Rating Rationale
November 27, 2020 | Mumbai
Eimco Elecon India Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.81 Crore
Long Term RatingCRISIL A/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term RatingCRISIL A1 (Reaffirmed)
 
Rs.5 Crore Non Convertible DebenturesCRISIL A/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Rs.17 Crore Commercial PaperCRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities and non convertible debentures of Eimco Elecon India Limited (Eimco Elecon) to 'Negative' from 'Stable' and reaffirmed the 'CRISIL A' rating. CRISIL has reaffirmed its 'CRISIL A1' rating on the company short-term bank facilities and commercial paper programme.
 
The revision in outlook reflects the continued moderation in the company's operating performance mainly due to low order execution amidst Covid-19 and the nationwide lockdown to contain the spread of the pandemic. Revenue declined 42% year-on-year to Rs 108 crore in fiscal 2020, while earnings before interest, taxes, depreciation and amortisation (Ebitda) declined 76% to Rs 6 crore. Ebitda margin declined to 5.5% because of lower fixed cost absorption despite about 60% of revenue coming from high-margin spares. With the execution of pending orders from Coal India Ltd (CIL; CRISIL AAA/Stable/CRISIL A1+) and its subsidiaries as well as sale of spares and new products, the company reported revenue of Rs 56 crore and Ebitda margin of 11.2% in the first six months of fiscal 2021. The company had orders of Rs 30 crore as on September 30, 2020; traction in new order flow and sustained recovery in operating performance will be key monitorables.
 
The ratings continue to reflect Eimco Elecon's leadership position in the underground mining equipment segment, backed by technological support from foreign collaborators, and its healthy financial risk profile. These strengths are partially offset by vulnerability to the prolonged sluggishness in the underground mining segment, dependence on CIL and its subsidiaries, and large working capital requirement.

Analytical Approach

CRISIL has not combined the financial and business risk profiles of Elecon Engineering Co Ltd and Eimco Elecon Electricals Ltd (47.62% stake) with Eimco Elecon as the two companies have no operational, managerial, or financial linkages with Eimco Elecon.

Key Rating Drivers & Detailed Description
Strengths
* Established market position in the underground coal mining equipment segment: The company has a near monopoly in the underground coal mining equipment industry in India with a healthy market share backed by an extensive after-sales service network.
 
* Technical collaboration with foreign partners: The company's foreign collaborations support its technical capability. The advanced technology enables continuous improvement in the effectiveness of equipment and helps caters to diverse applications. Development of new products will diversify revenue profile and support growth, albeit gradually.
 
* Healthy financial risk profile: The financial profile is likely to remain healthy, backed by strong capital structure with no long-term debt and absence of any debt-funded capital expenditure (capex). Debt protection metrics were strong, with interest coverage estimated at 35 times for fiscal 2020. Liquid surplus of Rs 163 crore as of September 2020 is likely to be maintained over the medium term, mainly comprising investments in short-term mutual funds.
 
Weaknesses:
* Vulnerability to the sluggish performance of the underground coal mining segment: The underground coal mining segment, which contributes 97% to revenue, has been sluggish over the past decade. Coal output from underground mining declined at an annual compound rate of 3.2% in last five years. This is one of the key impediments for revenue growth. Efforts with respect to revenue diversification into construction equipment and other products will be critical to drive growth over the medium term.
 
* High customer concentration in revenue: High dependence on CIL and its subsidiaries, which contribute around 60% to revenue, exposes the company to significant customer concentration risk. Any slowdown in demand from CIL and its subsidiaries can adversely impact revenue growth.
 
* Large working capital requirement: Operations are working capital intensive, due to large inventory of spares and imported components, and substantial credit offered to customers in the public sector.
Liquidity Strong

In the absence of debt obligation, expected annual cash accrual of Rs 16-18 crore will support liquidity. Cash and marketable securities stood at Rs 163 crore as on September 30, 2020. Fund-based limit of Rs 2 crore was unutilised over the 12 months through September 2020. Also, moderate annual capex of Rs 5-7 crore is expected to be funded through internal accrual. Dividend payout is likely to be low at 15-20% of net profit. Working capital requirement is large and had increased in March 2020 owing to the Covid-led lockdown. Inventory increased to 188 days while receivables days stood at 105 days as on March 31, 2020.

Outlook: Negative

CRISIL believes Eimco Elecon's operating performance will remain vulnerable to order flow for underground coalmining equipment because of limited revenue diversity. However, the company will maintain its healthy capital structure and strong liquid surplus.

Rating Sensitivity Factors
Upward Factors:
* Significant and sustained increase in revenue, with improvement in operating margin to over 15%
* Continued healthy financial risk profile and strong liquidity

Downward Factors:
* Weakening of business risk profile due to steep fall in revenue and profitability, leading to net cash accrual below Rs 15 crore
* Stretch in the working capital cycle or large additional debt affecting the capital structure
* Decrease in unencumbered liquid surplus due to substantial dividend payout, any large acquisition, or financial support to group companies.

About the Company

Eimco Elecon was formed in 1974 as a joint venture between the Elecon group and Sandvik AB (rated 'A-/Stable /A-2' by S&P Global Ratings), the world's leading manufacturer of rock-drilling tools and mining equipment. Eimco Elecon produces a wide range of mining machinery, such as air-powered rocker shovels, electro-hydraulic side-dump loaders, and electro-hydraulic and air-powered load-haul dumpers, used as loading machines in coal mines. Facilities are in Vallabh Vidyanagar, Gujarat. During fiscal 2012, Eimco Elecon sold its surface drilling product line to Sandvik Asia Pvt Ltd ('CRISIL AA+/Positive /CRISIL A1+').

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs.Cr 108 185
Profit After Tax (PAT) Rs.Cr 9 23
PAT Margin % 8.7 12.6
Adjusted debt/adjusted networth Times 0.00 0.01
Interest coverage Times 14.39 47.74

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 Issue size (Rs crore) Complexity level Rating assigned with outlook
NA Cash Credit NA NA NA 2 NA CRISIL A/Negative
NA Letter of Credit* NA NA NA 26 NA CRISIL A1
NA Letter of Credit NA NA NA 25 NA CRISIL A1
NA Proposed Long Term Bank Loan Facility NA NA NA 28 NA CRISIL A/Negative
NA Non-Convertible Debentures# NA NA NA 5 Simple CRISIL A/Negative
NA Commercial Paper NA NA 7-365 days 17 Simple CRISIL A1
*Interchangeable with bank guarantee
#Yet to be issued  
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
Commercial Paper  ST  17.00  CRISIL A1  30-03-20  CRISIL A1  24-04-19  CRISIL A1  03-04-18  CRISIL A1  23-05-17  CRISIL A1+  CRISIL A1+ 
Non Convertible Debentures  LT  0.00
27-11-20 
CRISIL A/Negative  30-03-20  CRISIL A/Stable  24-04-19  CRISIL A/Stable  03-04-18  CRISIL A/Stable  23-05-17  CRISIL A+/Stable  CRISIL A+/Stable 
Fund-based Bank Facilities  LT/ST  30.00  CRISIL A/Negative  30-03-20  CRISIL A/Stable  24-04-19  CRISIL A/Stable  03-04-18  CRISIL A/Stable  23-05-17  CRISIL A+/Stable  CRISIL A+/Stable 
Non Fund-based Bank Facilities  LT/ST  51.00  CRISIL A1  30-03-20  CRISIL A1  24-04-19  CRISIL A1  03-04-18  CRISIL A1  23-05-17  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
 
Annexure - Details of Bank Lenders & Facilities
Facility Name of Lender Amount (Rs.Crore) Rating
Cash Credit State Bank of India 2 CRISIL A/Negative
Letter of Credit Axis Bank Limited 25 CRISIL A1
Letter of Credit* State Bank of India 26 CRISIL A1
Proposed Long Term Bank Loan Facility Not Applicable 28 CRISIL A/Negative

This Annexure has been updated on 8-Sep-2021 in line with the lender-wise facility details as on 9-Aug-2021 received from the rated entity.

*Interchangeable with bank guarantee

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
CRISILs Criteria for rating short term debt

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