Rating Rationale
March 31, 2020 | Mumbai
Force Motors Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs 682.5 Crore (Reduced from Rs.720 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating 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CRISIL has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank facilities of Force Motors Ltd (FML) and withdrawn the ratings on Term loan of Rs 37.50 cr at the company's request and on receipt of a no-objection certificate from the bankers. The withdrawal is in line with CRISIL's policy on withdrawal of bank loan ratings
 
Revenue is expected to moderate by 6.4% in fiscal 2020 amid the industry slowdown. Operating margin will remain at 8-9% over the medium term because of healthy capacity utilisation in the automotive (auto) component and tractor segments.
 
Operating performance of FML in fiscal 2021 is expected to be impacted due to measures taken by various state governments towards containment of COVID-19 which includes temporary closure of non-critical establishments, inter-state transportation etc. along-with advisory against travel and visiting areas of mass gatherings. These measures are likely to impact the business profile of the company as manufacturing plants of key customers and the company have been shut down and thereby may have an impact on its credit quality, especially liquidity position. While, most of the state government's measures are applicable till March 31, 2020, revocation of the measures will be contingent upon directive from the Central government and extent of spread of COVID-19.

Prolonged closure could weaken the credit risk profiles of entities. In contrast, fast turnaround to normalcy will limit the extent of decline. The ability of the business to revert to operational stability and relief measures provided by the government are key monitorables.

Liquidity is adequate, backed by cash accrual of Rs 250 to 350 crore per annum. Utilisation of bank limit of Rs 300 crore has been negligible and the limit will be sufficient to fund capital expenditure (capex) of Rs 250-300 crore in each fiscal over the medium term. The company is likely to give 15-20% of profit after tax (PAT) as dividend over the medium term. Healthy investment of the parent, Jaya Hind Industries Ltd (JHI; 'CRISIL AA/Stable/CRISIL A1+'), and support from the Abhay Firodia group enhance 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 cash surplus, and strong financial flexibility provided by the promoters and their intent to offer additional support, if required. The strengths are partially offset by limited presence in the tractor segment, and susceptibility to the cyclicality inherent in the auto industry.

Analytical Approach

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

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 January 31, 2020). In the LCV School and Ambulances segment company has a market share of over 70%. The company will continue to benefit from its niche positioning in the auto original equipment manufacturers (OEMs) market, supported by the steady launch of new products and variants and rise in demand in the LCV segment.
 
Diversified revenue streams, auto (commercial vehicles [CVs] and tractors) and auto component businesses, have provided stability over the 3 fiscals through March 2020, despite sluggish demand in the domestic auto market.
 
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. It entered into a JV with Rolls-Royce Power Systems AG in March 2018 to manufacture and supply 10- and 12-cylinder, series 1,600 engines for power generation and underfloor rail applications.
 
The JV is scheduled to take off in April 2020, and will lend diversity to the revenue. Moreover, FML will be associated with three global automotive players: Mercedes Benz (division of Daimler AG), BMW AG, and Rolls-Royce Power Systems AG.
 
* Healthy financial risk profile
Negligible debt against sizeable networth (expected at Rs 1,653 crore as on March 31, 2020) will ensure a robust capital structure (gearing is expected at 0.22 time as on March 31, 2020) and strong debt protection metrics. Net cash accrual of Rs 250-280 crore is expected in fiscal 2020, driven by healthy operating margin of around 8%. Liquidity is supported by negligible utilisation of the bank limit of Rs 300 crore as on January 31, 2020. Large capex of around Rs 1,000 crore is expected in the next 3 fiscals, to expand capacity, increase research and development initiatives, invest in the JV, and ensure compliance with emission norms. In 2019, capex was partly funded through debt of Rs 300 crore and accrual. FML will give 15-20% of PAT as dividend over the medium term.
 
* Strong support from the promoters
The holding company of the Abhay Firodia group owns 57.38% stake in FML, and has stake 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 a 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 and Tractors and Farm Equipment Ltd ('CRISIL AA+/Stable/CRISIL A1+'). 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 sentiments. 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 250-300 crore in fiscal 2020. The fund-based limit of Rs 300 crore was utilised 22% on average during the 6 months through January 2020. 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 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 Factor
* Revenue diversity, growth of 10-12% in the auto and auto components businesses, and steady profitability of 9-10%
* Upgrade in the rating of the parent by 1 notch

Downward Factor
* Decline in profitability to 4-5%, or larger-than-expected debt-funded capex or acquisition
* Decline in revenue by 8-10%.

About the Company

Established in 1958, FML is the flagship company of the Abhay Firodia group. The company is a 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 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 at FML) and Mr Prasan Firodia (managing director). The group includes JHI and Jaya Hind Montupet Pvt Ltd (JML; 'CRISIL AA-/Stable/CRISIL A1+'), which manufacture and supply aluminium cylinder heads, blocks, and other aluminium components for leading auto OEMs.
 
In the 9 months ended December 31, 2019, on a consolidated basis, PAT was Rs 50 crore on net sales of Rs 2,426 crore, against Rs 108 crore and Rs 2,591 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars for period ended March 31 Unit 2019 2018
Revenue Rs crore 3,690 3,531
Profit After Tax (PAT) Rs crore 143 147
PAT margin % 3.9 4.3
Adjusted debt/Adjusted networth Times 0.18 0
Interest coverage Times 23.2 50.4

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.Cr) Rating assigned with outlook
NA Cash Credit NA NA NA 300.00 CRISIL AA/Stable
NA Letter of Credit^ NA NA NA 120.00 CRISIL A1+
NA Term Loan NA NA Oct-2023 262.50 CRISIL AA/Stable
NA Term Loan NA NA NA 37.5 Withdrawn
^Interchangeable with Bank Guarantee
 
Annexure - List of Entities Consolidated
Names of entities consolidated Extent of consolidation
Tempo Finance (North) Pvt Ltd 100%
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    --    --  30-03-19  Withdrawal  08-02-18  CRISIL A1+  25-09-17  CRISIL A1+  CRISIL A1+ 
            28-02-19  CRISIL A1+  01-02-18  CRISIL A1+       
Fixed Deposits  FD    --    --    --  01-02-18  Withdrawal/Stable  25-09-17  FAA+/Stable  FAA+/Stable 
Fund-based Bank Facilities  LT/ST  562.50  CRISIL AA/Stable      30-03-19  CRISIL AA/Stable  08-02-18  CRISIL AA/Stable  25-09-17  CRISIL AA/Stable  CRISIL AA/Stable 
            28-02-19  CRISIL AA/Stable  01-02-18  CRISIL AA/Stable       
Non Fund-based Bank Facilities  LT/ST  120.00  CRISIL A1+      30-03-19  CRISIL A1+  08-02-18  CRISIL A1+  25-09-17  CRISIL A1+  CRISIL A1+ 
            28-02-19  CRISIL A1+  01-02-18  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+
Term Loan 262.5 CRISIL AA/Stable Term Loan 300 CRISIL AA/Stable
Term Loan 37.5 Withdrawn -- 0 --
Total 720 -- Total 720 --
^Interchangeable with 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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