On September 20, 2023,, CRISIL Ratings has upgraded its ratings on the bank facilities of HPL to ‘CRISIL A-/Stable/CRISIL A2+’ from ‘CRISIL BBB+/Positive/CRISIL A2’.

 

The rating reflects the improvement in the credit risk profile of the HPL group. The business risk profile has strengthened backed by robust growth of 25% on-year in sales to Rs 1,262 crore in fiscal 2023 from Rs 1,014 crore in fiscal 2022. The growth in sales was driven by increasing demand for the metering segment, which contributes 45-50% of sales, along with focus on increasing share from smart meters. Smart meter sales have started picking up, with sales contribution increasing to 14% in the first quarter of fiscal 2024 from ~6% in fiscal 2023. The group is expected to witness healthy revenue growth of 10-15% over the medium term.

 

It had orders of more than Rs 2,100 crore (1.6 times of fiscal 2023 sales) as on June 30, 2023, out of which the major order book is from metering segment (of which more than Rs 1500 crore is for smart meters). Sales from smart meters are expected to grow aided by the government’s focus on this segment. The operating margin of the group remained stable at 12.43% in fiscal 2023. The group is focusing on increasing its sales share from smart meters over the medium term, and hence, the operating margin is expected to improve to more than 13% aided by stable commodity prices.

 

Improvement in the business risk profile resulted in a better financial risk profile. Networth was strong at Rs 795 crore as on March 31, 2023, backed by healthy accretion to reserve, and is expected over Rs 830 crore in fiscal 2024. Capital structure was healthy, as reflected in low gearing and total outside liabilities to adjusted networth (TOLANW) ratio of 0.76 time and 1.11 times, respectively, as on March 31, 2023. With no major debt-funded capital expenditure (capex) plans, gearing and TOLANW ratio are expected around 0.70 time and 1.1 times, respectively, as on March 31, 2024.

Analytical approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of HPL and its subsidiary, Himachal Energy Pvt Ltd (HEPL), and majority owned joint ventures (JVs), namely HPL-Shriji Designs (HPLSD) and HPL-Shriji Designs-Trimurthi Hitech Co Pvt Ltd (HPLTS). This is because all these entities, collectively referred to as the HPL group, are in the same industry and have operational and financial linkages.

 

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

Key rating drivers and detailed description

Strengths:

• Established position in the metering industry: The group has been an established player in the market, along with its brand HPL, for around three decades. Mr Lalit Seth (Chairman, HPL group) began importing meters from Europe in 1956. The group commissioned its first manufacturing facility dedicated to meters in 1998 and now has manufacturing capacity of  1.1 crore meters on annual basis. Also, all players in the metering industry have to provide a five-year guarantee to customers (usually state power utilities or private utilities) for the meters supplied, and there has never been an invocation of any guarantee by its customers. The ability to provide quality products is backed by complete backward integration and quality controls being followed by the group. The group has a strong market position in the metering segment with ~20% of market share. It is well positioned to capitalise on the smart meter opportunity. The three-decade-long experience of the promoters in the metering industry and backward integrated operations will continue to support the business over the medium term.

 

• Sound operating efficiency owing to in-house R&D capabilities: The group has three R&D facilities (two in Gurugram and one in Kundli). The in-house R&D capability has helped the group in innovating and developing new products on consistent basis. One of the major breakthroughs has been in the form of smart meters. The group has bagged orders for smart meters and is expected to ride the smart meter installation wave over the next few years as the government has indicated installation of 25 crore smart meters in the medium term. HPL had orders of more than Rs 2,100 crore  as on June 30, 2023, out of which the major order book is from metering segment (of which more than Rs 1500 crore is for smart meters).

 

• Diversified product profile: The group has diversified its product portfolio by adding products at regular intervals in allied industries. It serves both the business-to-business (B2B; meters) and business-to-customer (B2C; lighting, switchgears, wires and cables) segments. The metering segment contributes to 45-50% of total sales and the remaining comes from other segments. The group has an established pan-India distribution network of over 900 authorised dealers and distributors and over 35,000 retailers, which provides significant reach. The diversification is reflective of strong understanding of market dynamics owing to longstanding presence of the promoters in the electronics industry and healthy relationships with customers and suppliers.

 

The group’s diversified product basket mitigates the risk of obsolescence in a product as well as protects sales against downswing in any product stream. A diversified product profile along with continuous investment in R&D should lead to sustainable growth in sales in the long term.

 

• Robust networth and healthy capital structure: Backed by steady accretion to reserve, networth was strong at Rs 795 crore as on March 31, 2023, yielding gearing and TOLANW of 0.76 time and 1.11 times, respectively. The capital structure will remain healthy over the medium term supported by higher profitability in smart meters segment and efficient working capital management in the B2C segment, which will lead to lower reliance on debt. Further, with no debt-funded capex plans, long-term debt will not increase significantly from existing levels.

 

Weaknesses:

• Large working capital requirement and modest RoCE: Gross current assets (GCA) were at 337 days as on March 31, 2023 (improved from 393 days as on March 31, 2022), driven by receivables and inventory of 174 days and 162 days, respectively. The group operates in both B2B and B2C segments, wherein sales contribution was ~45% and ~55%, respectively, in fiscal 2023. However, working capital requirement in the B2C segment is smaller than in the B2B segment as the B2B segment consists of power utilities wherein manufacturing takes place over 2-3 months and payments are received on milestone basis from customers (government entities). In the B2B segment, the working capital cycle for an order can be over 365 days. GCAs will improve driven by efficient management of inventory and monitoring of receivables collection. Also, increasing sales contribution from smart meters, where realisation is faster, will further improve the working capital cycle over the medium term.  

 

RoCE stood at a modest 9.02% in fiscal 2023 (compared with 6.26% in fiscal 2022) owing to large working capital requirement and risks inherent in tender-based business. The RoCE was constrained at 6.0-7.5% because of increasing deployment of capital in enhancing capacities and capabilities for manufacturing smart meters. However, with increased focus on smart meters and the group's enhanced product profile, the RoCE is expected to improve over the medium term.

 

• Susceptibility to risks inherent in tender-based business: For the meters segment, sales and profitability entirely depend on the ability to win tenders from public sector undertakings. Also, entities in this segment face intense competition, requiring them to bid aggressively to get contracts, which restricts the operating margin.

Liquidity: Strong

The group has access to fund-based working capital limit of Rs 557 crore, which has been utilised 91% on average over the 12 months through June 2023. Expected net cash accrual of Rs 80-120 crore per annum will comfortably cover yearly debt obligation of Rs 20-25 crore over the medium term, providing adequate cushion to meet incremental working capital requirement and capex. Cash and bank balance stood at Rs 70 crore and current ratio was 1.4 times as on March 31, 2023.

Outlook: Stable

The HPL group will continue to benefit from its strong market position and healthy financial risk profile over the medium term.

Rating sensitivity factors

Upward factors:

• Steady growth in volumetric sales aiding increase in operating income and sustenance of operating margin over 14%, leading to RoCE over 12%
• Adjusted interest coverage ratio over 3.0 times on sustained basis
• Efficient working capital management

 

Downward factors:

• Decline in sales and operating margin resulting in RoCE below 7%
• Large, debt-funded capex weakening the capital structure and liquidity
• Further stretch in the working capital cycle weakening liquidity and financial risk profile

About the Group

Incorporated in 1992, HPL manufactures electric meters, lighting equipment, switchgears, wires and cables. The company is promoted by Mr Lalit Seth, Mr Rishi Seth and Mr Gautam Seth. It has seven manufacturing facilities in Haryana and Himachal Pradesh. It is listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

 

HEPL was incorporated in 2003. It is part of the HPL group and HPL holds 97% stake in the company. It manufactures energy-saving meters including energy management equipment, energy meters, digital meters and power meters. Its manufacturing facility is in Jabli, Himachal Pradesh.

 

HPL-Shriji Designs is a JV, which undertakes lighting projects. The JV was incorporated in 2010 and HPL holds 97% stake in the company.

 

HPL-Trimurthi Hitech Co Pvt Ltd-Shriji Designs (JV) undertakes lighting projects. The JV was incorporated in 2011 and HPL holds 94% stake in the company.

 

On consolidated basis, the group reported sales of Rs 320 crore and profit after tax (PAT) of Rs 6.94 crore in the first quarter of fiscal 2024, against Rs 296 crore and Rs 6.32 crore in the corresponding period of the previous fiscal.

Any other information: Not applicable