| Mahindra EPC Irrigation Limited | ||||
| Rating Reaffirmed | ||||
| 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 'CRISIL A+/Stable' rating on the long-term bank facilities of Mahindra EPC Irrigation Limited (MEIL).
The rating continues to reflect support received from the parent, Mahindra and Mahindra Ltd (M&M; 'CRISIL AAA/Stable/CRISIL A1+') as MEIL is in the micro-irrigation systems (MIS) business, which is part of the agricultural (agri) business vertical of the M&M group. The rating also factors in a healthy financial risk profile, reflected in comfortable capital structure and debt protection metrics.
These strengths are partially offset by modest scale of operations and susceptibility of profitability to volatile raw material prices given the regulated pricing of the products, susceptibility of MIS operations to regulatory changes, and stretched working capital cycle, because of large receivables, which are prone to delays in release of subsidies by state governments.
Low demand from Andhra Pradesh impacted revenue, which declined by 10% to Rs 256 crore in fiscal 2021 from Rs 284 crore in fiscal 2020. Sales in the first half of fiscal 2022 were impacted by elections in Tamil Nadu leading to decline of 7% in revenue to Rs 94 crore. Also, as prices of key raw materials, such as polymer resins, rose, the operating profit before depreciation, interest and tax (OPBDIT) margin declined to 10.8% in fiscal 2021 from 13.2% in fiscal 2020. In the first half of fiscal 2022, MEIL reported operating loss of Rs 3 crore owing to the full impact of higher input prices. Improved volumes on a low base along with higher spending towards MIS purchases by state governments should support revenue growth over the medium term. Increase in revenue will support better absorption of fixed cost, driving improvement in profitability in the seasonally strong second half of fiscal 2022 and the next fiscal. However, revision in cost norms by state governments is crucial to improve profitability over the medium term. |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support available from M&M. |
Key Rating Drivers & Detailed Description Strengths: Synergies with the agricultural vertical of the parent: The parent’s thrust on the agri-business, majority control and sharing of the brand, Mahindra, underscore its strategic objective and moral obligation to support the subsidiary. Also, MEIL has presence in the parent’s Mahindra Samriddhi centers across India which provide farming solutions. However, there has been limited investment in growth capital from the parent, and the company operates on a small scale compared with the M&M group in the agriculture sector.
Healthy capital structure: The company’s management has followed a conservative financial policy, reflected in gearing of less than 0.25 time. Funding of net cash accrual loss and increase in receivables during the first half of fiscal 2022 led to increase in working capital debt to Rs 24.9 crore as on September 30, 2021, from Rs 13 crore as on March 31, 2020. However, leverage remained low, with adjusted gearing of 0.14 time.
With no major planned capital expenditure (capex), continued focus on receivables and funding of working capital largely through internal accrual, leverage will remain low over the medium term.
Weaknesses: Modest scale of operations, lack of pricing power and volatile input prices: With market share of less than 7%, the company is a small player in the MIS industry. Larger players have sophisticated in-house research and development capabilities and diverse product portfolio.
Further, as prices are decided by state governments, players, including MEIL, do not have pricing power. On the other hand, as key raw materials, polymer resins, are derivatives of crude oil, their prices are volatile, impacting the profitability of the company during adverse movements.
Stretched working capital cycle, and susceptibility to changes in government policies: Government subsidies are the major drivers for MIS products in India. Thus, the company and the MIS sector in general, remain vulnerable to changes in government policies. Moreover, receivables rose further to 248 days as on March 31, 2021, because of delay in payments from Andhra Pradesh and as payments from few key states continue to be slow. However, receivables will decline, as some funds are likely to be released in the second half of fiscal 2022. |
Liquidity: Strong The company had unutilised working capital limit of Rs 24.5 crore (~38% of available limit) and cash and liquid investments of Rs 2 crore as on September 30, 2021. After negative net cash accrual in the first half of fiscal 2022, accrual is expected to turn marginally positive in the second half. However, in the absence of term debt obligation and capex, liquidity will remain healthy. Liquidity is further supported by the superior liquidity of the parent, M&M. MEIL can avail short-term inter-company deposits from the parent, if required. |
Outlook: Stable CRISIL Ratings believes MEIL will remain strategically important to M&M in the agri-solutions industry and receive strong operational, managerial and financial support from the parent over the medium term. |
Rating Sensitivity Factors Upward Factors:
Downward Factors:
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About the Company MEIL was established in 1981 as Exomet Plastics and Chemicals Pvt Ltd by Mr K Khanna. In August 1992, it was reconstituted as a public limited company and renamed EPC Industries Ltd (EPC). In February 2011, M&M acquired 38% stake in EPC for Rs 43.3 crore, and raised its stake to 54.8% in June 2012 through a rights issue. The parent held 54.4% as on September 30, 2021.
MEIL manufactures MIS consisting of drips and sprinklers at its facilities in Nashik, Vadodara and Coimbatore. |
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 working capital demand loan, letter of credit and bank guarantee limits |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Cash Credit* | 30 | HDFC Bank Limited | CRISIL A+/Stable |
| Cash Credit* | 20 | ICICI Bank Limited | CRISIL A+/Stable |
| Cash Credit* | 14.5 | YES Bank Limited | CRISIL A+/Stable |
| Proposed Long Term Bank Loan Facility | 10 | Not Applicable | CRISIL A+/Stable |
| Proposed Working Capital Facility | 5.5 | Not Applicable | CRISIL A+/Stable |
This Annexure has been updated on 28-Nov-22 in line with the lender-wise facility details as on 16-Nov-22 received from the rated entity.
*Interchangeable with working capital demand loan, letter of credit and bank guarantee limits.
Criteria Details
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