Rating Rationale
September 18, 2020 | Mumbai
Ingersoll Rand India Limited
Long-term rating downgraded to 'CRISIL AA/Stable', Removed from 'Watch Developing'
 
Rating Action
Total Bank Loan Facilities Rated Rs.100 Crore
Long Term Rating CRISIL AA/Stable (Downgraded from 'CRISIL AA+'; Removed from 'Rating Watch with Developing Implications')
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the long term bank facilities of Ingersoll Rand India Limited (IRIL) to 'CRISIL AA' from 'CRISIL AA+' while removed it from 'Rating Watch with Developing Implications' and assigned a 'Stable' outlook. The rating on the short-term bank facilities have been reaffirmed at 'CRISIL A1+'.
 
CRISIL has removed the rating on IRIL's long term debt facility from 'watch' following clarity from the IRIL management that the completion of the transaction between Ingersoll Rand Co, USA (IRCo, rated 'BBB/Stable/A-2' by S&P Global, currently known as Trane Technologies) and Gardner Denver Holdings (GDH, rated 'BB+/Negative by S&P Global, currently known as Ingersoll Rand Inc.) is not expected to have any material impact on the business and financial profile of the IRIL, except to the extent of trading of few products and parts. The industrial compressor business which vested in IRCo earlier has been combined with the business of GDH at the global level, and the combined entity is now Ingersoll Rand Inc. (IR Inc.)
 
IRIL, being a part of the industrial compressor segment, was also spun-off and this had triggered an open offer in India on account of an indirect acquisition of control over the company. The open offer was completed in July 2020 and post the completion of the open offer, IR Inc's shareholding in IRIL increased to 79.52% from earlier 74%. GDH also has an operating entity in India. This entity is expected to operate independently, both operationally and financially; mainly because the larger business for the entity is medical products, which is a different product line and is not related to IRIL's compressor business. However, no material financial support is likely to be provided by IRIL to the other group entities.
 
On May 15, 2019, CRISIL had placed its rating on the long term bank facilities of IRIL on watch owing to the ongoing transaction between IRCo and GDH. The two had entered into a definitive agreement, whereby IRCo would separate its industrial unit by way of a spin-off and merge it with GDH; while IRCo would operate as a provider of climate control solutions.
 
The rating revision on IRIL's long term facility follows CRISIL's expectation that IRIL's revenues will continue to remain at levels of Rs.650-700 crore (almost similar as between fiscals 2016-2020), even over the medium term owing to stiff competitive intensity, low investments by key end customer segments, and limited expansion of its product range. In fiscal 2021, revenues are also likely to dip by 20-25%, owing to muted demand given tepid economic conditions, exacerbated by the covid-pandemic. In the first quarter of fiscal 2021, IRIL's revenues de-grew by 52%. However, margins have improved over the years owing to better product mix, and remained in double digits even in the first quarter of fiscal 2021.
 
In addition to sluggish revenues, the company's net worth and liquid surpluses have depleted sizably due to special dividend payouts in fiscals 2019 and 2020, amounting to almost Rs 898 crores (including dividend distribution tax). The company though continues to maintain a debt free balance sheet. 
 
The ratings continues to reflect IRIL's established position with strong brands in the domestic compressor manufacturing segment, along with the technological and operational support from its parent, IR Inc. The ratings also factors in support from IRIL's healthy financial risk profile, supported by a debt free balance sheet.  These strengths are partially offset by the company's exposure to risks related to cyclical demand from its end-user segments, moderate susceptibility of profitability to volatile raw material prices and high dividend pay-outs leading to moderation in networth and liquidity.

Key Rating Drivers & Detailed Description
Strengths:
* Established market position and strong brand presence in compressor manufacturing segment
IRIL has a strong brand presence in the Indian compressor market. The company has a dominant market share of 50% and 40% respectively in the centrifugal compressor and rotary compressor segments. However, it faces stiff competition from the market leader, Atlas Copco India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+'). IRIL is the largest manufacturer in the small compressor segment in India. However, its presence in the domestic market is small, as most of its production capacity is dedicated to exports to various countries, primarily through IR Inc. Contribution from exports have remained steady at 18-20% of total revenues, over the last three fiscals ending 2020.
 
* Strong operational and technological support from the parent, IR Inc
IR Inc, with revenues exceeding USD 2.4 billion as of December 2019, holds 79.52% stake in IRIL. 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 compressors requirement from India. Exports (predominantly sales to affiliates) accounted for around 18% of IRIL's revenues in fiscal 2020. Furthermore, IRIL also meets a part of its input material requirement from its affiliates. CRISIL believes that IR Inc's support by way of close interaction with the management and access to a global product portfolio will support IRIL's business risk profile, over the medium term.
 
* Healthy financial risk profile and financial flexibility
IRIL's financial risk profile is healthy supported by debt free balance sheet. Its net worth at Rs 381 crores at March 31, 2020 is adequate but has moderated from over Rs.1000 crores, due to material dividend payout (higher than profits generated in fiscal 2019). The company invested around Rs. 100 crore to upgrade its facilities in Naroda, Ahmedabad over fiscals 2015 and 2016 leading to adequate manufacturing capacity. The company's ratio of total outside liabilities (TOL)/ tangible net worth (TNW), has remained below 0.5 times since fiscal 2017, and is likely to remain so, in the absence of material capital expenditure (capex) plans or expansion of working capital. IRIL is also expected to sustain its strong balance sheet over the medium term, enhancing its flexibility to raise funds. Cash surpluses were Rs.150 crores as of August 2020, but moderated from over Rs.775 crores in fiscal 2018.
 
Weakness:
* Exposure to risks related to cyclical demand in end-user industries and to volatility in raw material prices
IRIL's revenues over the past four fiscals have ranged between Rs 650-750 crore on account of high competitive intensity and lower capex undertaken by its customers in fiscal 2020. IRIL's customers in the industrial segment are largely based in capital-intensive sectors such as automotive, metals, pharmaceutical and textiles. Barring pharmaceuticals, demand from other sectors depends on the macro-economic environment and is therefore, cyclical. Further postponement of deliveries due to the outbreak of Covid-19 pandemic recently has led to lower revenues in the last quarter of fiscal 2020. Over the medium term, CRISIL believes that IRIL's revenues will remain vulnerable to cyclicality in investments in end-user industries and high competitive intensity.
 
In addition, IRIL's profitability is susceptible to fluctuations in foreign exchange rates and prices of raw materials and components (primarily castings made out of pig iron and steel). Material costs have ranged at 54-57% of operating income over the past three fiscals ending 2020, reflecting the impact on the cost structure and operating margin. Nevertheless, its operating margins have improved between fiscals 2018-2020, ranging between 13-16% owing to better product mix, and remained in low double digits even in the first quarter of fiscal 2021.
 
* High dividend pay-out leading to moderation in liquidity
In fiscals 2019 and 2020, the company had paid special dividends leading to a pay-out of Rs 792 crore and Rs 106 crore (including dividend distribution tax) respectively, which substantially moderated net worth and liquidity from over Rs 1100 crore and Rs 770 crore respectively in fiscal 2018 to over Rs 380 crore and Rs 160 crore respectively in fiscal 2020. Cash surpluses were at Rs 150 crore as of August 2020, 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 net worth.  
Liquidity Strong

Liquidity is strong with cash surplus of around Rs 150 crore as of August 2020. Fund based working capital lines are marginal, as the company has surplus cash. The company had nil debt as of August 2020 and is expected to operate as a debt free company over the medium term. Cash accruals are expected to be modest in the range of Rs 30-60 crore over fiscals 2021 to 2023, which would be sufficient to meet incremental working capital needs and low capital spends.

Outlook: Stable

CRISIL believes that 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 double digit levels. The company is also likely to maintain its healthy financial risk profile, marked by debt free balance sheet, and also gradually build up its liquidity over the medium term, following a prudent dividend philosophy.
 
Rating Sensitivity Factors
Upward Factors
* Better than expected growth in revenues on sustained basis, and operating profitability stabilizing between 13-15%
* Sustenance of strong balance sheet and material improvement in liquidity
 
Downward Factors
* Significant deterioration in operating performance with margins in mid-single digits (5-7%)
* Material debt funded capex or acquisitions or elongation of working capital cycle, leading to a sharp moderation in debt metrics; for instance TOL/TNW exceeding 1-1.2 times
* Further reduction  in cash surpluses and net worth, due to high dividend payout, capital reduction or share buy-back.

About the Company

IRIL was incorporated in 1921 as a subsidiary of IRCo. IRIL 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 exports to its parent and affiliates. The company has a manufacturing facility in Ahmedabad (Gujarat) and branch offices in most metros in India.

Key Financial Indicators
As on/for the period ended March 31 2020 2019
Revenue Rs crore 727 752
Adjusted profit after tax Rs crore 85 81
PAT margins % 11.6 10.8
Adjusted Debt/Adjusted Networth Times NA NA
Interest coverage Times NA NA
CRISIL Adjusted 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Cash Credit NA NA NA 1.0 NA CRISIL AA/Stable
NA Letter of credit & Bank Guarantee NA NA NA 87.0 NA CRISIL A1+
NA Proposed Non Fund based limits NA NA NA 12.0 NA CRISIL A1+
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
Fund-based Bank Facilities  LT/ST  1.00  CRISIL AA/Stable  23-06-20  CRISIL AA+/Watch Developing  04-11-19  CRISIL AA+/Watch Developing  03-07-18  CRISIL AA+/Stable      CRISIL AA+/Stable 
        16-04-20  CRISIL AA+/Watch Developing  14-08-19  CRISIL AA+/Watch Developing  20-04-18  CRISIL AA+/Stable       
        20-01-20  CRISIL AA+/Watch Developing  15-05-19  CRISIL AA+/Watch Developing  23-03-18  CRISIL AA+/Stable       
Non Fund-based Bank Facilities  LT/ST  99.00  CRISIL A1+  23-06-20  CRISIL A1+  04-11-19  CRISIL A1+  03-07-18  CRISIL A1+      CRISIL A1+ 
        16-04-20  CRISIL A1+  14-08-19  CRISIL A1+  20-04-18  CRISIL A1+       
        20-01-20  CRISIL A1+  15-05-19  CRISIL A1+  23-03-18  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 1 CRISIL AA/Stable Cash Credit 2 CRISIL AA+/Watch Developing
Letter of credit & Bank Guarantee 87 CRISIL A1+ Letter of credit & Bank Guarantee 87 CRISIL A1+
Proposed Non Fund based limits 12 CRISIL A1+ Proposed Non Fund based limits 11 CRISIL A1+
Total 100 -- Total 100 --
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 Engineering Sector
CRISILs Criteria for rating short term debt

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