| The Hi-Tech Gears 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 rating on the long-term bank loan facilities of The Hi-Tech Gears Ltd (THGL; part of the Hi-Tech group) at ‘CRISIL BBB+/Stable’.
The rating continues to reflect the extensive experience of the promoters in the automobile (auto) component manufacturing industry, healthy relationships with reputed original equipment manufacturers (OEMs), improving scale of operations, and a healthy financial risk profile. These strengths are partially offset by weak business performance in foreign subsidiaries and high working capital requirements. |
Analytical Approach 2545887 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.
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: Extensive experience of the promoter and healthy relationships with reputed OEMs: The promoters have over three decades of experience in the auto component manufacturing industry, which has enabled the group to maintain healthy relationships with reputed clients, such as Hero MotoCorp Ltd, JCB, Cummins, Daimler Bharat, Tata Cummins, and Magna. Also, the company has a diversified revenue profile with respect to its business segments, comprising of two-wheeler, four-wheeler, and commercial vehicle segments, with no particular sector contributing to over 50% of the revenue. This has supported the business growth, as downturn in any segment is offset by higher demand in other business segments. Furthermore, diversification into international territories through foreign subsidiaries will continue to help mitigate the risk of geographical concentration and cyclicality in the domestic auto industry.
Improving scale of operations: The group’s scale of operations is improving, as reflected in expected operating income of around Rs 1170 crore in fiscal 2023 (against Rs 971 crore in fiscal 2022 and Rs 749 crore in fiscal 2021), supported by diversification of revenue across business segments. The revenue growth during fiscal 2023 is supported by improved demand sentiment in two-wheeler, passenger vehicle and commercial vehicle segment. Ramp-up of revenue of the foreign subsidiaries and stable growth from domestic operations will continue to drive growth in the scale of operations.
Healthy financial risk profile: Group has a robust networth, expected to be around Rs 228 crore as on March 31, 2023 (Rs 217 crore in P.Y.) backed by healthy accretion to reserves. Capital structure has improved consistently as indicated by declining gearing and total outside liabilities to adjusted networth (TOLANW) ratio. As on March 31, 2023, gearing and TOLANW are expected improve to around 1.9 times and around 2.8 times, respectively. It is expected to improve further aided by improving networth and further repayment of debt. With the expected improvement in profitability in FY23, interest cover and net cash accruals to adjusted debt (NCA/AD) ratio are also expected to improve to around 4.4 times and around 0.2 time, respectively for FY23. With no debt-funded capex plans going ahead, the financial risk profile metrics are expected to remain healthy going forward.
Weaknesses: Weak business performance of the foreign subsidiaries: The operating performance of the foreign subsidiaries had weakened in fiscal 2022, as indicated by operating losses of 3.6% in fiscal 2022. The margin had been impacted by sharp increase in input cost, freight cost and supply chain issues during the fiscal and THGL was not able to immediately pass on the increased prices to its customers. The operating margin in foreign entity improved to 8.2% during 9M-FY23 from -3.6% in FY22 because of price negotiations, streamlining of operations, closing down non-profitable assembly line and reduction in labour. The operating margin for the group accordingly improved to 12.3% in 9M-FY23 from 8.9% in FY22. However, it continued to report net losses during this period. The foreign entity is reporting net losses due to high depreciation & amortization expenses. Hence, a sustained improvement in the profitability of foreign entity aiding the blended profitability of the group will remain a key monitorable over the medium term.
High working capital requirements: The business model of the Hi-tech group is inherently working capital intensive, as reflected by expected gross current asset (GCA) days of around 135 days as on March 31, 2023, driven by debtor days and inventory days of around 60-70 days and 45-50 days, respectively. The company receives payments within 30-40 days from local buyers and around 75 days from international clients. Inventory is procured considering orders, and therefore, the group's exposure to risk related to inventory holding is minimal. The large working capital requirement is supported by bank limits and by credit availed from suppliers of 60-90 days. |
Liquidity: Adequate Improved revenue and operating margin have resulted in better net cash accruals during fiscal 2023, expected to be over Rs 90 crore against repayments of around Rs 64 crore thereby resulting in improved NCA/RO ratio of around 1.45 times. Company is expected to generate net cash accruals of around Rs 100-130 crore per year over the next three years which will be more than adequate against yearly repayments of Rs 55-75 crore. The group has maintained healthy unencumbered cash and bank balance over the years, expected to be nearly Rs 60 crore as on Mar 31, 2023. The bank limit utilization has averaged at 60% for the past 12 months ended March-2023; the group has been maintaining healthy liquid cushion of around Rs 40 Cr, on an average, in its bank limits which also supports the liquidity profile. |
Outlook: Stable The Hi-Tech group will continue to benefit from its established relationships with major customers. |
Rating Sensitivity Factors Upward factors
Downward factors
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About the Group THGL, incorporated in 1986, is a public-limited company listed on the Bombay Stock Exchange and National Stock Exchange. The company 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 company.
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
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 16-May-2023 in line with the lender-wise facility details as on 12-Apr-2023 received from the rated entity.
Criteria Details
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