Rating Rationale
March 11, 2022 | Mumbai
L&T Valves Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.840 Crore
Long Term RatingCRISIL AA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
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 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities of L&T Valves Limited (LTVL).

 

The ratings continue to reflect the strong capital structure of the company, diversified presence in the international market and healthy management and financial support from the parent, Larsen and Toubro Ltd (L&T; ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’). Key management personnel from L&T and its group companies are appointed for LTVL to help improve its business performance; the extent of support from the parent continues to be a key rating sensitivity factor. These strengths are partially offset by exposure to intense competition and large working capital requirement.

 

Against forecast, fiscal 2021 results fared well, driven by better execution (particularly in the second-half), operating margin at over 5%, moderation in working capital intensity in the form of gross current assets (GCAs) below 300 days and consequent improvement in debt levels leading to strong gearing of 0.25 time as of March 2021.

 

During April-December 2021, revenue was lower by around 21% on-year due to the second wave of the pandemic and logistical challenges in the second quarter, before gradual recovery in the third quarter. Against earlier forecast, full-year revenue is expected to be lower by around 15% while operating margin may see a slight dip only due to better margin orders. While GCAs are expected to continue to improve with quality projects, fast-tracking the collections and rationalisation of inventory, overall financial leverage is expected to remain healthy and will further strengthen debt protection metrics.

 

As of December 2021, order book stood at around Rs 1,100 crore. The company is expected to get healthy orders over the medium term as well given improvement in crude oil prices, which is a key indicator of investments in the oil sector. Growth in revenue and profitability will be healthy and strong debt protection metrics will sustain in the fiscal 2022.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has applied its parent notch-up framework to factor in the distress support from L&T.

Key Rating Drivers & Detailed Description

Strengths

  • Strong capital structure: Gearing was healthy at 0.25 time and total outside liabilities to tangible networth ratio moderate at 1.43 times, as on March 31, 2021. Borrowings comprise working capital debt. Debt protection metrics were healthy, as reflected in sustained improvement in interest coverage ratio to 7.4 times in fiscal 2021 led by operational profit and reduction in debt. Gearing and debt protection metrics will remain steady over the medium term.

 

  • Diversified presence in international markets: LTVL is one of the largest manufacturers of valves in India and has a strong position in the domestic and global markets. Additionally, it has registered two subsidiaries, L&T Valves USA LLC and L&T Valves Arabia Manufacturing LLC, to cater to customers in the USA, Europe, Eastern Asia and Saudi Arabia. L&T Valves USA LLC runs a contract manufacturing model that is expected to help drive growth as well as profitability for LTVL. L&T Valves Arabia Manufacturing LLC has signed up a central purchase agreement with Saudi Aramco, which provides order visibility. Furthermore, LTVL has increased focus on the high-margin aftermarket segment by developing an exclusive service centre in Jamnagar, Gujarat, which is expected to boost recovery over the medium term.

 

  • Strong management and financial support from the parent: In March 2013, LTVL became a 100% subsidiary of L&T by acquiring stake from joint venture partner. LTVL should receive need-based financial aid from the parent. L&T has demonstrated support to the company by appointing its key management personnel: Mr Subramanian Sarma (non-executive director, L&T, and person-in-charge of the business of LTVL). The continued ownership of LTVL by the parent will constitute a rating sensitivity factor.

 

Weaknesses

  • Exposure to intense competition and susceptibility to slowdown in investment in end-user segments: The domestic and international valves markets are highly fragmented. In fiscal 2021, the company derived around 45% of its revenue from overseas, where it has to compete with established Chinese manufacturers. It is also susceptible to volatility in crude oil prices globally, which decides the outlook for the valves industry.

 

  • Large working capital requirement: Despite moderating to below 300 days as on March 31, 2021, from 374 days as on March 31, 2020, due to rationalisation of material procurement strategy and focus on fast-tracking collections, GCAs remained high. This was mainly because of retention money blocked with clients, which will be released only at the defect liability period. However, advance from customers partly offsets the pressure on working capital. Receivables are also expected to reduce over the medium term as the company has calibrated its credit policy to negotiate better commercial terms and also liquidate retention money by providing performance bank guarantee.

Liquidity: Strong

Expected net cash accrual of Rs 55-65 crore in fiscal 2022 will be sufficient to meet interest obligation and capital expenditure of around Rs 16 crore. Furthermore, absence of term debt enables cash deployment in the business and reduces reliance on external funds. Fund-based bank limit was utilised at around 24% as of January 2022. Need-based support from the parent will also continue to support liquidity.

Outlook: Stable

The Stable outlook reflects the expectation that the operating performance of the company will remain strong in the near term.

Rating Sensitivity Factors

Upward Factors

  • Improvement in operating profitability and working capital leading to return on capital employed sustaining over 10%
  • Sustained high strategic importance to L&T

 

Downward Factors

  • Change in the credit rating of the parent
  • Change in L&T ownership or stance of support
  • Delay in order execution resulting in weaker-than-expected operating performance

About the Company

Incorporated in 1961 as Audco India Ltd, LTVL was a 50:50 joint venture of Audco Ltd, the UK, and L&T. The company got its present name in March 2013 when L&T bought the entire stake, making LTVL its wholly owned subsidiary. In fiscal 2014, L&T merged its valve manufacturing facility (which catered to the power sector) with LTVL. The manufacturing facilities (in Kanchipuram and Coimbatore, Tamil Nadu) of LTVL have total installed capacity of 1,388,000 valve per annum (ranging from 2-72 inches).

 

The company caters to the oil and gas, power, petrochemicals, defence, nuclear, aerospace, chemicals, fertilisers and pharmaceuticals industries in India and abroad. Other than manufacturing valves, it also offers aftermarket services, for which it set up an exclusive facility in Jamnagar.

Key Financial Indicators (CRISIL Ratings-adjusted)

As on/for the period ended March 31

Unit

2021

2020

Operating income

Rs.Crore

1,240

1,055

Profit After Tax (PAT)

Rs.Crore

45

3

PAT Margin

%

3.6

0.3

Adjusted debt/adjusted networth

Times

0.25

0.43

Adjusted interest coverage

Times

7.23

6.54

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Type of Instrument

Date of Allotment

Coupon Rate (%)

Maturity Date

Issue Size

(Rs.Crore)

Complexity Level

Rating assigned with Outlook

NA

Fund-Based Facilities

NA

NA

NA

90

NA

CRISIL AA/Stable

NA

Non-Fund-Based Limit*

NA

NA

NA

90

NA

CRISIL A1+

NA

Non-Fund-Based Limit**

NA

NA

NA

249

NA

CRISIL A1+

NA

Non-Fund-Based Limit

NA

NA

NA

411

NA

CRISIL A1+

*Rs 30 crore interchangeable with fund-based limit

**Interchangeable with fund based limit

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 90.0 CRISIL AA/Stable   --   -- 07-12-20 CRISIL AA/Stable 09-08-19 CRISIL AA/Negative CRISIL AA+/Negative
      --   --   -- 01-12-20 CRISIL AA/Stable   -- --
      --   --   -- 26-11-20 CRISIL AA/Stable   -- --
Non-Fund Based Facilities ST 750.0 CRISIL A1+   --   -- 07-12-20 CRISIL A1+ 09-08-19 CRISIL A1+ CRISIL A1+
      --   --   -- 01-12-20 CRISIL A1+   -- --
      --   --   -- 26-11-20 CRISIL A1+   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Fund-Based Facilities 15 ANZ Banking Group Limited CRISIL AA/Stable
Fund-Based Facilities 11 Bank of Baroda CRISIL AA/Stable
Fund-Based Facilities 29 State Bank of India CRISIL AA/Stable
Fund-Based Facilities 3 Standard Chartered Bank Limited CRISIL AA/Stable
Non-Fund Based Limit* 90 Bank of Baroda CRISIL A1+
Fund-Based Facilities 2 The Hongkong and Shanghai Banking Corporation Limited CRISIL AA/Stable
Non-Fund Based Limit 150 Standard Chartered Bank Limited CRISIL A1+
Non-Fund Based Limit** 99 ANZ Banking Group Limited CRISIL A1+
Non-Fund Based Limit** 150 HDFC Bank Limited CRISIL A1+
Non-Fund Based Limit 140 The Hongkong and Shanghai Banking Corporation Limited CRISIL A1+
Fund-Based Facilities 30 HDFC Bank Limited CRISIL AA/Stable
Non-Fund Based Limit 121 State Bank of India CRISIL A1+

This Annexure has been updated on 20-Mar-23 in line with the lender-wise facility details as on 07-Mar-23 received from the rated entity.

*Rs 30 crore interchangeable with fund-based limit

**Interchangeable with fund based limit

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Engineering Sector
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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