Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities of ABB Power Products and Systems India Ltd (APPSIL).

 

The ratings reflect APPSIL's healthy business risk profile, driven by strong market position in the power grid segment, with diversified business portfolio, geographical diversification and strong clientele. It also reflects the company’s robust financial risk profile, as indicated by absence of any debt and strong networth of over Rs 900 crore as on December 31, 2020. The ratings factor in strong support from its ultimate parent - Hitachi Ltd (Hitachi) by virtue of Hitachi’s acquisition of 80.1% stake in the global power grids business of ABB Ltd (ABB, rated 'A-/Stable/A-2' by S&P Global Ratings).

 

On April 1, 2021, S&P Global Ratings (S&P) put Hitachi Ltd’s ratings on ‘A/Watch Neg/A-1’ from ‘A/Stable/A-1’ based on the announcement by Hitachi on March 31, 2021 to acquire GlobalLogic Inc. for USD 9.6 billion. The current rating action by S&P on Hitachi does not impact the outstanding ratings on APPSIL as per our rating criteria.

 

The promoter stake of 75% in APPSIL was transferred to Hitachi ABB Power Grids Ltd (which is an 80.1:19.9 joint venture [JV] of Hitachi and ABB) by ABB Asea Brown Boveri Ltd on February 5, 2021, as anticipated.

 

APPSIL was incorporated in February 2019, and registered a healthy performance during its first year of operations (from the appointed date of April 1, 2019). Operating income stood at Rs 3,231 crore for the nine months ended December 2019, while the operating margin was healthy at 10.5%. However, operating performance was impacted during fiscal 2020, on account of the Covid-19 pandemic and the resultant disruption in operations. As a result, the company registered an operating income of Rs 3,420 crore and operating earnings before interest, taxes, depreciation and amortisation (EBITDA) of Rs 251 crore (margin of 7.3%) for the year ended December 31, 2020.

 

Despite the pandemic-led economic disruptions in fiscal 2020, APPSIL's business risk profile should remain strong, driven by established market position and healthy order book of Rs 4,955 crore as on December 31, 2020. Moreover, the company has ample liquidity, driven by cash equivalent of Rs 319 crore, and access to fund-based bank limits of Rs 967 crore as on December 31, 2020, which remain largely unutilised.

 

These strengths are partially offset by susceptibility of profitability to capital investment cycles and project implementation risks, largely on account of exposure to structural issues in the power sector and intense competition in the capital goods industry.

 

CRISIL had assigned its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings to the bank facilities of APPSIL on January 04, 2021

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of APPSIL and has applied its parent notch-up framework to factor in the extent of support available to APPSIL from its ultimate parent, Hitachi Ltd.

Key Rating Drivers & Detailed Description

Strengths:

• Strong market position in the power grid segment: APPSIL has a strong market position in the power grids equipment and automation solutions segment. The company has an established track record in this space and has also executed various large scale projects in India over the years (as part of ABB India Ltd). Furthermore, APPSIL’s clientele include reputed players across utilities, industries, and transportation and infrastructure sectors, such as Power Grid Corporation of India Ltd (PGCIL; 'CRISIL AAA/Stable/CRISIL A1+'), which is also the biggest customer of the company.

 

Established market position, strong order book and favourable industry scenario, with higher investments envisaged in the power transmission and distribution (T&D) segment in India over the medium term, should continue to support the business.

 

• Acquisition by Hitachi: In December 2018, ABB Ltd announced the divestment of its global power grids business unit into a JV, where Hitachi would be the majority shareholder with 80.1% stake and ABB would hold the balance. On July 1, 2020, Hitachi and ABB announced the formation of Hitachi ABB Power Grids Ltd, following the completion of the global transfer of ABB’s business unit into the JV.

 

Consequently, APPSIL commenced using Hitachi brand identity for all business purposes and for external communication. Furthermore, the company has access to all of Hitachi’s group-level resources.

 

• Strong operational, technological and management support from the parent: Hitachi views India as a high-growth geography, and APPSIL’s operations are considered strategically important to the group, as the company not only manufactures its extensive range of products locally for the Indian market, but also exports to group entities globally. Post the recent acquisition of majority stake in the JV, there has been ongoing operational integration in manufacturing, global procurement, marketing and sales, with the application of the group’s global best practices. Furthermore, Hitachi will also provide management support through delegates on the board of APPSIL, immediately upon completion of share transfer. CRISIL Ratings believes Hitachi will keep extending support to APPSIL over the long term.

 

• Robust financial risk profile: APPSIL has a robust financial risk profile, marked by healthy networth of over Rs 900 crore and no debt as on December 31, 2020. The financial risk profile should remain strong over the medium term, driven by healthy cash accrual, strong liquidity and absence of any large capital expenditure (capex).

 

Weaknesses:

• Susceptibility of profitability to capital investment cycles and structural issues in the power sector: Profitability is susceptible to downturn in demand and structural issues and volatility in the power sector. Any large-scale project deferrals lead to cost overruns for players in the industry, which would impact their profitability, given that they have limited flexibility to pass on the same. While the company has mitigated these risks through diversification of its revenue profile, in addition to efficient cost and resource management; profitability remains susceptible to these structural issues.

 

• Exposure to intense competition: Competition is intense in the industry due to the presence of several domestic and international players. Most of the large orders are procured through competitive bidding, which along with the macroeconomic slowdown, has resulted in heightened competition and pressure on profitability. While cost optimisation measures have helped APPSIL arrest the pressure on profitability to some extent, it will remain susceptible to intense competition over the medium term.

Liquidity: Superior

APPSIL has ample liquidity, as reflected in unencumbered cash equivalent of Rs 319 crore as on December 31, 2020, and expected annual cash accrual of Rs 200-300 crore each in fiscals 2021 and 2022. Moreover, the company is debt-free. Liquidity is also supported by bank lines of around Rs 967 crore, which remain largely unutilised. CRISIL Ratings believes the unutilised bank lines are more than sufficient to meet APPSIL’s incremental working capital needs over the medium term.

Outlook Stable

CRISIL Ratings believes that APPSIL will continue to benefit from its established market position, strong clientele and strong parental support; and will maintain its robust financial risk profile, given its conservative financial policy.

Rating Sensitivity factors

Downward factors:

• A slump in order inflow or decline in operating margin to below 8% on a sustained basis
• If any large, debt-funded capex is undertaken
• Material weakening of the credit risk profile of Hitachi Ltd, leading to downward revision in its rating by S&P Global Ratings by one or more notches, or change in stance or support philosophy towards APPSIL

About the Company

Incorporated in February 2019, following the demerger of ABB India's power grid business unit; APPSIL provides product, system, software and service solutions across the entire power value chain. The company’s portfolio includes an extensive range of high-voltage products, transformers, grid automation products, and power quality products and systems.

 

APPSIL is a public limited company with 25% equity shares traded publically. The balance 75% promoter shareholding is currently held by Hitachi ABB Power Grids Ltd.

Key Financial Indicators (for financial year ending December 31)

Particulars	Unit	2020	2019*
Revenue	Rs crore	3,420	3,231
Profit after tax (PAT)	Rs crore	100	165
PAT margin	%	2.9	5.1
Adjusted debt/adjusted networth	Times	0.0	0.43
Interest coverage	Times	12.3	11.4

*Reported financials (for the period, April-December 2019)

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating
NA	Fund-based limit	NA	NA	NA	961	NA	CRISIL AAA/Stable
NA	Non-fund-based limit	NA	NA	NA	3125	NA	CRISIL A1+
NA	Proposed non-fund-based limit	NA	NA	NA	914	NA	CRISIL A1+

 

Annexure – List of entities consolidated