Rating Rationale
February 08, 2024 | Mumbai
The Hi-Tech Gears Limited
Rating outlook revised to 'Positive'; Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.183 Crore
Long Term RatingCRISIL BBB+/Positive (Outlook revised from 'Stable'; Rating 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 revised its outlook on the long-term bank facilities of The Hi-Tech Gears Limited (THGL, part of Hi-Tech Group) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL BBB+’ .

 

The revision in the outlook factors in expected improvement in the group’s financial risk profile, particularly liquidity, on account of sale and lease back arrangement undertaken for one of its plants. The proceeds from the same, estimated at around Rs 166 crores, were used to prepay the term debt obligations which shall aid the group’s liquidity by easing off the maturing repayments on the stated debt. While annual lease rentals shall slightly increase the group’s fund outflow, the same will be lower than the annual obligation on the afore-stated debt. Resultantly, excess net cash accruals would be deployed towards the working capital requirement, hence further easing off the pressure on bank lines and aiding the liquidity. Going forward,  sustenance of financial risk profile and liquidity, amid sustained business growth, will remain a key rating sensitivity factor.

 

The rating also factors in steady improvement in the business risk profile over the years, which is expected to improve further in the ongoing fiscal amid revival of profitability in the subsidiary’s operation. With operating income of ~Rs 550 crores during first half of fiscal 2024 and addition of new customers and products in each segment of business, operating income shall further improve by around 8-10% on year during the discussed fiscal. Group’s operating profitability, on the other hand, shall remain supported by improvement in subsidiary’s performance and is estimated at around 12-13%. Going forward, sustenance of the business risk profile with sustained revenue growth and stable operating profitability will remain a key monitorable.

 

The ratings reflect the established market position of the group along with comfortable debt protection metrics. These strengths are partially offset by moderate capital structure and limited track record of improved operating profitability from foreign subsidiary.

Analytical Approach

Ontario Inc, Canada, is a wholly owned subsidiary of THGL and has various step-down subsidiaries. Hence, CRISIL Ratings has taken a consolidated approach with regards to all these entities, collectively referred to as the Hi-Tech group, because of the parent and subsidiary relationship and common promoters.

 

CRISIL Ratings has added the discounted value of future non-cancellable lease payments to arrive at adjusted debt, while such lease payments are added back to the operating profit to arrive at earnings before interest, tax, depreciation, amortization, and rentals (EBITDAR). Debt protection metrics, including leverage and interest coverage ratios, are calculated using adjusted debt and EBITDAR.

 

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: THGL promoters have extensive industry experience of over three decades in auto component industry. Over the years, promoters have developed a sound understanding of market dynamics and healthy relations with customers and suppliers, which has resulted in group achieving an operating income CAGR of ~17% for last 3 years through FY23. The operating income of group has been ~ Rs 550 crores till H1 of FY24, and with continuous focus on adding new products and new customers in each segment of business,  the business risk profile of group is expected to support consistent improvement in operating income, with group expected to achieve operating income growth of 8-10% over medium term.

 

  • Comfortable debt protection metrics : Debt protection metrices of the group have been comfortable with interest cover and NCAAD of more than 2.9 times and 0.4 times respectively as on Sep23. With prepayment of term loan obligations under sale and lease back agreement, the interest obligations on term loan facilities have reduced and with no major debt funded capital expenditure proposed to be undertaken, along with sustenance of operating margins in range of 12-13%, the debt protection metrics are expected to improve. The  interest cover is expected to be in range of 8-9 times with expected NCAAD of 0.7-0.8 times for full fiscal 2024

 

Weaknesses:

  • Moderate capital structure: While the leverage position of the group has partly improved during first half of the ongoing fiscal, it continues to remain moderately high with total outside liabilities to tangible networth (TOL/TNW) ratio of around 1.5 times as of Sep 30, 2023 (~2.5  times as of Mar 31, 2023). The improvement in the leverage was primarily on account of prepayment of debt amid sale proceeds from sale and lease back arrangement. As the operations of the group remain working capital intensive, CRISIL Ratings believes that, with expected business expansion, the working capital requirement shall also increase leading to increased reliance on external debt. Hence, efficient management of working capital cycle leading to moderate reliance on external debt and sustained improvement in leverage position will remain a key monitorable.

 

  • Limited track record of improved profitability from foreign subsidiary: The operations of foreign subsidiary were into operating losses till FY22 and stood low at around 8% during fiscal 2023. While operating profitability improved to 11% during first half of the ongoing fiscal, the track record of sustained improvement in the same remains limited. Going forward, sustained improvement in the operating margins of the subsidiary aiding the group’s profitability will remain a key rating sensitivity factor.

Liquidity: Adequate

THGL is expected to generate net cash accruals around Rs 140-150 crores, which shall be sufficient to meet up with annual debt obligations of ~Rs 30-40 crores over medium term. Cash and bank balances have been ~Rs 63.0 crore as on Sep 30, 2023, which is expected to be in range of Rs 70-80 crores over medium term. THGL also has access to fund-based limits of Rs 110.0 crores , where average utilisation has been ~79% for last 12 months through Nov’23. CRISIL Ratings expects internal accruals, cash & cash equivalents, and unutilized bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirements.

Outlook: Positive

CRISIL Ratings believe the financial risk profile of the company shall continue to improve with reduced term debt obligations and net cash accruals of the company being utilized for working capital requirements.

Rating Sensitivity factors

Upward factors:

  • Sustained increase in operating income, with sustenance of operating margins in range of 12-13% leading to higher-than-expected net cash accruals.
  • Efficient management of working capital leading to lower reliance on bank lines and thereby improving the capital structure and overall financial risk profile of the group.

 

Downward factors:

  • Decline in revenue or operating margins falling below 9-10%, leading to lower-than-expected net cash accruals.             
  • Stretch in working capital cycle or large debt funded capex adversely affecting the financial risk profile, particularly liquidity profile.

About the Group

THGL, incorporated in 1986, is a public-limited group listed on the Bombay Stock Exchange and National Stock Exchange. The group manufactures auto components, particularly transmission gears. It has three manufacturing plants in India: two in Bhiwadi, Rajasthan, and one in Manesar, Haryana. Mr Deep Kapuria is the founder and promoter of the group.

 

The Hi-Tech group’s operating income was Rs 883 crore and profit after tax (PAT) was Rs 6.47 crore in the first nine months of fiscal 2023 against Rs 682 crore and Rs (12.3) crore, respectively, in the first nine months of fiscal 2022.

 

Key Financial Indicators

Particulars

Unit

H1 of FY24

2023

2022

Revenue

Rs.Crore

548

1170

971

Profit After Tax (PAT)

Rs.Crore

81

23

-1

PAT Margin

%

14.8

1.96

-0.1

Adjusted debt/adjusted networth

Times

0.8

1.69

2.17

Interest coverage

Times

2.9

4.5

3.4

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 Name of the instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs.Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Working capital facility NA NA NA 70 NA CRISIL BBB+/Positive
NA Long term loan NA NA 31-Mar-2027 50.52 NA CRISIL BBB+/Positive
NA Working capital loan NA NA NA 30 NA CRISIL BBB+/Positive
NA Working capital demand loan NA NA NA 30 NA CRISIL BBB+/Positive
NA Proposed fund based bank limits NA NA NA 2.48 NA CRISIL BBB+/Positive

Annexure – List of entities consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

THGL

Full

Common management and similar line of business

2545887 Ontario Inc. Canada

Full

Wholly owned subsidiary, common management and similar line of business

Teutech Industries Inc

Full

Step-down subsidiary, common management and similar line of business

2504584 Ontario Inc

Full

Step-down subsidiary, common management and similar line of business

Teutech Holding Corporation

Full

Step-down subsidiary, common management and similar line of business

Teutech Leasing Corporation

Full

Step-down subsidiary, common management and similar line of business

Teutech LLC

Full

Step-down subsidiary, common management and similar line of business

2323532 Ontario Inc Canada

Full

Step-down subsidiary, common management and similar line of business
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 183.0 CRISIL BBB+/Positive   -- 16-05-23 CRISIL BBB+/Stable 08-04-22 CRISIL BBB+/Stable 06-01-21 CRISIL BBB+/Stable CRISIL BBB+/Stable
      --   --   -- 29-03-22 CRISIL BBB+/Stable   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Long Term Loan 6 Bajaj Finance Limited CRISIL BBB+/Positive
Long Term Loan 5.5 The Federal Bank Limited CRISIL BBB+/Positive
Long Term Loan 22.36 The Federal Bank Limited CRISIL BBB+/Positive
Long Term Loan 16.66 HDFC Bank Limited CRISIL BBB+/Positive
Proposed Fund-Based Bank Limits 2.48 Not Applicable CRISIL BBB+/Positive
Working Capital Demand Loan 30 The Federal Bank Limited CRISIL BBB+/Positive
Working Capital Facility 1 Citibank N. A. CRISIL BBB+/Positive
Working Capital Facility 19 ICICI Bank Limited CRISIL BBB+/Positive
Working Capital Facility 20 Standard Chartered Bank Limited CRISIL BBB+/Positive
Working Capital Facility 30 The Federal Bank Limited CRISIL BBB+/Positive
Working Capital Loan 30 HDFC Bank Limited CRISIL BBB+/Positive
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
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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