Rating Rationale
February 01, 2019 | Mumbai
Hindustan Aeronautics Limited
Issuer not cooperating, based on best-available information; Ratings migrated to 'CRISIL AAA/Stable/CRISIL A1+ Issuer not cooperating' ; Bond Withdrawn
 
Rating Action
Total Bank Loan Facilities Rated Rs.1500 Crore
Long Term Rating CRISIL AAA/Stable (ISSUER NOT COOPERATING; Rating Migrated')*
Short Term Rating CRISIL A1+ (ISSUER NOT COOPERATING; Rating Migrated)* 
 
Rs.450 Crore Bond CRISIL AAA/Stable (ISSUER NOT COOPERATING; Migrated from 'CRISIL AAA/Stable' and Rating Withdrawn)*
Rs.450 Crore Short Term Debt CRISIL A1+ (ISSUER NOT COOPERATING; Rating Migrated)*
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*Issuer did not cooperate; based on best-available information
Please note that the rating(s) are based on best available information with the credit rating agency: the entity whose debt is being published via this press release did not provide the requisite information needed to conduct the rating exercise and is therefore classified as 'non cooperative'.
Non cooperation by Issuer

CRISIL has been consistently following up with Hindustan Aeronautics Ltd (HAL) for obtaining information, through e-mails dated October 30, 2018, November 29, 2018, November 30, 2018, and December 31, 2018, apart from telephone calls and a non-cooperation letter. However, the issuer remained non-cooperative and has not shared any information on either the financial performance or its future plans.
 
Investors, lenders and all other market participants should exercise due caution while using the rating assigned/reviewed with the suffix, 'issuer not cooperating'. These ratings lack a forward-looking component as they have been arrived at without any management interaction, and are based on best available, limited or dated information on the company.

Detailed Rationale

CRISIL has migrated the ratings on the bank facilities and short-term debt of HAL to 'CRISIL AAA/Stable/CRISIL A1+ Issuer not cooperating'. Additionally, CRISIL has withdrawn its rating on the bonds of Rs 450 crore, as they have not been issued till date.
 
The company's credit risk profile continues to benefit from the strategic position as main aviation equipment supplier to the Indian defence sector, a strong order book, superior technological absorption capabilities, a sound financial risk profile, and expected support from the Government of India (GoI) in case of any exigencies. These strengths are partially offset by exposure to revenue concentration risk on account of high dependence on the Indian defence sector, and a stretched working capital cycle.

Analytical Approach

The ratings factor in the support expected from GoI in case of any exigencies. CRISIL believes that HAL will receive distress support from the government for timely repayment of debt by virtue of the company's strategic position as the major domestic supplier of aviation equipment to the Indian defence sector and the majority shareholding of GoI (89.97% as on December 31, 2018). Further, investments in the defence sector are critical to the government as seen from sustained annual budget allocation to the sector.

Key Rating Drivers & Detailed Description
Strengths:
* Strategic position as the main aviation equipment supplier to the Indian defence sector
HAL occupies a strategic position as the major domestic supplier of aviation equipment to the Indian defence sector. The company is also the primary provider of maintenance and overhauling services to the defence forces. It also benefits from the government's healthy annual budget allocation for the defence sector on an ongoing basis (Rs 2.95 lakh crore in the Union Budget for fiscal 2019). HAL has also identified growth opportunities in the non-defence segment to diversify its revenue base; this comprises advanced light helicopters, structures and tankages for launch vehicles of Indian Space Research Organisation, and marine gas turbine overhaul and sub-assembly supplies to global majors.
 
* Strong order book and superior technology-absorption capability
As on March 31, 2018, there were orders of Rs 61,123 crore, providing revenue visibility over the medium term. Superior technology-absorption capability has led to in-house development capability for licensed production of aircraft, provision of repairs and overhaul services, and indigenous design and development of aircraft and helicopters.
 
* Sound financial risk profile and expected government support in case of any exigencies
The financial risk profile is backed by healthy profitability, low gearing, and sound debt coverage metrics. Profit after tax has been over Rs 2,000 crore per fiscal in the five fiscals through 2018. Though profitability is healthy, significant dividend payments to GoI has contained the growth in networth (Rs 10,354 crore as on September 30, 2018). The gearing was low at 0.09 time as on March 31, 2018, supported by low debt and the strong networth. Debt protection metrics are also sound with interest coverage and net cash accrual to total debt ratios at over 10 times and 1 time, respectively, in the five fiscals through 2018.
 
Debt and networth stood at around Rs 600 crore and Rs 10,354 crore, respectively, as on September 30, 2018. Although the company has thereafter availed additional debt to support working capital requirement, the capital structure remains intact backed by the healthy networth.
 
Furthermore, the government is expected to provide support in case of any exigencies, given the strategic position of the company as the major domestic supplier of aviation equipment to the Indian defence sector and the majority shareholding of GoI (89.97% as on December 31, 2018). Further, investments in the defence sector are critical to the government, as evident from the sustained annual budget allocation to the sector.
 
Weaknesses
* Significant revenue concentration in the Indian defence sector
The company derives 80-90% of its revenue from the Indian defence sector, primarily aviation. Inability to fulfil critical defence needs may lead to increased share of private or foreign players in the defence budget of Indian Air Force (IAF). Also, lowering of the defence budget could impact revenue.
 
* Stretched working capital cycle
Pending receivables from customers (Indian defence entities) increased to Rs 9,845 crore as on September 30, 2018, from Rs 7,742 crore as on March 31, 2018. This, coupled with higher inventory impacted liquidity: cash and cash equivalents reduced to Rs 725 crore as on September 30, 2018, from Rs 6,524 crore as on March 31, 2018. Receivables are expected to reduce over the next few months supported by expected release of funds by the Ministry of Defence. Further, GoI would support the company in case of any exigencies.
Liquidity

Liquidity deteriorated over the past 12 months. Cash and cash equivalents reduced sharply to Rs 725 crore as on September 30, 2018, from Rs 6,524 crore as on March 31, 2018. This was on account of the increase in pending receivables from customers (Indian defence entities) to Rs 9,845 crore as on September 30, 2018, and resulted in additional borrowings thereafter. Though receivables are expected to improve over the next few months supported by release of funds by the Ministry of Defence, limited interaction with the management restricts CRISIL's ability to assert the same. Timely release of funds will remain a key monitorable. Liquidity is also supported by the financial flexibility available with the company as reflected from low gearing of below 0.10 time as on September 30, 2018. Further, government support is expected in case of any exigencies to support the liquidity and debt repayment requirement.

Outlook: Stable

CRISIL believes HAL will maintain its strong business and financial risk profiles over the medium term because of its strategic importance to the government and the business support it receives from IAF. The company is also expected to benefit from government support in case of any exigencies. The outlook may be changed to 'Negative' in case of any dilution in HAL's strategic importance to the Indian defence sector or continued deterioration in liquidity.

About the Company

Incorporated in 1964, and listed on the Bombay Stock Exchange and National Stock Exchange in 2018, HAL is a Navratna company with the GoI having majority shareholding (89.97%). The company has a memorandum of understanding with the Ministry of Defence's Department of Defence Production and Supplies. HAL is a vertically integrated aerospace company, and designs, manufactures, and overhauls aviation products. It has 19 production units supported by research and development centres at Kanpur, Lucknow, and Korwa in Uttar Pradesh; Koraput in Odisha; Bengaluru; Nashik in Maharashtra; and Hyderabad.

HAL had revenue and PAT of Rs 5,423 crore and Rs 650 crore, respectively, in the first half of fiscal 2019, as against Rs 5,285 crore and Rs 398 crore, respectively, during the corresponding period of the previous fiscal. 

Key Financial Indicators
Financials as on / for the period ended March 31   2018 2017
Revenue Rs crore 18,318 17,653
Profit after tax (PAT) Rs crore 2,070 2,616
PAT margin % 11.3% 14.8%
Adjusted debt/adjusted networth Times 0.09 0.09
Interest coverage Times 342 227
 

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 Short term debt NA NA 7-365 days 450 CRISIL A1+/Issuer Not Cooperating
NA Bond** NA NA NA 450 Withdrawn/Issuer Not Cooperating
NA Bank Guarantee NA NA NA 20 CRISIL A1+/Issuer Not Cooperating
NA Cash Credit NA NA NA 450 CRISIL AAA/Stable/Issuer Not Cooperating
NA Letter of Credit NA NA NA 1030 CRISIL AAA/Stable/Issuer Not Cooperating
*Issuer did not cooperate; based on best-available information
**has not been issued till date
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
Bond  LT  0.00
31-01-19 		 Withdrawn(Issuer Not Cooperating)*      28-03-18  CRISIL AAA/Stable  29-06-17  CRISIL AAA/Stable  21-06-16  CRISIL AAA/Stable  CRISIL AAA/Stable 
Short Term Debt  ST  450.00  CRISIL A1+ (Issuer Not Cooperating)*      28-03-18  CRISIL A1+  29-06-17  CRISIL A1+  21-06-16  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  450.00  CRISIL AAA/Stable (Issuer Not Cooperating)*      28-03-18  CRISIL AAA/Stable  29-06-17  CRISIL AAA/Stable  21-06-16  CRISIL AAA/Stable  CRISIL AAA/Stable 
Non Fund-based Bank Facilities  LT/ST  1050.00  CRISIL A1+ (Issuer Not Cooperating)*      28-03-18  CRISIL A1+  29-06-17  CRISIL A1+  21-06-16  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
*Issuer did not cooperate; based on best-available information
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 20 CRISIL A1+/Issuer Not Cooperating Bank Guarantee 20 CRISIL A1+
Cash Credit 450 CRISIL AAA/Stable/Issuer Not Cooperating Cash Credit 450 CRISIL AAA/Stable
Letter of Credit 1030 CRISIL A1+/Issuer Not Cooperating Letter of Credit 1030 CRISIL A1+
Total 1500 -- Total 1500 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Framework for Assessing Information Adequacy Risk
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Entities Based on Government Support

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