Rating Rationale
January 04, 2021 | Mumbai
ABB Power Products and Systems India Limited
'CRISIL AAA / Stable / CRISIL A1+ ' assigned to Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.5000 Crore
Long Term RatingCRISIL AAA/Stable (Assigned)
Short Term RatingCRISIL A1+ (Assigned)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL has assigned its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings to 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 robust financial risk profile, marked by absence of any debt and strong networth of over Rs 800 crore as on September 30, 2020. The ratings factor in strong support, on an ongoing basis, from its ultimate parent - Hitachi Ltd (Hitachi, rated 'A/Stable/A-1' by S&P Global Ratings) 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).

 

The promoter stake of 75% in APPSIL, which is currently held by ABB Asea Brown Boveri Ltd, is expected to be transferred to Hitachi ABB Power Grids Ltd (which is an 80.1:19.9 joint venture (JV) of Hitachi and ABB) during the first quarter of CY2021. However, Hitachi already exercises indirect control over APPSIL as per the terms of the global deal, and the former would have an effective stake of around 60% in the latter upon completion of the share transfer. Accordingly, the completion of share transfer in a timely manner would be a key monitorable.

 

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 the second quarter of fiscal 2020, on account of the Covid-19 pandemic and the resultant disruption in operations. Company registered an operating income of Rs 2,377 crore, and earnings before interest, taxes, depreciation and amortisation (EBITDA) of Rs 196 crore (margin of 8.3%) for the first nine months ended September 30, 2020.

 

Nevertheless, despite the pandemic-led economic disruptions during fiscal 2020, APPSIL's business risk profile should remain strong, driven by established market position and healthy order book of Rs 5,175 crore as on September 30, 2020. Moreover, the company has ample liquidity driven by cash equivalents of Rs 177 crore, and access to fund-based bank limits of Rs 936 crore as on September 30, 2020, which remain unutilised.

 

These strengths are partially offset by susceptibility of profitability 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.

Analytical Approach

CRISIL 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). Further, APPSIL’s clientele include reputed players across utilities, industries, and transportation and infrastructure; such as Power Grid Corporation of India Ltd (PGCIL; 'CRISIL AAA/Stable/CRISIL A1+'), which is also the biggest customer for 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.

 

While the promoter stake of 75% in APPSIL, which is currently held by ABB Asea Brown Boveri Ltd, is expected to be transferred to this JV during the first quarter of CY2021, the completion of the global transaction had resulted in Hitachi acquiring an indirect control over APPSIL from July 1, 2020 as per terms of the global transaction. Consequently, APPSIL has commenced using Hitachi brand identity for all business purposes and for external communication. Further, 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 with regards to manufacturing, global procurement, marketing, and sales; and group’s global best practices. Further, Hitachi will also provide management support through delegates on the board of APPSIL, immediately upon completion of share transfer. CRISIL 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 800 crore and no debt as on September 30, 2020. Liquidity is ample, marked by healthy cash and equivalents (Rs 177 crore as on September 30, 2020), as well as large unutilised fund-based bank lines.

 

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 a downturn in demand environment 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 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, marked by unencumbered cash equivalents of Rs 177 crore as on September 30, 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 over Rs 936 crore, which remain unutilised. CRISIL believes the unutilised bank lines are more than sufficient to meet APPSIL’s incremental working capital needs over the medium term.

Outlook: Stable

CRISIL believes that APPSIL will continue to benefit from its established market position, strong clientele and being part of a strong parent; 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 ABB Asea Brown Boveri Ltd (Switzerland), a wholly-owned subsidiary of ABB Ltd; and is expected to be transferred to Hitachi ABB Power Grids Ltd during the first quarter of CY2021.

Key Financial Indicators

As on/for the period ended December 31

Units

2019

2018

Operating income

Rs crore

3,231

NA

Profit after tax (PAT)

Rs crore

165

NA

PAT margin

%

5.1

NA

Adjusted debt/adjusted networth

Times

0.43

NA

Interest coverage

Times

11.4

NA

*NA - Not applicable

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instruments

ISIN

Name of instrument

Date of allotment

Coupon rate (%)

Maturity date

Issue size (Rs crore)

Complexity levels

Rating assigned with outlook

NA

Fund-based facilities

NA

NA

NA

961

NA

CRISIL AAA

/Stable

NA

Non-fund-based limit

NA

NA

NA

3,125

NA

CRISIL A1+

NA

Proposed non-fund-based limit

NA

NA

NA

914

NA

CRISIL A1+

Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 961.0 CRISIL AAA/Stable   --   --   --   -- --
Non-Fund Based Facilities ST 4039.0 CRISIL A1+   --   --   --   -- --
All amounts are in Rs.Cr.
 
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities 961 CRISIL AAA/Stable - - -
Non-Fund Based Limit 3125 CRISIL A1+ - - -
Proposed Non Fund based limits 914 CRISIL A1+ - - -
Total 5000 - Total 0 -
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
Rating Criteria for Engineering Sector
Mapping global scale ratings onto CRISIL scale
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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