Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the bank loan facilities of Ingersoll Rand India Limited (IRIL).

 

The ratings continue to reflect the established position of IRIL with strong brands in the domestic compressor manufacturing segment, along with technological and operational support from its ultimate parent, IRIL (IR Inc; upgraded to ‘BBB-/Positive’ from 'BB+/Positive’ in March 2023 by S&P Global Ratings). The ratings also factor healthy financial risk profile of IRIL, supported by a debt-free balance sheet. These strengths are partially offset by exposure to risks related to cyclical demand from end-user segments, susceptibility of profitability to volatile raw material prices and high dividend pay-outs leading to moderation in networth and liquidity.

 

Revenue grew 26% in fiscal 2023, at the back of a stronger volume and realisation growth. While export sales (~one fourth of total sales) increased ~40%, domestic sales reported ~22% growth in fiscal 2023. Operating margin rose by ~500 basis points to ~21.7%, led by moderation in input prices in fiscal 2023. ln the first quarter of fiscal 2024, revenue stood at Rs 305 crore and operating margin at 23.4%; the margin is projected at 19-20% over the medium term.

 

The company is setting up a new manufacturing plant worth about Rs 170 crore in Gujarat to increase its manufacturing capacity (of air compressors) by 5,000 units per month (to 15,000 units per month). The plant is expected to be commissioned in the second half of fiscal 2025 and will be entirely funded via cash accrual.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of IRIL.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position and strong brand presence in the compressor manufacturing segment: IRIL has strong brand presence in the Indian compressor market. The company has a dominant market share of around 48% in the centrifugal compressor segment. However, it faces competition from prominent players such as Atlas Copco India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Elgi Equipments Ltd (‘CRISIL AA/Stable/CRISIL A1+’) and Kirloskar Pneumatic Company Ltd (‘CRISIL AA-/Stable/CRISIL A1+).

 

• Strong operational and technological support from the parent, IR Inc: IR Inc, with revenue of over USD 5.9 billion for the year ended December 2022, holds 75% stake in IRIL (directly holds 1% and 74% through its wholly owned subsidiary -- Ingersoll-Rand Industrial U S Inc). It provides mission-critical air, fluid, energy, specialty vehicles and medical technologies; coupled with services and solutions to increase industrial productivity and efficiency. The parent provides requisite technological support to IRIL and procures a part of its global small compressor requirement from India. Exports (sales to affiliates) accounted for around 24% of IRIL’s revenue in fiscal 2023. Furthermore, IRIL meets a part of its input material requirement from its affiliates. Support of IR Inc, by way of close interaction with the management and access to a global product portfolio, should continue to support the business risk profile of IRIL.

 

• Healthy financial risk profile: Financial risk profile should remain supported by a debt-free balance sheet. Networth stood adequate at over Rs 570 crore as on March 31, 2023; however, it moderated from over Rs 1,000 crore in fiscal 2018 due to material dividend payout (higher than profits generated in fiscal 2019). On December 22, 2022, the Board of Directors had approved setting up a new manufacturing plant in Gujarat to increase the manufacturing capacity of the existing products and to additionally manufacture new products (from 10,000 units per month to 15,000 units per month) for Rs 170 crore spread over fiscals 2023 to 2025. Healthy capital structure with total outside liabilities to tangible networth (TOL/TNW) ratio below 0.5 time since fiscal 2017 and is likely to remain so going forward as well. Debt protection metrics continue to remain strong with interest coverage ratio of ~113 times and net cash accruals to total debt (NCATD) ratio of ~9 times for fiscal 2023. IRIL is also expected to sustain its strong balance sheet over the medium term, enhancing its flexibility to raise funds.

 

Weaknesses:

• Exposure to risks related to cyclical demand in end-user industries and volatility in raw material prices: Revenue of IRIL has been restricted at Rs 600-1,200 crore over the past five fiscals due to intense competitive pressure. Customers in the industrial segment are largely based in capital-intensive sectors such as automotive, metals, pharmaceuticals and textiles. Barring pharmaceuticals, demand from other sectors depends on the macro-economic environment and is therefore, cyclical. Vulnerability to cyclicality in end-user investments and competitive intensity may persist.

 

Further, profitability is susceptible to fluctuations in foreign exchange rates and prices of raw materials and components (castings made of pig iron and steel). Material costs were 54-62% of operating income over the four fiscals through 2023, reflecting its impact on the cost structure and operating margin. Nevertheless, the operating margin improved to 13-21% between fiscals 2018 and 2022 owing to better product mix.

 

• High dividend pay-outs leading to moderation in liquidity: The company paid special dividends of Rs 792 crore in fiscal 2019, Rs 106 crore in fiscal 2020 and Rs 95 crore in fiscal 2023. In fiscal 2023, the dividend was due to IRIL completing 100 years. Consequently, networth moderated to Rs 578 crore in fiscal 2023 from over Rs 1,100 crore in fiscal 2018 and liquidity to Rs 277 crore from Rs 770 crore. The company continues to hold healthy cash surpluses, while bank lines were completely unutilised. Dividend pay-out is expected to normalise over the medium term, facilitating better cash surplus build-up and improvement in networth.

Liquidity: Strong

Liquidity is supported by cash surplus of around Rs 277 crore as of March 2023 and unutilised fund-based working capital lines. The company had nil debt as on March 31, 2023, and is expected to operate as a debt-free company over the medium term. The company has planned a capital expenditure (capex) over the medium term. However, annual net cash accrual is expected to be sufficient at over Rs 100 crore each year in the medium term to meet incremental working capital needs and capital spends.

 

ESG profile

The environment, social and governance (ESG) profile of IRIL supports its already strong credit risk profile. The industrial machinery and consumable sector has a significant impact on the environment owing to emissions, waste generation and water consumption. The sector has a social impact due to its nature of operations, affecting local community and involving health hazards. IRIL has continuously focused on mitigating its environmental and social risks.

 

Key highlights

• IRIL is committed to reduce 60% greenhouse gas emission by 2030.
• The company has consumed lower energy as compared to peer average. It has implemented various projects in fiscal 2023 such as use of high-volume, low-speed fans, use of variable frequency drives in air handling units and replacement of plant compressor for reducing greenhouse emissions.
• 66% of its third-party purchasing spend is through local suppliers.
• The governance structure is characterised by ~38% of its board comprising independent directors, split in chairman and CEO position, dedicated investor grievance redressal system and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. Commitment of IRIL to ESG principles will play a key role in enhancing stakeholder confidence.

Outlook: Stable

IRIL will continue to sustain its established business position in the domestic compressor segment over the medium term, with technical and product support from its parent. Its operating profitability is also expected to sustain at healthy levels. The company is likely to maintain its healthy financial risk profile, as indicated by debt-free balance sheet and gradual build-up of liquidity over the medium term, following a prudent dividend philosophy.

Rating Sensitivity factors

Upward factors:

• Strong double digit growth of 15-20% in revenue on sustained basis, while maintaining healthy operating profitability
• Sustenance of strong balance sheet and material improvement in liquidity

 

Downward factors:

• Significant deterioration in operating performance
• Material debt-funded capex or acquisitions or a sizeable stretch in the working capital cycle, leading to sharp moderation in debt protection metrics; for instance, TOL/TNW ratio exceeding 1.0-1.2 times
• Further reduction in cash surplus and networth, due to high dividend payout, capital reduction or share buy-back

About the Company

IRIL, incorporated in 1921, manufactures air compressors of various capacities for the domestic and export markets. The company derives revenue from the sale of reciprocating, rotary and centrifugal compressors and spares in the domestic market, and from export to its parent and affiliates. It has a manufacturing facility in Ahmedabad (Gujarat) and branch offices in most metros across India.

Key Financial Indicators*

As on/for the period ended March 31		2023	2022
Revenue	Rs crore	1,154	912
Adjusted profit after tax (PAT)	Rs crore	183	110
PAT margin	%	15.8	12.1
Adjusted debt/adjusted networth	Times	0.01	0.01
Interest coverage	Times	113.48	73.88

*CRISIL Ratings-adjusted numbers

Any other information: Not applicable