Rating Rationale
February 28, 2019 | Mumbai
Force Motors Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.420 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.200 Crore Commercial Paper Programme  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+ ratings on the bank facilities and CP programmes of Force Motors Limited (FML).
 
Revenue is expected to grow 8-9% in fiscal 2019, and 10-12% annually over the medium term, driven by reviving demand, product launches and sustained growth in the auto component business. FML's established position in the light commercial vehicle (LCV) passenger segment, focus on expanding the product portfolio, and healthy outlook for the tractor and luxury car segments, will further enhance revenue visibility. Operating margin should remain at 9-10%, because of healthy capacity utilisation in the auto-component and tractor segments, apart from productivity enhancement initiatives. Cash accrual of Rs 250 to 350 crore is expected per annum over the medium term. Planned capex of Rs 300-400 crore per annum, and working capital requirement over the medium term, will thus be covered internally. The company has raised long-term debt of Rs 300 crore to fund the capex in fiscal 2019, but is unlikely to borrow further over the next 2-3 years supported by healthy cash generation. Financial risk profile remains healthy, marked by low gearing (expected to be 0.14 time as on March 31, 2019), adequate liquidity and strong debt protection metrics.
 
The rating reflects FML's leading market position in the LCV passenger segment in the domestic automobile (auto) market, and its diversified revenue profile. The rating also factors in the substantial cash surplus, and strong financial flexibility of promoters and their stated intent to offer additional support if required. These rating strengths are partially offset by the company's modest presence in the tractor segment, and susceptibility of revenue to the inherent cyclicality in demand in the auto industry.

Analytical Approach

For arriving at the rating, CRISIL has applied the notch-up support for its principal shareholder, from the holding company of the Abhay Firodia group as per CRISIL's criteria, and considering the strong financial and managerial support from, and FML's criticality to, the group. Jaya Hind Investment Private Limited( JHIPL earlier holding company of the group) is amalgamated with Jaya Hind Industries (JHI; rated CRISIL A+/FAA-/CRISIL A1/Watch Positive).

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
* Leading market position in the LCV passenger segment in the domestic auto market and a diversified revenue profile
The company focusses on the niche passenger sement of the overall LCV market (market share of 34.5% as on Jan 31, 2019), and more specifically, on LCVs with a maximum mass of five tonne (market share of around 70%). CRISIL believes the company will continue to benefit from its niche positioning in the auto OEM market, supported by steady introduction of new products and variants, and favourable demand outlook for the LCV segment.
 
Revenue streams are diversified, with auto (commercial vehicles and tractors) and auto-component businesses. This has enabled maintain stability over the three fiscals through March 2018, despite sluggish demand in the domestic auto industry.
 
Furthermore, FML has entered into a non-binding term sheet with Rolls Royce Power Systems AG (subsidiary of Rolls Royce Holdings Plc rated at 'BBB+/Stable/A-2' by S&P Global) and has formed joint venture (JV) 'Force MTU Power Systems' (FML holds 51% stake in the JV) to produce engines for the power generation and railways segments, in India and globally. CRISIL expects the start of operations by end of 2019 which is expected to lend more diversity to revenue. With this new JV, FML will be associated with three major global automotive players ' Mercedes Benz (division of Daimler AG), BMW AG and Rolls Royce Power Systems AG.
 
* Healthy financial risk profile
Minimal debt, along with sizeable networth estimated at Rs 1798 crore as on March 31, 2018, has ensured a robust capital structure (estimated gearing of 0.14 time as on March 31, 2019), and strong debt protection metrics. Net cash accrual is likely to improve to Rs 280 crore in fiscal 2019, from Rs 256 crore in fiscal 2016, aided by a healthy operating margin of 8.6%. Liquidity is marked by cash and cash equivalents of Rs 263 crore as on September 30, 2018, and minimally utilised bank limit of Rs 300 crore as on December 31, 2018. Sizeable capex of around Rs 1,000 crore over next 3 fiscals, is being planned to expand capacity, increase research and development initiatives, invest in the new JV, and ensure compliance with emission norms. The company has partly funded the capex in fiscal 2019, via debt of Rs 300 crore (Rs 235 crore outstanding as on December 31, 2018).However, the planned capex is expected to be funded through internal cash accrual a thereby ensuring sustenance of the healthy financial risk profile over the medium term.
 
* Strong support from promoters
The holding company of Abhay Firodia Group holds 57.38% equity shares of FML, and has holdings in Bajaj group of companies - Bajaj Auto Ltd, Bajaj Holdings & Investment Ltd, and Bajaj Finserve Ltd, with significant market value. This provides strong financial flexibility to the group, including FML.
 
Weaknesses
* Susceptibility to cyclicality in demand:
In spite of a leading market position in select product categories, the company has a low market share in the high-volume LCV goods carriers category, where competitors such as Tata Motors Ltd ('CRISIL AA/Negative/CRISIL A1+'), Mahindra and Mahindra Ltd (M&M; 'CRISIL AAA/Stable/CRISIL A1+'), and Ashok Leyland Ltd have established a strong presence. Furthermore, market share in the tractor market is modest, and vulnerable to intense competition from large players, including M&M and Tractors and Farm Equipment Ltd ('CRISIL AA+/Stable/CRISIL A1+'). CRISIL believes that these factors will constrain any significant improvement in scale of operations over the medium term.
 
The company is susceptible to inherent cyclicality in the domestic auto industry, and more particularly in the CV segment. The demand patterns in this industry have displayed cyclicality in the past, in line with industrial growth and consumer sentiments. Exposure to cyclicality inherent in the auto businesses is likely to persist over the medium term.
Liquidity

FML has adequate liquidity driven by expected healthy cash accruals of 250-300 crore and adequate liquidity of Rs 263 crore as on September 30, 2018. The company also has access to fund based limits of Rs. 300 crore, minimally utilised with average utilisation of 4% over 12 months ended December 2018. The company has long term repayment obligations around Rs.60 crore per annum in fiscal 2020 and fiscal 2021. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations as well as incremental working capital requirements. Moreover, Abhay Firodia Group has ample liquidity and will extend need based support to FML over the medium term in case of any exigency. FML will be continue to enjoy strong financial flexibility and strong need based financial support from the group.

About the Company

Established in 1958, FML is the flagship company of the Pune, Maharashtra-based Abhay Firodia group. The company is a vertically-integrated, manufacturer of small and light CVs, multi-utility vehicles, and agricultural tractors. In the auto-component business, engines are assembled for Mercedes-Benz India Pvt Ltd and BMW India Pvt Ltd. The primary brands in LCVs and multi-utility vehicles include Traveller, Trax, and Trump, while the brands in tractors are Balwan and Orchard.
 
The Abhay Firodia group is currently headed by Mr Abhaykumar Firodia (chairman at FML) and Mr Prasan Firodia (managing director). Other companies in the group include Jaya Hind Industries Ltd ('CRISIL A+/FAA-/Stable/CRISIL A1') and Jaya Hind Montupet Pvt Ltd ('CRISIL BBB/Positive/CRISIL A3+'); both these companies manufacture and supply aluminium cylinder heads, blocks, and other aluminium components to leading auto original equipment manufacturers.
 
In the nine months ended December 31, 2018 on standalone basis, PAT was Rs 108 crore on net sales of Rs 2598 crore, against Rs 86.3 crore and Rs 2387 crore, respectively, in the corresponding period of the previous year.

Key Financial Indicators
Particulars for period ended March 31, Unit 2018 2017
Revenues Rs. Cr. 3,453 3,105
Profit After Tax Rs. Cr. 147 180
PAT Margin % 4.3 5.8
Adjusted Debt/Adjusted Net worth Times 0 0.13
Interest coverage Times 50.4 63.7

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
Rating assigned
with Outlook
NA Cash Credit* NA NA NA 300 CRISIL AA/Stable
NA Letter of Credit NA NA NA 120 CRISIL A1+
NA Commercial Paper Programme NA NA 7-365 days 200 CRISIL A1+
*Interchangeable Bank Guarantee
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation
Tempo Finance (North) Private Limited 100%
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  200.00  CRISIL A1+      08-02-18  CRISIL A1+  25-09-17  CRISIL A1+  27-12-16  CRISIL A1+  -- 
            01-02-18  CRISIL A1+           
Fixed Deposits  FD    --    --  01-02-18  Withdrawal/Stable  25-09-17  FAA+/Stable  27-12-16  FAA+/Stable  FAA/Stable 
                    22-09-16  FAA+/Stable   
Fund-based Bank Facilities  LT/ST  600.00  CRISIL AA/Stable      08-02-18  CRISIL AA/Stable  25-09-17  CRISIL AA/Stable  27-12-16  CRISIL AA/Stable  CRISIL AA-/Stable 
            01-02-18  CRISIL AA/Stable      22-09-16  CRISIL AA/Stable   
Non Fund-based Bank Facilities  LT/ST  120.00  CRISIL A1+      08-02-18  CRISIL A1+  25-09-17  CRISIL A1+  27-12-16  CRISIL A1+  CRISIL A1+ 
            01-02-18  CRISIL A1+      22-09-16  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 300 CRISIL AA/Stable Cash Credit* 300 CRISIL AA/Stable
Letter of Credit 120 CRISIL A1+ Letter of Credit 120 CRISIL A1+
Total 420 -- Total 420 --
*Interchangeable Bank Guarantee
Links to related criteria
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 Commercial Vehicle Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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