Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank loan facilities of PG Electroplast Limited (PGEL, part of the PG group) to 'CRISIL A/Positive/CRISIL A1' from ‘CRISIL A-/Stable/CRISIL A2+

 

The ratings upgrade reflects the improved market position in the products business while sustaining the healthy market position in the plastic moulding component business and CRISIL Ratings’ expectation that the credit profile will continue to benefit from the improving market position, operating efficiencies and financial risk profile. The group is one of the leading contract manufacturers/vendors for air conditioners (ACs), washing machines and other plastic moulded components for white goods. It has a diversified clientele across reputed white goods brands such as Carrier Midea, Voltas, LG India, Whirlpool, Reliance Digital, Onida, Godrej and Acer. The group has reported a robust compound annual growth rate of 75% in its operating income over the two fiscals through fiscal 2023. The operating income of the group has improved to Rs. 2160 cr. in FY23 (FY22: Rs.1,113 cr.) which is better than CRISIL’s expectations; the growth is driven by a continuous increase in revenue from the product business which has improved from Rs. 478 cr. in FY22 to Rs. 1341 cr. in FY23.  In Q1FY24 the group has already achieved revenue of Rs. 678 cr. (improved from Rs. 537 cr. in Q1FY23). Revenue is expected to grow at a healthy pace backed by continuous addition of customers in both Original Equipment manufacturers (OEM’s) and in Original Device Manufactures (ODM’s) along with continuous expansion in capacities and in-house research and development. The group achieved EBITDA margins of 7.9% in FY23 supported by benefits of backward integration and increased contribution from ODM segment, wherein margins are better than in OEM segment. In Q1FY24 margins have further improved to 9.73% viz-a-viz. Q1FY23: 6.7%. Operating margins are expected to be around 8-9% over the medium term.

 

The group has recently raised funds to the tune of Rs. 500 crores through QIP route which is expected to significantly improve the financial risk profile of the group. The funds are expected to be utilized for debt reduction, funding expansion, and meeting working capital requirements over the medium term. With the further reduction in debt and improvement in the networth, the gearing levels are expected to further improve to below 1 time in FY24. As on Sep 2023 group has unencumbered liquid funds of more than Rs. 340 crores and with no further debt funded capex expected over the medium term, the group is expected to remain net debt free over the medium term.

 

The ratings reflect the group’s established position in manufacturing plastic components for the consumer durable goods industry, healthy product diversity along with well-established clientele and comfortable financial risk profile. These strengths are partially offset by exposure to intense competition in the consumer electronics segment, vulnerability to cyclicality in end-user industry and large working capital requirement.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of PGEL and its 100% subsidiaries, PGTL and PG Plastronics Pvt Ltd (PGPPL). The entities, collectively referred to as the PG group, are under common management and in the same business and have operational and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Established market position : 

The group is one of the leading contract manufacturers/vendors for air conditioners (ACs), washing machines and other plastic moulding components for white goods the plastic components segment. The group supplies to various industries such as consumer electronics, sanitaryware and mobile handsets. The promoters’ experience of more than 30 years in the consumer durables industry, the group's established position and their healthy relationships with customers will continue to support the business. Group is continuously increasing the revenue share in the ODM solution space which offers better operating margin; the revenue from product business has improved from Rs. 478 crores in FY22 to Rs. 1341 crores in FY23. PGEL has the capacity to offer product development and manufacturing solutions from designing, tooling to final assembling and testing. Most of the operations are backward-integrated and the processes are carried out in-house. Backward integration gives it the flexibility to control the manufacturing processes and reduce dependence on external suppliers, which has enabled it to become a consistent and reliable ODM supplier and contract manufacturer.

 

Healthy product diversity and well-established clientele: The group supplies to leading brands such as LG electronics India Pvt Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Whirlpool India Ltd (‘CRISIL AA+/Stable/CRISIL A1+’) Carrier Midea India Pvt Ltd, Voltas, Sansui, Godrej and Orient Electric Ltd. It supplies to all the leading players in the washing machine and domestic refrigeration and air conditioning (RAC) market. The group has large product portfolio manufacturing plastic parts for a comprehensive range of consumer electronic products such as air conditioners (ACs), air Coolers, refrigerators and washing machines. PGEL is one of the leading, diversified Indian manufacturing services provider and among the few companies in India specialising in ODM, OEM and plastic injection moulding for the consumer durables industry, thereby providing one stop and end to end solutions to consumer durable brands.

 

Comfortable financial risk profile: Capital structure remains healthy owing to moderate reliance on external funds.  Total outside liabilities to adjusted networth (TOL/ANW) ratio was 2.8 times as on March 31, 2023. The group's net worth was comfortable at Rs.394 crore in fiscal 2023 on account of sustained profitability and improved scale of operations. Group has raised Rs. 500 crores through preferential allotment of equity shares at a price of Rs. 1560 with premium of Rs. 1,550 per equity share to marquee investors including Nippon MF, Tata MF, Pinebridge, HSBC Global Investors, Kotak Mahindra Life Insurance, Abakkus, etc. The QIP proceeds would be utilized for funding working capital requirements, funding capacity expansion capex and for prepayment of existing term debt.  With healthy margins and continuous accretion to reserves, the net worth is expected to increase to improve further going ahead.  Debt protection metrics is expected to remain comfortable with gearing expected to remain below 1 times, with interest coverage and net cash accrual to total debt ratios expected to be more than 5 times and 0.35 time, respectively, in fiscal 2024. With expected improvement in profitability, the debt protection metrics should remain strong over the medium term.

 

Weaknesses:

Exposure to intense competition in the consumer electronics segment: 

The domestic consumer electronics market is intensely competitive on account of entry of several large players over the past few years, which has affected profitability of most players such as PGEL. Additionally, raw material price fluctuations accentuate the pressure on profitability because of the players’ inability to pass on cost increases to their customers. Therefore, profitability will remain constrained for most players in the industry on account of intense competition and expectation of economies of scale benefits to be passed on to large consumer goods brands in the domestic market. However, the ODM business is expected to support profitability.

 

Large working capital requirement: Consolidated gross current assets were at 150-190 days in last 2 fiscals ending as on March 31, 2023. GCA days are expected to be in range of 150-170 days going forward as the majority of sales in the second half of the fiscal driven by the demand for ACs in summer. However, the working capital cycle is supported by payables of 80-100 days. Although the GCA days improved in FY23 to ~150 days due to the efficient management of inventory. The working capital requirement will remain large over the medium term considering the healthy growth prospects and ramp-up of volume in the AC segment.

Liquidity: Strong

Cash accrual of the group are expected at Rs.120-180 crore going forward which will sufficiently cover yearly debt obligation of Rs.50-70 crore. Bank limit utilisation averaged 62% for the 12 months ended June-2023. Cash balance was healthy over Rs.340 crore as of September 2023. Current ratio was 1.12 time as on March 31, 2023. Internal cash accrual, cash and equivalent, and unutilised bank lines will be sufficient to meet debt obligations and incremental working capital requirements over the medium term.

Outlook: Positive

CRISIL Ratings believes the PG group will continue to benefit from the increasing revenue share and better profitability from ODM business, along with the extensive experience of the promoters and established relationships with clients.

Rating Sensitivity Factors

Upward Factors:

• Increase in revenue of the group by more than 20-25% and stable operating margin of around 8-9 % leading to higher cash accrual.
• Improvement in the working capital cycle and financial risk profile of the group, with gearing to be maintained below 1 times.

 

Downward Factors:

• Large, debt-funded capex weakening the financial risk profile of the group, with gearing of more than 2 times
• Decline in net cash accrual of group below Rs.70 crore on account of fall in revenue or operating profit.

About the Company

PGEL, manufactures printed circuit board (PCB) assemblies, color flourscent lamps (CFL) and plastic injection mouldings for LG India Ltd (LG), Videocon Industries Ltd (Videocon), Carrier Airconditioning & Refrigeration Ltd, Panasonic India Pvt. Ltd.,USHA India Ltd and others. PGEL has manufacturing facilities in Roorkee (Uttarakhand), Greater Noida Three Units(Uttar Pradesh) and Pune (Maharashtra) for assembling injection-moulded plastic components.

About the Group

PGEL, set up in 2003 by Mr Promod Gupta, manufactures printed circuit board assemblies, plastic injection mouldings for major consumer durables, specialised AC components, home electricals and kitchen appliances. The company caters to industries such as automotive components, consumer electronics mobile handsets and sanitaryware. It has facilities in Roorkee, Uttarakhand; Greater Noida, Uttar Pradesh; and Pune, Maharashtra.

 

Incorporated in August 2020, PGTL manufactures consumer appliances. The company is promoted by Anurag Gupta, Vishal Gupta and Vikas Gupta. It has facilities in Ahmednagar, Maharashtra.

 

PGPPL was incorporated in June 2021; the company manufactures consumer appliances. It is promoted by Anurag Gupta, Vishal Gupta and Vikas Gupta, and has facilities in Noida.

Any other information: Not applicable