Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA/Stable’ rating to Rs.190 crore unlisted, secured, redeemable, non-convertible debenture of Force Motors Limited (FML) and reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities.

 

Revenue is expected to moderate by 30-35% in fiscal 2021 on account of the impact of the Covid-19 pandemic and slowdown in key, end-user demand. Automobile (auto) volumes, contributing around 60% to sales, are expected to improve with reopening of schools, offices and on prevailing normalcy in all sectors, particularly on revival of tourism Industry, after the sharp impact seen in the first half of fiscal 2021. The auto components business, which contributes to the remaining 40% of sales, has fared comparatively better on account of improvement in volumes for original equipment manufacturers (OEMs). Operating margin improved to 9.6% in the second quarter of fiscal 2021 because of improvement in operating leverage and several cost reductions initiatives undertaken by the management of the Company. With new launches in the pipeline resulting in improving capacity utilisation, the operating margin is expected to remain healthy at 9-10% over the medium term.

 

The financial profile is likely to moderate because of large, debt-funded capital expenditure (capex) of Rs 1,200 crore across the fiscal 2021-2023 mainly towards new product platform, face-lift in existing product lines and capacity expansion. As a result, gearing is expected to increase to 0.3-0.4 time from the current 0.2 time.

 

Liquidity is adequate, backed by cash accrual of Rs.200-300 crore per annum. Average utilisation of bank limit of Rs 500 crore (increased from Rs 300 crore) has been low at 17% for the last nine months through December 2020. Furthermore, large capex/investment of Rs 875 crore in fiscal 2020 and 2021 and moderation in cash accrual in current fiscal resulted in reduction in cash surplus to Rs.14.26 crore as on September 30, 2020 from Rs 66.40 crore as on March 31, 2020.

 

However, large marketable securities at parent Jaya Hind Industries Ltd (JHI; ‘CRISIL AA/Stable/CRISIL A1+’), and support from the Abhay Firodia group, enhance the company’s financial flexibility.

 

The ratings continue to reflect FML’s leading position in the domestic light commercial vehicle (LCV) segment and diversified revenue. 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 partially offset by susceptibility to the cyclicality inherent in the auto industry.

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, JHI, 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

FML focusses on the niche passenger segment of LCV (market share of 37.9% as on March 31, 2020). In the LCV school 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.

 

Decline in sales volume for key categories resulted in muted revenue CAGR of 3.2% over last 5 fiscals. Pandemic induced erosion to result in 30-35% revenue growth erosion in fiscal 2021. Recovery in fiscal 2022 will be led by improvement in key end use demand segment.  Extent of recovery in volumes as schools, offices and on prevailing normalcy in all sectors, particularly on revival of tourism Industry, will remain a key monitorable.

 

FML has entered into 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 power and railway sectors. The Joint Venture Company to manufacture and supply 10- and 12-cylinder, series 1,600 engines for power generation and under floor rail applications for Rolls-Royce Power Systems. Revenue generation from this business is expected to start from fiscal 2022.

 

• Comfortable financial risk profile

Total debt is expected to increase to over 600 crore in fiscal 2021 due to debt funded capex. Despite this capital structure to remain comfortable due to healthy networth, gearing will increase to 0.3 times in fiscal 2021 from 0.16 times in fiscal 2020. Cash accruals to moderate this fiscal by Rs.40-50 crore, however, with recovery in revenue the accruals will improve to Rs 250-300 crore in fiscal 2022. Liquid surplus has moderated and high capex intensity will keep liquid surplus minimal over medium term. 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-/Negative/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-/Positive/CRISIL A1+’) and Tractors and Farm Equipment Ltd (‘CRISIL AA+/Stable/CRISIL A1+’). In spite of the intense competition, the volume is on the track of growth. These factors will constrain FML’s scale of operations over the medium term.

 

• Susceptibility to the cyclicality inherent in the auto industry

The company is susceptible to cyclicality in the CV segment. Demand depends on industrial growth and consumer sentiment. Exposure to cyclicality inherent in the auto businesses will persist.

Liquidity: Strong

FML’s liquidity will remain adequate, driven by healthy cash accrual of Rs 200-300 crore in fiscal 2020. The fund-based limit of Rs 500 crore was utilised at 17% on average during the nine months through December 2020. Internal accrual, cash and cash equivalent and unutilised bank lines will be sufficient to meet debt obligation and working capital requirement. However, the company may depend on additional term debt to fund increased capex. 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 remain healthy over the medium term, despite capex, because of healthy cash accrual, strong liquidity 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 9-10%
• Upgrade in the rating of the parent by one notch
• Improvement in financial risk profile due to reduction in debt, leading to improvement in gearing to below 0.2 time

 

Downward Factors

• Decline in operating margin to 4-5%, or larger-than-expected, debt-funded capex or acquisition
• Delay in recovery of return metrics such as return on capital employed

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.

 

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 and Jaya Hind Montupet Pvt Ltd (JML; ‘CRISIL AA-/Stable/A1+’), which manufacture and supply aluminium cylinder heads, blocks and other aluminium components for leading auto OEMs.

 

For the six months ended September 30, 2020, net loss was Rs 51 crore on net sales of Rs 880 crore on a consolidated basis, against Rs 30 crore profit after tax and Rs 1557 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars for period ended March 31	Unit	2020	2019
Revenue	Rs.Crore	3093	3,690
Profit After Tax (PAT)	Rs.Crore	50	143
PAT Margin	%	1.6	3.9
Adjusted debt/adjusted networth	Times	0.16	0.18
Interest coverage	Times	10.9	23.2

 

Any other information: Not applicable

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	500.00	NA	CRISIL AA/Stable
NA	Letter of Credit^	NA	NA	NA	250.00	NA	CRISIL A1+
NA	Term loan	NA	NA	Oct-2023	225.00	NA	CRISIL AA/Stable
NA	Term Loan	NA	NA	Feb-2025	400.00	NA	CRISIL AA/Stable
NA	Proposed Term Loan	NA	NA	NA	37.50	NA	CRISIL AA/Stable
NA	Unlisted,Secured,Redeemable, NCD*	NA	NA	Feb-2025	190.00	NA	CRISIL AA/Stable

^Interchangeable with Bank Guarantee

*Yet to be placed

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for Consolidation
Tempo Finance (North) Pvt Ltd	100%	Business linkages
Force MTU Power Systems Private Limited	51%	Business linkages