crore in fiscal 2024 from over Rs 1,100 crore in fiscal 2018 and liquidity to Rs 224 crore from Rs 770 crore. The company continues to hold healthy cash surplus, while bank lines remain completely unutilised. Dividend payout is expected to remain high over the medium term considering increase in the operating profitability; nevertheless, liquidity shall remain healthy.

Liquidity: Strong

Liquidity is supported by cash surplus of around Rs 288 crore as on September 30, 2024, and unutilised fund-based working capital lines. The company had nil debt as on September 30, 2024, and is expected to operate as a debt-free company over the medium term. IRIL is currently in the middle of its planned capex exercise, which is being funded entirely through its internal accrual. Despite this and its high dividend payout, the annual net cash accrual is expected to be sufficient at over Rs 40 crore in the medium term to meet incremental working capital needs and capital spends.

 

ESG profile

The environment, social and governance (ESG) profile of IRIL supports its already strong credit risk profile. The industrial machinery and consumables sector has a significant impact on the environment owing to emissions, waste generation and water consumption. The sector has a social impact due to its nature of operations, affecting the local community and involving health hazards. IRIL has continuously focused on mitigating its environmental and social risks.

 

Key highlights

• IRIL is committed to reducing 60% of its greenhouse gas emission by 2030.
• The company has consumed less energy as compared to peer average. It has implemented various projects such as the use of high-volume, low-speed fans; use of variable frequency drives in air handling units; and replacement of plant compressor for reducing greenhouse emissions.
• 66% of its third-party purchasing spend is through local suppliers.
• The governance structure is characterised by ~50% of its board comprising independent directors, split in chairman and CEO position, dedicated investor grievance redressal system and extensive disclosures. 

 

There is growing importance of ESG among investors and lenders. Commitment of IRIL to ESG principles will play a key role in enhancing stakeholder confidence.

Outlook: Stable

IRIL will continue to sustain its established business position in the domestic compressor segment over the medium term, with technical and product support from its parent. Its operating profitability is also expected to remain healthy. The company is likely to maintain its strong financial risk profile, as indicated by debt-free balance sheet and gradual build-up of liquidity over the medium term, following a prudent dividend philosophy.

Rating sensitivity factors

Upward factors:

• Strong double-digit revenue growth of 15-20% on sustained basis, while maintaining healthy operating profitability
• Sustenance of strong balance sheet and material improvement in liquidity

Downward factors:

• Significant deterioration in operating performance
• Material, debt-funded capex or acquisitions or a sizeable stretch in the working capital cycle, leading to sharp moderation in debt protection metrics; for instance, TOLTNW ratio exceeding 1.0-1.2 times
• Reduction in cash surplus and further moderation in networth, due to high dividend payout, capital reduction or share buyback

About the Company

Incorporated in 1921, IRIL manufactures air compressors of various capacities for the domestic and overseas markets. The company derives revenue from the sale of reciprocating, rotary and centrifugal compressors and spares in the domestic market, and from exports to its parent and affiliates. It has a manufacturing facility in Ahmedabad (Gujarat) and branch offices in most metros across India.

Key Financial Indicators*

As on/for the period ended March 31	Unit	2024	2023
Revenue	Rs crore	1,215	1,154
Adjusted profit after tax (PAT)	Rs crore	222	183
PAT margin	%	18.3	15.8
Adjusted debt/adjusted networth	Times	0.01	0.01
Interest coverage	Times	193.09	113.48

*Crisil Ratings-adjusted numbers

Any other information: Not Applicable