Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities of Linde Engineering India Private Limited (LEIPL).

 

The ratings continue to reflect established position of LEIPL as an offshore provider of engineering and engineering, procurement, and construction (EPC) services for its parent, Linde PLC (rated ‘A/Stable/A-1' by S&P Global Ratings [S&P]). The ratings also factor in the company’s global operations, backed by strong operational linkages and business and financial support from the parent. Financial risk profile remains healthy, as characterised by debt-free position, strong liquidity of free cash of Rs 200 crore and unutilised bank limit of Rs 46 crore as on September 30, 2023. These strengths are partially offset by subdued operating performance in fiscal 2023 and exposure to intense competition and cyclicality in the EPC segment.

 

The operating margin moderated to 8.9% in fiscal 2023 (from 25% in fiscal 2022) owing to execution of lower-margin orders to gain entry into new technology domestically and the parent’s decision to discontinue all order execution in Russia, impacting the capacity utilisation. The margin may recover to 12-15% over the medium term, considering higher-margin orders to be executed in the EPC segment. Revenue grew 10% on the back of healthy order execution. Revenue is expected at Rs 1,200 crore in fiscal 2024 and Rs 1,300 crore in fiscal 2025, driven by strong outstanding order book (Rs 1,211 crore as on September 30, 2023) and over Rs 1,000 crore worth of orders under tendering, ensuring revenue visibility. 

 

The company registered negative net cash accrual of Rs 240 crore in fiscal 2023, driven by higher dividend outflow of Rs 323 crore; this led to total outside liabilities to tangible networth (TOL/TNW) ratio increasing to 2.73 times as on March 31, 2023, from 1.22 times a year ago. Net cash accrual is expected to remain subdued over the medium term owing to the dividend payout to the parent. However, higher-than-expected dividend outflow, impacting the cash surplus, will be a key credit monitorable. Despite moderation in the operating performance, working capital continues to be prudently managed with gross current assets (GCAs; net of cash) under 100 days in fiscal 2023 and nil fund-based utilisation. Maintaining the working capital cycle at these levels will remain a key rating sensitivity factor.

Analytical Approach

In line with its parent notch-up framework, CRISIL Ratings has notched up LEIPL’s standalone rating based on the expectation of strong support from the parent, Linde PLC.

Key Rating Drivers & Detailed Description

Strengths:

Established position as an offshore provider of engineering and EPC services to the global operations of parent

LEIPL is a wholly owned subsidiary of Linde PLC, formed after the merger of Linde AG and Praxair Inc in 2018. Linde PLC is the world’s largest industrial gas and engineering company with annual sales of around USD 31 billion. The company has an established position in the global industrial gas industry. It also has an engineering division, catering to industrial gas plants.

 

The cost-effectiveness of technically skilled manpower in India makes LEIPL the preferred provider of engineering design support to the global EPC projects of its parent. Moreover, the company will remain critical to parent operations in India and continue to enhance the competitive advantage of Linde PLC while bidding for orders globally. Further, although LEIPL operates as an independent subsidiary, it benefits from the technological know-how of its parent, which shall drive future growth.

 

Strong business and financial support from the parent

The company receives strong business support from the parent and executes contracts undertaken by Linde PLC in India. LEIPL is a designated hub for providing engineering services to the parent and group companies across the globe, from which it continues to receive significant orders. Common brand, full ownership and complete management control imply a strong moral obligation on the parent to support LEIPL if the need arises. Also, Linde PLC has provided letter of comfort to the company’s banks. The company will remain critical to Linde PLC's operations in India and will continue to benefit from the competitive position of the parent.

 

LEIPL had an outstanding order book of Rs 1,211 crore as on September 30, 2023, translating into order book to revenue ratio of around 1 time for fiscal 2024, which provides adequate revenue visibility in the near term. Around 73% of the order book comprises orders from the parent or group companies; this share is expected to remain high in the near term owing to substantial opportunities from group companies to promote new technology domestically.

 

Healthy financial risk profile

The financial risk profile stood healthy owing to debt-free position of the company over the past decade and free cash surplus of Rs 200 crore as on September 30, 2023; liquid surplus of over Rs 150-200 crore will be maintained over the medium term. Further, prudent working capital management, with GCAs (net of cash) under 100 days on the back of interest-free customer advances and back-to-back arrangements with the suppliers, lead to nil fund-based working capital utilisation. Given limited capital expenditure (capex) and working capital requirement, no debt is expected to be drawn over the medium term. While the TOL/TNW ratio increased to 2.73 times as on March 31, 2023, due to moderation of networth to Rs 206 crore from Rs 476 crore a year ago (15 months) owing to higher dividend outflow. Going forward, networth is expected at Rs 200-250 crore.

 

Revenue is expected at Rs 1,200 crore in fiscal 2024 and Rs 1,300 crore in fiscal 2025, driven by strong outstanding order book of Rs 1,211 crore as on September 30, 2023, and over Rs 1,000 crore worth of orders under tendering, ensuring revenue visibility. Further, the margin may recover to 12-15% in fiscal 2024 from 8.9% in fiscal 2023, though lower from 24-25% during fiscals 2020 to 2022 due to the focus shifting towards the EPC segment offering lower margin along with execution of procurement service and engineering service offering higher margins. Return on capital employed (RoCE) stood healthy at 37% in fiscal 2023, though moderated from ~70% in fiscal 2022.

 

Weaknesses:

Exposure to intense competition and cyclicality in the EPC industry along with risk related to contingent liabilities

The EPC segment for processing plants is highly fragmented, resulting in stiff competition. LEIPL is also susceptible to cyclicality inherent in the industry, which mirrors the cyclicality in end-user industries. Revenue depends on the capex plans of end-user segments such as steel, oil and gas, petrochemicals and pharmaceuticals. Given LEIPL's presence in the highly competitive and cyclical EPC segment, it is vulnerable to volatility in income and profitability.

 

Due to the nature of business, LEIPL has sizeable off-balance sheet liabilities, primarily bank guarantees given to clients. Hence, the company is exposed to the liquidity risk that may arise out of these contingent liabilities.

 

High dividend outflow

The company is paying dividend since fiscal 2020, which impacted net cash accrual. Rs 323 crore of dividend was paid in fiscal 2023, resulting in negative net cash accrual of Rs 240 crore. LEIPL expects dividend output of Rs 150 crore in the future as well (barring the current fiscal). However, higher-than-expected dividend outflow, significantly impacting networth or cash surplus, will be a key rating sensitivity factor.

Liquidity: Strong

Liquidity remained strong, with unencumbered cash and cash equivalents of Rs 200 crore and undrawn fund-based limit of Rs 46 crore as on September 30, 2023, and debt-free position. Net cash accrual remained negative in 2023 because of dividend payout of Rs 323 crore in March 2023 and is  expected to remain negative over the medium term on account of  dividend payout. However higher-than-expected dividend outflow impacting the cash surplus will be a key credit monitorable. Bank guarantee facility was utilised at about 43% during the 12 months through September 2023.

Outlook: Stable

LEIPL will continue to benefit from support and linkages with Linde PLC. LEIPL is likely to maintain healthy profitability and capital structure, with negligible external debt.

Rating Sensitivity Factors

Upward Factors

• Substantial and sustainable increase in revenue and profitability, leading to networth more than Rs 300 crore
• Sustenance of prudent working capital management and capital structure

 

Downward Factors

• Low revenue and profitability, resulting in a significant stretch in the working capital cycle and increase in debt and reduction in cash surplus below Rs 150 crore
• Higher-than-expected dividend outflow, impacting tangible networth
• Downgrade in S&P's rating on Linde PLC by more than two notches

About the Company

LEIPL was established in 1987 as a wholly owned subsidiary of Linde PLC. The Linde group is the world's leading supplier of industrial, process and specialty gases with operations across 100 countries. LEIPL primarily partners with Linde PLC in implementing lump-sum turnkey EPC contracts for hydrogen and synthesis gas plants in India and nearby countries. It also extends detailed offshore engineering support to the parent's global operations.

About the Parent

Linde AG merged with US peer, Praxair Inc, in 2018, becoming the largest industrial gases company in the world. The combined group, Ireland-incorporated Linde PLC, has about USD 28 billion in annual sales. It provides industrial gases (atmospheric and specialty) through onsite, merchant and package distribution to diversified end markets such as petroleum, chemicals, refining, manufacturing, metals and mining, healthcare and food and beverage. The group also has an engineering business, including procurement, project management and construction of industrial plants. Further, Linde PLC has a surface technologies business that supplies wear-resistant and high-temperature, corrosion-resistant metallic and ceramic coatings and powders.

Any other information: Not Applicable

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	Overdraft facility*	NA	NA	NA	46.0	NA	CRISIL AA/Stable
NA	Bank guarantee#	NA	NA	NA	250.0	NA	CRISIL A1+

*Interchangeable with short-term loans

#Interchangeable with letter of credit