Detailed Rationale

CRISIL Ratings has reaffirmed its 'Provisional CRISIL A(CE)/Stable/Provisional CRISIL A1(CE)' ratings on the bank facilities of Ecolife Green One Mobility Private Limited (Ecolife). The ratings are based on the strength of unconditional and irrevocable corporate guarantee by the company’s parent, JBM Auto Ltd (JAL; rated ‘CRISIL A/Stable/CRISIL A1’).

 

The company has shared revised draft corporate guarantee document with presence of defined invocation and payment mechanism. CRISIL Ratings has evaluated the revised corporate guarantee in line with revised RBI guidelines for the CE ratings. The rating may be migrated to Ecolife’s unsupported rating in case final executed guarantee deed is not in line with regulatory requirements.

 

The ratings reflect the status of Ecolife as a successful concessionaire for procurement, operations and maintenance of 200, 12-metre-long, fully built air-conditioned electric buses (e-buses) on intercity routes for Delhi Transport Corporation (DTC; Authority; on gross cost contract basis under the Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles [FAME] II scheme), and its strong financial flexibility through support from the parent. All 200 buses have successfully commenced operations as of January 2023. Fixed payment for a minimum assured distance for the project indicates high revenue visibility, while subsidies for bus procurement increase the viability of the project. The counterparty risks are mitigated to an extent by an escrow mechanism, wherein the Authority would be obligated to deposit the revenue to Ecolife while also maintaining two months of revenue payable as a payment reserve.

 

JAL has a strong credit risk profile driven by its healthy market position in the auto component industry with longstanding client relationships, diverse clientele and a comfortable financial risk profile. JAL also has prior experience in supplying, operating and running 150 e-buses for NMMT for more than a year.

Analytical Approach

The ratings are based on CRISIL Ratings criteria for rating instruments backed by guarantees. The (CE) suffix in the rating reflects the payment structure that is designed to ensure full and time-bound payment to lenders owing to corporate guarantee by JAL. To arrive at its unsupported rating, CRISIL Ratings has applied its parent notch-up framework to factor in the support from the parent.

Key Rating Drivers & Detailed Description

Strengths:

• Unconditional and irrevocable corporate guarantee by JAL

The ratings are based on an unconditional, continuing and irrevocable guarantee from JAL, and an unconditional undertaking by the latter for securing principal and interest obligations on the entire debt of Ecolife. The capital structure of JAL is comfortable, with gearing of 1.42 times as on March 31, 2022, which is expected to improve to below 1 time over the medium term owing to healthy accrual.

 

The payment structure is designed to ensure full and timely payment to the lender. The payment structure incorporated in amended guarantee document is designed to ensure full and timely payment to the lender. The guarantee covers the principal, interest, and other monies payable under the guaranteed bank loan. The guarantor, JAL, will pay any amount due and payable by Ecolife in relation to these instruments no later than 5 calendar days post invocation of guarantee in line with the corporate guarantee document. Also, the central treasury team of JAL will closely monitor the repayments and provide timely support.

 

• High revenue visibility with assured offtake

As per the terms of the concession agreement, the Authority would pay Ecolife fixed rate (Rs 68.6 per kilometre [km] for 12-metre bus) for a minimum assured distance of 195 km/bus/day, subject to bus availability. Accordingly, Ecolife does not bear the traffic risk on the routes and only needs to ensure availability of buses as per the Authority’s deployment plan. Given this arrangement, the company’s business model essentially translates into an annuity model with high cash flow visibility over the concession period. Company is expected to generate revenue of Rs 60-100 crores along with EBITDA margin of 45-55% per annum over the medium term and has generated Rs 20 crore in during first half of fiscal 2023 with EBITDA margins of 57%.

 

• Strong experience of the JBM group

The parent, JAL, which along with being a Tier-I component supplier to auto OEMs, is also an OEM (original equipment manufacturer) bus supplier itself, and has been manufacturing buses since fiscal 2017 with current capacity of 1,500 buses per year. The group plans to increase the same to 6,500 buses per year over the next three years. Additionally, JAL supplied 30 e-buses in August 2019, which are running successfully in Mumbai from the Turbhe Depot under NMMT. Company has also supplied 90 E-buses through VT E mobility Pvt Ltd and 150 buses through MH Ecolife under the GCC model. It has dedicated manpower for depot management under its sales team operating at various locations in the country. The parent has the required expertise and capability to manufacture, supply and operate e-buses.

 

• Healthy growth prospects for e-buses in India

The Government of India is focusing significantly on promoting electric vehicles (EVs) as a cleaner and sustainable form of transportation, with special focus on the commercial segment. To support faster adoption of EVs in India, the government has introduced various schemes such as FAME, offering upfront subsidies (to reduce capital costs), exemptions or reductions on road tax, registration tax, subsidised electricity tariffs, among others. The tender to operate e-buses for NMMT is part of the FAME II scheme, with Ecolife eligible for a subsidy of Rs 55 lakh per bus for 12-metre bus wherein the entire amount will be released in three tranches within six months of commencement of operations. This would significantly reduce the capital cost associated with the project and thereby improve project viability.

 

Weaknesses

• Project exposed to implementation/stabilisation risks and timely receipt of subsidy

The project is currently operational with all 200 buses however, the timing of subsidy receipt remains a key monitorable, especially considering the involvement of multiple agencies. Any inordinate delays in receipt of the subsidy (about 30% of project cost) could increase the dependence on external borrowings and leveraging of the project.

 

• Weak financial risk profile despite commencement of operations, track record is yet to be seen.

Company shall avail a term debt of Rs 220.45 crores for a tenure of 8 years for the project. This is expected to result in a weak financial risk profile, including muted debt protection metrics, on a standalone basis with adjusted gearing and total outside liabilities to tangible net-worth ratio expected to be 4.8 and 7.2 times respectively as on March 31, 2023. The estimated cash flows will be adequate to service the debt obligations. Further, presence of escrow mechanism with deposit of 2 months of revenue payable i.e. Rs 10-11 crores will ensure a Debt Service Retention Account (DSRA) of around 3 months thereby bolstering liquidity and mitigating counterparty risk to an extent. Overall financial performance is expected to improve gradually with commencement of operations, though track record of smooth operations will remain a key monitorable.

Liquidity: Strong

Liquidity derives comfort from credit enhancement available in the form of an unconditional and irrevocable corporate guarantee by the parent. JAL is likely to provide financial support in the event of an exigency. Capital expenditure of around Rs 369 crore has been funded through term loan of Rs 221 crore, subsidy of Rs 110 crores and the rest with equity from JAL. The parent also has access to fund-based limit of Rs 886 crore, utilized by 64% on average (on fund based sanctioned Limits)

Outlook: Stable

The outlook is based on the 'Stable' outlook on the guarantor's debt instruments. The ratings will remain sensitive to any change in CRISIL's rating on JAL.

Rating Sensitivity Factors

Upward Factors

• Improvement in the overall credit risk profile of the guarantor by 1 notch
• Track record of operations with steady cash flows and healthy DSCR

 

Downward Factors

• Deterioration in the overall credit risk profile of the guarantor by 1 notch or more
• Non-adherence to the terms of transaction structure/payment mechanism

Adequacy of credit enhancement structure

The rating is based upon the strength of an unconditional, continuing and irrevocable guarantee extended by JAL, along with an unconditional undertaking to ensure full and timely payment of all amounts due to the lender.

 

According to the payment mechanism, the guarantor, JAL, will pay not later than 3 calendar days from the due date any amount due and payable by Ecolife in relation to these instruments in case of any default on, or shortfall in, payment. The guarantee and the undertaking together cover the entire principal, interest, and other monies payable under the guaranteed loan.

Unsupported ratings: CRISIL BBB

CRISIL Ratings has introduced 'CE' suffix for instruments having an explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has considered the standalone business and financial risk profiles of Ecolife and has applied its parent notch-up framework to factor in the extent of support available to the company from JAL. The rating factors in the strong revenue visibility for the project with fixed charges over a minimum assured distance, support in the form of subsidy for bus procurement, presence of escrow mechanism and the strategic importance of Ecolife to its parent, given the synergies to its operations and criticality of the project for the strategy of JAL to focus on its bus manufacturing and operating segment. These are partially offset low track record of smooth running of operations and timely receipt of subsidy.

Additional disclosures for the provisional rating

The 'provisional' rating on the proposed instruments will be converted into a 'final' rating on:

 

• Receipt of executed guarantee document
• Sanction letter of bank facilities

 

Additional documents, if any, executed for the transaction will also have to be provided. A rating rationale/report indicating conversion of the 'provisional' rating into a 'final' rating will be published on the CRISIL website on receipt of these documents.

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending documentation considered while assigning the provisional rating as mentioned above, CRISIL Ratings would have assigned a rating of ‘CRISIL BBB’.

Risks associated with the provisional rating:

The 'Provisional' prefix indicates that the rating is contingent on occurrence of certain steps or execution of certain documents by the issuer, as applicable. If the documents received and/or completion of steps deviate significantly from the expectations, CRISIL Ratings may take an appropriate action, including placing the rating on watch or changing the rating/outlook, depending on the status of progress on a case to case basis. In the absence of the pending steps /documentation, the rating on the instrument would not have been assigned ab initio.

About the Company

Ecolife was incorporated as a private limited company under the Companies Act, 2013, in 2020. It was established to run 200 EV buses in Delhi through a concession agreement with DTC under the FAME-II scheme. The company is a subsidiary of JAL, which is a part of the JBM group.

 

Company has earned revenues of Rs 19.79 crore in first half of fiscal 2023 with EBITDA margins of 57%

About the Guarantor

Incorporated in 1996, JAL manufactures sheet metal components, assemblies and sub-assemblies, tools, dyes and moulds. JAL is primarily a Tier-1 supplier of key systems and assemblies to the automotive OEM industry and caters to esteemed clients such as Ashok Leyland, Bajaj, Daimler, Fiat Chrysler, Ford, Honda, Hero, JCB, Mahindra, Maruti Suzuki, Renault, Nissan, TATA, Toyota, TVS, Volvo Eicher, and Volkswagen. The group has alliances with more than 15 renowned companies globally, including Arcelor Mittal, Cornaglia, Dassault Systemes, JFE Steel, Ogihara, and Solaris Bus & Coach. The structure of JAL enables each business unit to chart its own future and simultaneously leverage synergies across its competencies. The company has 16 manufacturing facilities: 14 for sheet metal components and tooling and 2 for buses and 1 Skill Development Centre (SDC).

List of covenants

• Any cost overrun/shortfall in debt servicing to be borne by JAL
• Any unsecured/promoter loans to be subordinate to bank loans

Any other information: Not applicable