Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and non convertible debentures of Force Motors Limited (FML). CRISIL Ratings has also withdrawn its rating on Rs.190.5 crore of proposed long term bank loan facility on company’s request. This is in line with CRISIL Ratings’ withdrawal policy.

 

The ratings continue to reflect FML’s leading position in the domestic light commercial vehicle (LCV) segment, presence across MUV and SUV segments and well-established position in the automotive component business with long standing relationships with reputed OEMS resulting in a diversified revenue stream. The ratings also factor in the company’s substantial and strong financial flexibility, provided by the promoters and their intent to offer additional support, if required. These strengths are sufficiently offset the susceptibility to the cyclicality inherent in the auto industry.

 

Revenue for fiscal 2022 stood at Rs.3265 crores: a y-o-y growth of 63.25% driven by recovery in schools, office and tour & travel industry from pandemic induced disruptions. Recovery momentum continued in first half of fiscal 2023 where company recorded revenues of Rs. 2235 crores. Automobile (auto) volumes have improved to 12,587 ~ in 6M FY23 from 10713 in 6MFY22 (FY22: 20575) and are expected to be in line with pre-pandemic levels in fiscal 2023. This recovery was aided by 53% volume growth in CV segment. The auto components business has also performed better backed by gradual recovery in volumes for original equipment manufacturers (OEMs).

 

Operating margins in H1 2023 stood at 6.4% as compared to 3.4% in fiscal 2022 due to price hikes taken by FML during this period besides some cooling down of key RM prices like steel during the last 6 months. The margins are expected to remain stable over the medium term. Lower than expected recovery in operating margins will remain key rating sensitivity factor.

 

During the last 2 fiscals because of large, debt-funded capital expenditure (capex) of Rs 700 crore mainly towards new product platform, face-lift in existing product lines, electric variants of Traveller, new T1N Vehicles, and BS6 stage 2 implementation, the overall debt has increased to ~Rs 991 crores as on 30 September 2022. However, despite increase in debt, gearing is comfortable at 0.57 times. Interest cover which stood at 4.8 times during H1 2023 is expected to further improve with improvement in operating performance. Expected recovery in operating performance will lead to net cash accruals increasing to over Rs 200 crore this fiscal from ~93 crores in fiscal 2022. As a result, dependence on external debt is likely to remain limited in the medium term.

 

FML also has strong parentage with major shareholder Jaya Hind Industries Private Ltd. (JHI ‘CRISIL AA/Stable/CRISIL A1+’) having large marketable securities of over Rs 20,000 crore and cash surplus of over Rs 600 crore as on 30 September 2022. Furthermore, JHI has an outstanding support of ~Rs. 150 crores in form of loans and advances to FML as on ending of Q2 in fiscal 2023 to support its capex plans. Thus, support from parent JHI (Abhay Firodia group), supports the company’s financial flexibility.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has applied the parent notch-up criteria for FML’s principal shareholder from the Abhay Firodia group, Jaya Hind Industries, because of FML's importance to the group and the group’s strong financial and managerial support to the company.

 

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:

Leading position in the domestic LCV passenger segment and diversified revenue stream

FML focusses on the niche passenger segment of LCV (market share of around 60% as on September 2022 which has increased from 52% as on December 2020). In the LCV school buses and ambulances segment, the company has a market share of over 70%. The company will continue to benefit from its niche positioning in the auto OEM market, supported by the steady launch of new products and variants and rise in demand in the LCV segment.

 

FML has a joint venture (JV), Force MTU Power Systems Pvt. Ltd, with MTU Friedrichshafen GmbH (FML owns 51% stake in the JV), to produce engines for the powergen and railway applications. The Joint Venture Company will manufacture and supply 10 and 12-cylinder, series 1,600 engines for power generation and under floor rail applications for Rolls-Royce Power Systems. For the first half of fiscal 2023, the JV has reported a revenue of ~Rs. 66 crores and is expected to generate revenues of ~300-400 crores per annum at full capacity over the medium term.

 

Adequate financial risk profile

Due to large, debt-funded capex FMLs overall debt, as on 30 September 2022, is at Rs. 991 crores. Despite this, gearing is comfortable at 0.57 times and Interest cover stood at 4.8 times as on 30 September 2022. Gearing is expected to stay below 0.8 times while interest cover to remain healthy at over 6-7 times over the medium term. Furthermore, cash accruals which moderated in fiscal 2022 and 2021 due to sharp decline in sales volume are expected increase to Rs.200-250 crore this fiscal on back of strong recovery. Improvement in sales owing to large capex undertaken will remain key rating sensitivity factor.

 

Strong support from the promoters

The holding company of the Abhay Firodia group owns 57.38% stake in FML, and has stakes of significant market value in the Bajaj group of companies, Bajaj Auto Ltd, Bajaj Holdings & Investment Ltd and Bajaj Finserve Ltd. This provides strong financial flexibility to the group, including FML.

 

Weaknesses:

Susceptibility to cyclicality in demand:

Despite its leading position in certain product categories, FML has low market share in the high-volume LCV goods carrier category, compared with the strong presence of its competitors, such as Tata Motors Ltd (‘CRISIL AA-/Stable/CRISIL A1+’), Mahindra & Mahindra Ltd (M&M; 'CRISIL AAA/Stable/CRISIL A1+') and Ashok Leyland Ltd. The company’s market share in the tractor market is modest on account of intense competition from large players, including M&M, Escorts (‘CRISIL AA/Watch Positive/CRISIL A1+’) and Tractors and Farm Equipment Ltd (‘CRISIL AA+/Stable/CRISIL A1+’). These factors will constrain FML’s scale of operations over the medium term. However, in spite of the intense competition, the overall volume is back on the track of growth.

 

Profitability susceptible to macro-economic factors, industry cyclicality and raw material prices 

The automobile industry is subjected to macro-economic headwinds emanating from inflationary pressure and economic slowdown. Economic downturns impact consumer spending on discretionary items, and hence slowdown in economic activity can impact industry sales and thus impact Force Motors Limited.  Raw materials and components prices constituting more than 50% of revenues are directly influenced by international commodity prices.  Basic raw material index (BRMI) which constitutes over 35.0% of the overall raw material costs increased by ~37.0% on year; led by a 51.0% and 47.0% surge in prices of steel and aluminum (key inputs).

Liquidity: Strong

FML’s liquidity will remain strong, driven by healthy cash accrual of Rs 126 crore in first half of fiscal 2023. The fund-based limit of Rs 390 crore was utilised at 15% on an average during the 12 months through December 2022. Internal accrual, cash and cash equivalent and unutilised bank lines will be sufficient to meet debt obligation and working capital requirement. Moreover, the Abhay Firodia group has robust liquidity and will provide need-based support to FML. The group will continue to provide strong financial flexibility and need-based financial support.

Outlook: Stable

CRISIL Ratings believes FML will continue to benefit from its leadership position in niche products segments, revenue diversity and stable operating profitability. Furthermore, the financial risk profile will improve over the medium term, with limited increase in total debt in future because of healthy cash accrual vis a vis progressive loan repayments and financial flexibility of the Abhay Firodia group.

Rating Sensitivity Factors

Upward Factors

• Substantial increase in scale of operations driven by improvement in product diversity, and market share gains while sustaining operating margin at 8-9%
• Upgrade in the rating of the parent by one or more notches
• Improvement in financial risk profile due to reduction in debt, leading to improvement in gearing and debt protection metrics

 

Downward Factors

• Decline in operating margin to 4-5% on sustained basis in near term
• Larger-than-expected, debt-funded capex or acquisition leading to deterioration in gearing levels and moderation in debt protection metrics
• Delay in recovery of return metrics such as return on capital employed
• Downward revision in rating of parent by 1 or more notches, or change in stance of support

About the Company

Established in 1958, FML is the flagship company of the Abhay Firodia group. The company is a fully vertically integrated manufacturer of small and light CVs, multiutility vehicles, and agricultural tractors. Under the auto components division, engines are assembled for Mercedes-Benz India Pvt Ltd and BMW India Pvt Ltd. The primary brands in LCVs and multiutility vehicles include Traveller, Trax, Gurkha and Shaktiman, while the brands in tractors are Balwan, Orchard, Abhiman and Sanman.

 

For the six months ended September 30, 2022, net profit was Rs 2.7 crore on net sales of Rs 2235 crore, on a consolidated basis as against net loss of Rs 5.4 crore on net sales of Rs 1581 crore in the corresponding period of the previous fiscal.

About the Group

The Abhay Firodia group, based in Pune, Maharashtra, is headed by Mr Abhaykumar Firodia (Chairman of FML) and Mr Prasan Firodia (Managing Director). The group includes JHI, which manufacture and supply aluminium cylinder heads, blocks and other aluminium components for leading auto OEMs.

Any other information: Not applicable