Rating Rationale
September 22, 2016 | Mumbai
Force Motors Limited
Ratings upgraded to 'CRISIL AA/FAA+/Stable' ; short-term rating reaffirmed
Total Bank Loan Facilities Rated Rs.1900 Million
Long Term Rating CRISIL AA/Stable (Upgraded from 'CRISIL AA-/Stable')
Short Term Rating CRISIL A1+ (Reaffirmed)
(Refer to Annexure 1 for Facility-wise details)
Rs.500 Million Fixed Deposits FAA+/Stable (Upgraded from 'FAA/Stable')

CRISIL has upgraded its ratings on long-term bank facilities and fixed-deposit programme of Force Motors Limited (FML) to 'CRISIL AA/FAA+/Stable' from 'CRISIL AA-/FAA/Stable' and reaffirmed the short-term facilities at 'CRISIL A1+'.
The rating upgrade reflects CRISIL's belief that the company will maintain strong operating performance over the medium term. The significant improvement in operating performance over the two fiscals through fiscal 2016 was driven by improved volume growth of the automobile (auto) business and ramp-up of the auto-component business. Annual volume growth in the Traveller product portfolio was strong at 20% in these two fiscals. Furthermore, revenue in the auto-component business increased to over Rs 12 billion in fiscal 2016 from Rs 6 billion in fiscal 2014 driven by ramp-up of business with its key customers- large luxury car manufacturers in India. This resulted in an increase in operating profit to Rs 3.1 billion from Rs 1.3 billion over this period. The operating performance is expected to be sustained over the medium term, supported by strong demand for auto products. Also, capacity utilisation in the auto-component segment is expected to improve driven by healthy demand outlook for the luxury car segment in India.
The rating reflects a healthy financial risk profile because of low debt (fixed deposit) and substantial cash surplus, and strong financial flexibility of the promotersand the promoters' stated intent to provide support to FML, should the need arise. The rating is also factors in a leading market position in the light commercial vehicle (LCV) passenger segment in the domestic auto market, and a diversified revenue profile. These rating strengths are partially offset by the relatively smaller market size of target segments, a modest presence in the tractor segment, and susceptibility of revenue to the inherent cyclicality in demand in the auto industry.
FML, as the flagship company of the Abhay Firodia group, benefits from the healthy financial flexibility at Jaya Hind Investments Pvt Ltd (JHIPL; the group's holding company). The investment portfolio of JHIPL, which currently holds 55.92% equity stake in FML, includes significant holdings in Bajaj group of companies, including Bajaj Auto Ltd (rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'). CRISIL believes the Abhay Firodia group, through JHIPL, will continue to provide need-based financial support to FML.
Minimal debt, along with sizeable networth (Rs 13.8 billion as on March 31, 2016), has ensured a robust capital structure (gearing of 0.01 time) and strong debt protection metrics. Cash accrual increased significantly to Rs 2.6 billion in fiscal 2016 from Rs 1.7 billion in fiscal 2015, driven by better profitability and revenue. Liquidity is also healthy, as reflected in cash and cash equivalents of Rs 3.35 billion as on July 31, 2016, and completely unutilised working capital bank line. Sizeable capital expenditure (capex) of around Rs 8.0 billion is planned over the medium term for expanding capacity and increasing research and development, and to ensure compliance with emission norms. However, the capex is expected to be funded through internal cash accrual, thereby ensuring sustenance of the healthy financial risk profile over the medium term.
The company focusses on the niche passenger segment of the overall LCV market (market share of 43.6% as on Mar 31, 2016), and more specifically in the market for LCVs with a maximum mass of five tonne (market share of around 70%). The healthy market position, which has strengthened significantly over the past five years, is supported by a strong brand, Traveller. CRISIL believes the company will continue to benefit from its niche positioning in the auto market, supported by steady introduction of new products and variants, and favourable demand outlook for the LCV segment.
Revenue streams are diverse, with auto (commercial vehicles and tractors) and auto-component businesses contributing around 63% and 37%, respectively, to revenue. This diversity has enabled the maintenance of stability in revenue over the three fiscals through fiscal 2016, despite sluggish demand in the domestic auto industry.
In spite of a leading market position in select product categories, the market size of the target segments (passenger vehicles with a maximum mass of five tonne) in the overall LCV market is limited, as compared with the high-volume goods carriers category, where competitors like Tata Motors Ltd ('CRISIL AA/Stable/CRISIL A1+'), Mahindra & Mahindra Ltd (M&M; 'CRISIL AAA/Stable/CRISIL A1+'), and Ashok Leyland Ltd have established a strong presence. Furthermore, market share in the tractor market is modest, and vulnerable to intense competition from large players including M&M and Tractors and Farm Equipment Ltd ('CRISIL AA+/FAAA/Stable/CRISIL A1+'). CRISIL believes that these factors will constrain any significant improvement in scale of operations over the medium term.
The company is susceptible to inherent cyclicality in the domestic auto industry, and more particularly in the CV segment. The demand patterns in this industry have displayed cyclicality in the past, in line with industrial growth and consumer sentiments. Exposure to cyclicality inherent in the auto businesses is likely to persist over the medium term.

Outlook: Stable

CRISIL believes the business risk profile of the company will benefit over the medium term from a leadership position in niche product segments, improving business diversity, and sustained operating profitability. Furthermore, the financial risk profile is expected to remain healthy over this period, despite the capex, because of healthy cash accrual, strong liquidity, and the financial flexibility of the Abhay Firodia group.
The outlook may be revised to 'Positive' in case of improvement in revenue diversity and more-than-expected growth in the auto and auto-component businesses while profitability and return on capital employed are maintained. The outlook may be revised to 'Negative' in case of significant deterioration in profitability or larger-than-expected debt-funded capex or acquisitions. The rating would also remain sensitive to significant moderation in financial flexibility of JHIPL due to large acquisitions or new investments.

About the Company

Established in 1958, FML is the flagship company of the Pune, Maharashtra-based Abhay Firodia group. The company is a vertically integrated auto original equipment manufacturer of small and light CVs, multi-utility vehicles, and agricultural tractors; the auto segment currently contributes around 63% of revenue. In the auto-component business (around 37% of revenue), engines are assembled for Mercedes-Benz India Pvt Ltd and BMW India Pvt Ltd. The primary brands in LCVs and multi-utility vehicles include Traveller, Trax, and Trump, while the brands in tractors are Balwan and Orchard.
The Abhay Firodia group is currently headed by Mr Abhaykumar Firodia (chairman at FML) and Mr Prasan Firodia (managing director). Other companies in the group include Jaya Hind Industries Ltd ('CRISIL A/FA+/Stable/CRISIL A1') and Jaya Hind Montupet Pvt Ltd ('CRISIL BBB-/Stable/CRISIL A3'); both these companies manufacture and supply aluminium cylinder heads, blocks, and other aluminium components to leading auto original equipment manufacturers.
In fiscal 2016, profit after tax (PAT) was Rs 1.79 billion on net sales of Rs 30.6 billion, against PAT of Rs 1.01 billion on net sales of Rs 23.36 billion in fiscal 2015. In the three months ended June 30, 2016, PAT was Rs 634.7 million on net sales of Rs 8.5 billion, against PAT of Rs 485.8 million on net sales of Rs 7.2 billion in the corresponding period of the previous year.

Annexure 1 - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Million) Rating Facility Amount (Rs.Million) Rating
Bank Guarantee 200 CRISIL A1+ Bank Guarantee 200 CRISIL A1+
Letter of Credit 400 CRISIL A1+ Cash Credit 1300 CRISIL AA-/Stable
Proposed Cash Credit Limit 1300 CRISIL AA/Stable Letter of Credit 400 CRISIL A1+
Total 1900 -- Total 1900 --

Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Manufacturing Companies
Rating Criteria for Commercial Vehicle Industry
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
Criteria for rating Short-Term Debt (including Commercial Paper)

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