Rating Rationale
March 24, 2021 | Mumbai
Atlas Copco India Limited
Ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.309 Crore
Long Term RatingCRISIL AAA/Stable (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities of Atlas Copco India Limited (Atlas Copco).

 

Revenue was Rs 2,000 crore in the first nine months of fiscal 2021, 3% lower than in the corresponding period of the previous fiscal due to the impact of the nationwide lockdown imposed to contain the Covid-19 pandemic. Revenue is likely to be lower by 7-8% in fiscal 2021, but healthy growth is expected thereafter. The operating margin has been sustained at 16-17%, supported by cost cutting measures such as reduction in administration costs, lease rentals and contract workers. The margin is expected to remain healthy at 16-17% over the medium term, supported by revenue from high-value products. The financial risk profile remains robust, backed by a strong networth, a conservative capital structure and steady cash accrual. Moderate capital expenditure (capex) plans support the credit metrics, despite high dividend payout, which is expected to continue over the medium term.

 

The ratings continue to reflect a leadership position in the Indian compressor and construction segments, a robust financial risk profile, and strong technological and managerial support from the parent, Atlas Copco AB (ACAB; rated ‘A+/Stable/A1’ by S&P Global Ratings). These strengths are partially offset by large working capital requirement and susceptibility to cyclicality in demand from end-user industries.

Analytical Approach

For arriving at the ratings, CRISIL has applied its parent notch-up framework to factor in the technological and managerial support from ACAB. In the event of an exigency, the parent should also provide distress support to Atlas Copco. This is considering the strategic importance of Atlas Copco to ACAB, and the companies being in the same line of business. ACAB owns 99.97% stake in Atlas Copco, and shares its name and product lines with the subsidiary.

Key Rating Drivers & Detailed Description

Strengths:

  • Leadership position in the Indian compressor and construction equipment segments: Among the factors that contribute to Atlas Copco’s market dominance are strong brand equity, a diversified product portfolio, use of latest technology, and a wide distribution and service network. Revenue is expected to grow around 7-9% over the medium term because of the strong market position, after seeing a moderation in fiscal 2021 due to the pandemic.

 

  • Strong technological and managerial support from the parent: ACAB is a leading global player in the compressed air equipment, generator, construction equipment, and pneumatic tool industries. Access to the parent’s technological capabilities, and diversified product portfolio and brand name gives a competitive edge in the domestic market. The company routinely imports critical components for compressors from its group companies, and thus, benefits from new technology and global economies of scale.

 

  • Robust financial risk profile: Financial risk profile remains strong, backed by a conservative capital structure, above-average profitability, and solid credit metrics, notwithstanding high dividend payout of up to 50% of profit after tax. The sizeable payout may continue over the medium term as well.

 

Weaknesses:

  • Exposure to cyclicality in demand from end-user industries: Customers in the industrial segment are mainly in the engineering and other capital-intensive divisions. Demand from these industries is cyclical, and dependent on the performance of the Indian economy. Revenue growth, therefore, remains vulnerable to economic downturns.

 

  • Large working capital requirement: Most of the critical components and spare parts are imported from group companies. The long delivery lead time for imports and the requirement to maintain stock of spares result in high inventory days. The sizeable inventory and long receivables periods result in large working capital requirement.

Liquidity: Superior

Financial support from the parent is expected to continue both on an ongoing basis and in the event of distress. On a standalone basis, the company has strong liquidity driven by expected cash accrual of over Rs 200 crore each in fiscals 2021 and 2022 and cash and cash equivalents of Rs 385 crore as on December 31, 2020. Fund-based limits of Rs 37 crore was utilised negligibly over the 6 months through December 2020. The company has no long term debt and plans to incur capital expenditure of around Rs 75 crore per fiscal, which would be funded through internal accrual. Moreover the gearing of 0.06 time as on March 31, 2020 gives sufficient headroom, to raise additional debt.

Outlook: Stable

Atlas Copco should maintain its strong business risk profile over the medium term, backed by technological support from its parent and established market position in the Indian compressor and construction equipment segments. Further, financial risk profile is expected to remain robust, supported by steady cash generation, negligible debt and healthy liquid surplus.

Rating Sensitivity factors

Downward factors

  • Change in the credit risk profile of parent ACAB or variation in stance of support
  • Business levels weaken sharply, or in the event of sizeable debt-funded acquisitions or capital spending, materially impacting cash generation and credit metrics
  • Higher-than-expected funds repatriation to ACAB by way of dividend, share buy-back, or capital reduction

About the Company

Atlas Copco manufactures air and gas compressors, construction equipment, and industrial tools. Its units are in Chakan and Pune (both in Maharashtra). In March 2011, ACAB increased its equity stake in Atlas Copco to 96.29% (from 83.77%), following which the latter was delisted.  Consequent to the capital reduction exercise in July 2020, ACAB has 99.97% stake in Atlas Copco as on date.

Key Financial Indicators

Particulars-Year ended March 31

Unit

2020

2019

Revenue

Rs crore

2875

2652

Profit after tax

Rs crore

349

325

PAT margin

%

12.1

12.3

Adjusted debt/adjusted networth

Times

0.06

0.09

Interest coverage

Times

52.36

96.68

 

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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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 Instrument(s)

ISIN

Name of instrument

Date of allotment

Coupon rate (%)

Maturity date

Complexity levels

Issue size

(Rs crore)

Rating assigned

with outlook

NA

Cash Credit

NA

NA

NA

NA

37

CRISIL AAA/Stable

NA

Letter of credit & Bank Guarantee

NA

NA

NA

NA

272

CRISIL A1+

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 37.0 CRISIL AAA/Stable   -- 20-03-20 CRISIL AAA/Stable 26-02-19 CRISIL AAA/Stable 02-04-18 CRISIL AAA/Stable CRISIL AA+/Stable
      --   -- 03-03-20 CRISIL AAA/Stable   --   -- --
Non-Fund Based Facilities ST 272.0 CRISIL A1+   -- 20-03-20 CRISIL A1+ 26-02-19 CRISIL A1+ 02-04-18 CRISIL A1+ CRISIL A1+
      --   -- 03-03-20 CRISIL A1+   --   -- --
All amounts are in Rs.Cr.
 
 
Annexure - Details of various bank facilities
Facility Name of Lender Amount (Rs.Crore) Rating
Letter of credit & Bank Guarantee Axis Bank Limited 91 CRISIL A1+
Letter of credit & Bank Guarantee Axis Bank Limited 7 CRISIL A1+
Letter of credit & Bank Guarantee Bank of India 28 CRISIL A1+
Letter of credit & Bank Guarantee Citibank N. A. 28 CRISIL A1+
Letter of credit & Bank Guarantee HDFC Bank Limited 90 CRISIL A1+
Letter of credit & Bank Guarantee Union Bank of India 28 CRISIL A1+
Cash Credit Axis Bank Limited 2 CRISIL AAA/Stable
Cash Credit Bank of India 10 CRISIL AAA/Stable
Cash Credit Citibank N. A. 12.5 CRISIL AAA/Stable
Cash Credit HDFC Bank Limited 10 CRISIL AAA/Stable
Cash Credit Union Bank of India 2.5 CRISIL AAA/Stable

This Annexure has been updated on 5-Oct-2021 in line with the lender-wise facility details as on 6-Sep-2021 received from the rated entity.

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
Mapping global scale ratings onto CRISIL scale
Understanding CRISILs Ratings and Rating Scales
CRISILs Bank Loan Ratings

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