Rating Rationale
July 21, 2022 | Mumbai
Happy Forgings Limited
Rating upgraded to 'CRISIL AA-/Stable'; Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities RatedRs.485 Crore (Enhanced from Rs.270 Crore)
Long Term RatingCRISIL AA-/Stable (Upgraded from 'CRISIL A+/Positive')
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Happy Forgings Limited (HFL) to ‘CRISIL AA-/Stablefrom ‘CRISIL A+/Positive.

 

The rating action reflects the improvement in the performance of the company in fiscal 2022 and the expectation that the trajectory of better performance will be sustained over the medium term. The healthy financial risk profile is likely to be sustained as well. Capacity enhancement, contribution from new orders and increasing proportion of exports will drive sustenance of improved business risk profile in the medium term. Revenue is expected to grow 15-18% per annum over the next three fiscals, supported by healthy segment and client diversity across the commercial vehicle (CV) and tractor segments, and diversified product offerings, mitigating the impact of demand slowdown in a segment. Furthermore, the company commissioned a 8,000-tonne press in fiscal 2021 and is setting up a 14,000 tonne press, which will be commissioned in fiscal 2023. The operating margin is expected to be healthy at 26-28%. Consequently, net cash accrual is expected to increase to Rs 200-250 crore per annum on sustained basis.

 

Performance improved sharply in fiscal 2022 supported by recovery in demand, especially in the CV segment, which offset the impact of tepid demand in the tractor segment. Revenue grew by 46% year-on-year to Rs 851 crore in fiscal 2022. The operating margin stood at 26.8%, supported by increasing proportion of higher-margin machined products and cost-cutting initiatives undertaken by the company. Better prospects for CVs after two weak years and ramp up in utilisation in the new presses will aid revenue growth over the medium term. Operating profitability will continue to be supported by change in product mix to heavier products which offer better margins, and remain healthy at 25-27%.

 

The financial risk profile has benefitted from healthy cash accrual, prudent working capital management and equity raised in fiscal 2019. This has enabled it to maintain comfortable debt metrics. The total outside liabilities to tangible networth (TOLTNW) ratio improved to below 0.45 time over the past four years from above 2 times owing to healthy cash accrual and prudent capital expenditure (capex). Interest coverage ratio was over 22 times, while the ratio of debt to earnings before interest depreciation, tax, depreciation and amortisation (Ebitda) was 1 time in fiscal 2022. HFL is expected to undertake capex of Rs 175 crore in fiscal 2023 for plant installations and routine maintenance. The capex is expected to be partly funded by debt of Rs 100 crore. Annual capex of Rs 35-40 crore will be funded through internal accrual. Hence, the TOLTNW ratio is expected below 0.4 time over the medium term. The financial risk profile is expected to remain healthy, supported by strong cash generation, resulting in continued comfortable debt metrics. Liquidity will remain adequate, supported by healthy cash accrual of over Rs 250 crore over the medium term, which will sufficiently cover debt obligation, working capital requirement and capex. Utilisation of fund-based bank limit of Rs 242 crore was moderate over the past six months.

 

The rating continues to reflect the company’s established position in the forged and machined components market, healthy segmental and customer diversity, and healthy financial risk profile. These strengths are partially offset by working capital-intensive operations, susceptibility to sharp cyclical downturns of commercial vehicle (CV) or tractor segments.

Analytical Approach

CRISIL Ratings has considered the standalone business, financial and management risk profiles of HFL.

Key Rating Drivers & Detailed Description

Strengths:

Healthy business risk profile supported by strong relationships with customers

The company has been in the automotive forgings segment for over three decades, and manufactures 50-60 types of forged components in 10-15 sizes and variants per product. Furthermore, strong relationship with customers such as Ashok Leyland Ltd (ALL), Bharat Gears Ltd, Graziano Transmission India Pvt Ltd, JCB India Ltd. and VE Commercial Vehicles is reflected in repeat orders. With increase in capacity revenue growth is also expected to increase due to increasing share of business with existing clients and addition of new clients. Also, HFL is a preferred supplier for ALL and started with supplies of suspension for trucks and gradually penetrated into suspension and crankshafts requirement, thereby increasing penetration per vehicle and share of business. Over the medium term, and with utilisation levels being upped at new presses, HFL is expected to benefit from strong linkages with existing customers as well as addition of new customers, including Tata Motors Ltd. Machining proportion over the years has been increasing which supported operating margin to improve to over 25% on sustained basis

 

Healthy segmental and customer diversity with improving product range

Sales to cyclical sectors like tractors and CV vehicles contributed 45% and 30% of the revenue respectively in fiscal 2022. The balance 25% is derived from passenger cars and utility vehicles, off-highway vehicles, railways and scrap sales. HFL also has good customer diversity and supplies to leading players in both the tractor and CV segments; it supplies to more than 40 customers with its largest customer accounted for only 14% of revenues in fiscal 2022 and top 5 contributing to around 46%. Exports also increased to 11% in fiscal 2022. With commissioning of newer presses, HFL will further diversify its portfolio to include newer customers as well as increase its share in segments other than MHCV and tractors. HFL has also started diversifying by moving into the non-automobile space like wind, oil& gas etc.

 

Strong financial risk profile

Financial risk profile has improved over the years on the back of healthy cash accrual, progressive debt repayment and equity infusion in fiscal 2019. Motilal Oswal Private Equity (MOPE) invested Rs 200 crore in HFL in fiscal 2019, which helped HFL repay debt as well as fund capex. Gearing is estimated to improve to 0.16-0.20 time in fiscal 2023, from 0.3 times as of March, 2022. In fiscal 2023, company is expected to undertake capex of Rs. 175 crore. Annual capex is estimated at Rs.35-40 crore from fiscal 2024 onwards. The capex in fiscal 2022, is expected to be part funded by debt of Rs. 100 crore. Despite the addition of debt, the financial risk profile is expected to remain healthy, as cash generation will continue to remain strong. The gearing is expected be below 0.3-0.4 time and debt to Ebitda ratio is expected at 0.8-1 time over the medium term.

 

MOPE’s fund, India Business Excellence Fund–III, has 11.76% stake in HFL. The exit  to MOPE can be through other routes including sale to another private equity player or through an initial public offering Any material change in this understanding or debt raise by HFL  will be key monitorables.

 

Weakness:

Large working capital requirement: Operations are working capital intensive, as reflected in gross current assets (GCAs) of 191 days as on March 31, 2022 The high GCA days are mainly due to sizeable inventory, given the large product range and high lead time required for manufacturing. Operations will remain working capital intensive due to increasing exports which are more working capital intensive. Also, increasing proportion of exports may keep debtors at elevated level. Debtor days have varied between 118 days to 94 days in the past five fiscals. Prudent management of the same remains a rating sensitivity factor.

 

Susceptibility to cyclicality in the CV and tractor segments: The CV segment is vulnerable to growth in industrial and agricultural production, freight movement, share of road transport in freight movement, changes in freight rates and fuel prices, profitability of truck operators, state transport undertakings and government policies. Also, tractor demand is vulnerable to the vagaries of monsoon and farm income. Capex coinciding with weak demand may pose risk of slower ramp-up of capacities and will remain a key monitorable.

 

Hence, high dependence on these segments poses a risk to revenue and profitability. While HFL has been gradually diversifying its customer base by addition of new clients, revenues and profitability will remain susceptible to segmental concentration, given that HFL derives around 45% from CV segment and 30% tractor segment. This fiscal, CV demand is expected to remain on a recovery mode recover after consecutive weak years, while tractor demand is expected to remain moderate.

Liquidity: Strong

Expected cash accrual above Rs 250 crore per annum will sufficiently cover yearly term debt obligation of Rs 15-20 crore over the medium term. Utilisation of fund-based limit of Rs 242 crore was moderate at 46% on average during the 12 months through March 2022. Steady accrual and unutilised bank lines should be sufficient to meet working capital requirement and debt obligation over the medium term.

Outlook: Stable

CRISIL Ratings believes HFL's business risk profile will benefit over the medium term from the initiatives it has taken to increase share of business from existing domestic and overseas customers, and enhance opportunities in both the markets. Furthermore, improving cash accrual should help sustain the healthy financial risk profile over the medium term despite the ongoing capex cycle.

Rating Sensitivity Factors

Upward factors:

  • Sustained double digit revenue growth while maintaining healthy operating margin supported by diversification of customer base and product mix leading to better than cash accruals of over Rs. 400-450 crore
  • Sustenance of healthy debt metrics, despite high capital intensity – gearing remains below 0.30 times

 

Downward factors:

  • Slower-than-expected recovery in performance, most likely due to sluggish business performance resulting in operating margin of below 15%, and cash accruals below Rs.150 crore
  • Large debt-funded capex or acquisitions, or buyback or dividend payout, leading to deterioration of debt metrics – gearing sustaining above 1.5 time

About the Company

Established in 1979 by Mr Paritosh Kumar Garg (Chairman cum  Managing Director) and his father, Mr Channan Ram Garg & and further well supported by Mr. Ashish Garg, Managing Director (son of Mr. Paritsoh Kumar Garg), HFL manufactures forged and machined components, primarily crankshafts, for the automotive and non-automotive segments. facility in Ludhiana has forging capacity of 74,000 TPA and machining capacity of 45,000 TPA.

Key Financial Indicators

As on/for the period ended March 31

 Unit

2022

2021

Revenue

Rs.Crore

851

583

Profit After Tax (PAT)

Rs.Crore

131

87

PAT Margin

%

15.4

14.8

Adjusted debt/adjusted networth

Times

0.30

0.23

Interest coverage

Times

22.90

14.68

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)

Complexity level

Rating Assigned with Outlook

NA

Long Term Loan

NA

NA

30-June-28

40

NA

CRISIL AA-/Stable

NA

Cash Credit

NA

NA

NA

90

NA

CRISIL AA-/Stable

NA

Long Term Loan

NA

NA

31-Mar-28

75

NA

CRISIL AA-/Stable

NA

Long Term Loan

NA

NA

31-Mar-28

75

NA

CRISIL AA-/Stable

NA

Long Term Loan

NA

NA

31-Aug-26

55

NA

CRISIL AA-/Stable

NA

Cash Credit

NA

NA

NA

80

NA

CRISIL AA-/Stable

NA

Cash Credit

NA

NA

NA

70

NA

CRISIL AA-/Stable

Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 485.0 CRISIL AA-/Stable   -- 11-08-21 CRISIL A+/Positive 28-08-20 CRISIL A/Stable 25-01-19 CRISIL A/Positive CRISIL A-/Stable
      --   --   -- 06-05-20 CRISIL A/Stable   -- CRISIL BBB+/Stable
      --   --   -- 30-04-20 CRISIL A/Stable   -- --
Non-Fund Based Facilities ST   --   --   --   --   -- CRISIL A2+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 70 ICICI Bank Limited CRISIL AA-/Stable
Cash Credit 80 HDFC Bank Limited CRISIL AA-/Stable
Cash Credit 10 YES Bank Limited CRISIL AA-/Stable
Cash Credit 80 YES Bank Limited CRISIL AA-/Stable
Long Term Loan 55 Bajaj Finance Limited CRISIL AA-/Stable
Long Term Loan 40 HDFC Bank Limited CRISIL AA-/Stable
Long Term Loan 75 ICICI Bank Limited CRISIL AA-/Stable
Long Term Loan 75 YES Bank Limited CRISIL AA-/Stable

This Annexure has been updated on 21-Jul-2022 in line with the lender-wise facility details as on 11-Dec-2021 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for rating short term debt

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