Rating Rationale
October 08, 2020 | Mumbai
Eltech Appliances Private Limited
Ratings migrated to 'CRISIL BB+/Stable/CRISIL A4+'
 
Rating Action
Total Bank Loan Facilities Rated Rs.135 Crore
Long Term Rating CRISIL BB+/Stable (Migrated from 'CRISIL BB+/Stable  ISSUER NOT COOPERATING'*)
Short Term Rating CRISIL A4+ (Migrated from 'CRISIL A4+ ISSUER NOT COOPERATING'*)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Issuer did not cooperate; based on best-available information
Detailed Rationale

Due to inadequate information and in line with Securities and Exchange Board of India guidelines, CRISIL had migrated the ratings on Eltech Appliances Private Limited (EAPL) to 'CRISIL BB+/Stable/CRISIL A4+ Issuer Not Cooperating'. However, the management has subsequently started sharing requisite information for carrying out a comprehensive review of the ratings. Consequently, CRISIL is migrating its ratings on the bank facilities of EAPL from 'CRISIL BB+/Stable/CRISIL A4+ Issuer Not Cooperating' to 'CRISIL BB+/Stable/CRISIL A4+'.
 
EAPL's consolidated revenue is estimated to have declined by 20% in fiscal 2020 due to cessation of O-General air conditioner (AC) distributorship, loss of sales in the last 10 days of March 2020 following government restrictions and competitive pressure in the domestic market. The revenue loss from O-General was anticipated and was expected to be offset by the pan-India distribution arrangement with Sharp Corporation. However, the sale of SHARP ACs did not ramp-up as expected. Furthermore, volume growth of Vestar ACs was also subdued. The impact on revenue would have been higher, but for the increased sales through its subsidiary.  
 
Revenue is expected to decrease further by 35-40% in fiscal 2021 as sales in the peak summer season were impacted by the Covid-19 pandemic. Despite lower volume, operating profitability is expected to be around 2% in fiscal 2021 supported by significant reduction in employee expenses and renegotiation of prices with vendors. Cash accrual is expected to be about Rs 2 crore in fiscal 2021.
 
The financial risk profile is constrained by high total outside liabilities to adjusted networth (TOLANW) ratio, estimated at 6.4 times as on March 31, 2020. However, the promoter support has been forthcoming with cumulative fund infusion of Rs 93 crore in fiscals 2019 and 2020 by way of unsecured loans and preference shares. Most of these funds have been deployed in the subsidiary as working capital to support trading operations in automobiles in addition to ACs.  
 
The ratings continue to reflect the promoters' financial support and the company's established distribution network. These strengths are partially offset by intense competition and high dependence on the AC segment, large working capital requirement, and moderate financial risk profile, and vulnerability to increasing raw material cost and fluctuations in foreign exchange (forex) rates.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of EAPL and its wholly owned subsidiary, Eltech Middle East FZE (EME), which is in the same business and has strong financial and operational linkages with EAPL.

Unsecured loans of Rs 41 crore as neither debt nor equity as they are expected to remain in the business over the long term and have low interest. The preference shares have been treated as debt as the residual maturity is less than five years.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Financial support of promoters
The promoters have extended considerable support to EAPL through unsecured loans and preference shares; cumulative fund infusion in fiscals 2019 and 2020 was Rs 93 crore. Furthermore, margin requirement for additional letter of credit (LC) limits is completely backed by deposits from group companies. While the unsecured loans from the promoters is expected to remain in the business, preference shares will be redeemed in fiscal 2025. EAPL will continue to benefit from the financial support of its promoters.
 
* Established distribution network
EAPL has a wide distribution network in India and in the Middle East through its subsidiary. Given its extensive reach in the domestic market, the company is likely to ramp up the distribution of SHARP ACs by leveraging the network. Furthermore, EME has been steadily increasing its AC sales in the Middle East market, which had grown to over Rs 130 crore in 2019 (January to December). Recently, EAPL commenced operations in Nigeria for the distribution of ACs through a step-down subsidiary, which is still in nascent stages.   
 
Weaknesses:
* Large working capital requirement and moderate financial risk profile
Operations remain working capital intensive because of seasonal sales, large inventory and high reliance on bank lines to fund import purchases; the TOLANW ratio was over 6 times as on March 31, 2020. The LC limit of Rs 32 crore is fully utilised, and the company relies on additional LC backed by group company deposits in order to completely manage its working capital requirement. While, promoter support has been demonstrated in the past, access to adequate sanctioned limits and higher cash flow from operations to part support working capital requirements will be a monitorable. Further, EAPL also has sizeable payables with ETA General Pvt Ltd.
 
* Intense competition and high dependence on the AC segment
EAPL faces intense competition from established players such as Johnson Controls-Hitachi Air Condition India Ltd, LG Electronics India Pvt Ltd, Blue Star Ltd, Carrier Air-conditioning and Refrigeration Ltd, Voltas Ltd, and Samsung India Software Operations Pvt Ltd. Also, EAPL derives over 70% of total revenue from ACs, while other players offer an extensive range of products such as mobile phones, televisions, refrigerators, washing machines, and other electronic appliances in both the low-end and premium segments.
 
* Vulnerability to increasing raw material cost and fluctuations in forex rates
Material cost accounts for over 70% of EAPL's revenue, and the company imports two-thirds of material. Any steep increase in the cost of raw material or unfavourable movement in the value of the Indian rupee against the US dollar will affect the company's operating profitability. While export to the Middle East through its subsidiary provides a natural hedge to some extent, profitability will remain susceptible to fluctuations in forex rates and raw material cost.
Liquidity Stretched

EAPL has stretched liquidity. The company is expected to generate cash accrual of around Rs 2 crore in fiscals 2021 and over Rs 4 crore in fiscal 2022. The company has no long-term bank borrowing, however fund-based limit of Rs 10 crore is utilised at an average of 77% over the 12 months through July 2020. Further, the company has fully utilised its LC limits and additional working capital requirement is supported by ad-hoc LC limits backed by group company deposits. These factors are partly offset by expectation of need-based promoter support. 

Outlook: Stable

CRISIL believes EAPL will continue to benefit from its forthcoming promoter support and established distribution network, although operating performance will remain subdued in the near term.

Rating Sensitivity factors
Upward factors
* Increase in company's scale of operations and profitability leading to annual cash accruals of over Rs 8 crore
* Sustained improvement in financial risk profile and working capital management
 
Downward factors
* Lower than expected sales or profitability resulting in weaker cash flows; net accruals declining below Rs 2 crore
* Increase in debt due to stretch in working capital leading to moderation credit metrics
About the Company

EAPL is involved in the sales and distribution of Vestar ACs, refrigerators, and water dispensers. EME, a subsidiary of EAPL incorporated in 2013, sells ACs, refrigerators, washing machines, and water dispensers under the Vestar brand in the Middle Eastern and African markets. The company used to sell O-General branded ACs in the past, but discontinued their distribution in fiscal 2019. EAPL has started the distribution of SHARP ACs in fiscal 2020
 
EAPL has also bid for a contract for engineering, procurement, and construction (EPC) projects on behalf of an associate entity owned by the promoters.

Key Financial Indicators - (Consolidated)
Particulars Unit 2019 2018
Operating Income Rs crore 303 425
Profit after tax (PAT) Rs crore 6.3 3.7
PAT margin % 2.1% 0.9%
Adjusted debt / adjusted networth Times 0.78 0.28
Interest coverage Times 2.58 1.74

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs crore)		 Complexity
levels		 Rating assigned
with outlook
NA Cash Credit NA NA NA 10 NA CRISIL BB+/Stable
NA Letter of credit & Bank Guarantee NA NA NA 32 NA CRISIL A4+
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 93 NA CRISIL BB+/Stable
 
Annexure - Details of Instrument(s)
Names of entities consolidated Extent of consolidation Rationale for consolidation
Eltech Middle East FZE Fully consolidated Strong business and financial linkages
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 Bank Facilities  LT/ST  103.00  CRISIL BB+/Stable  07-05-20  CRISIL BB+/Stable (Issuer Not Cooperating)*  25-03-19  CRISIL BBB-/Positive  22-01-18  CRISIL BBB-/Stable  01-03-17  CRISIL BBB-/Stable  CRISIL BB+/Stable 
            14-03-19  CRISIL BBB-/Positive           
Non Fund-based Bank Facilities  LT/ST  32.00  CRISIL A4+  07-05-20  CRISIL A4+ (Issuer Not Cooperating)*  25-03-19  CRISIL A3  22-01-18  CRISIL A3  01-03-17  CRISIL A3  CRISIL A4+ 
            14-03-19  CRISIL A3           
All amounts are in Rs.Cr.
*Issuer did not cooperate; based on best-available information
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 10 CRISIL BB+/Stable Cash Credit 10 CRISIL BB+/Stable/Issuer Not Cooperating
Letter of credit & Bank Guarantee 32 CRISIL A4+ Letter of credit & Bank Guarantee 52 CRISIL A4+/Issuer Not Cooperating
Proposed Long Term Bank Loan Facility 93 CRISIL BB+/Stable Proposed Long Term Bank Loan Facility 73 CRISIL BB+/Stable/Issuer Not Cooperating
Total 135 -- Total 135 --
Links to related criteria
Assessing Information Adequacy Risk
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Consumer Durable Industry
CRISILs Criteria for Consolidation

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