Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank loan facilities and debt instruments of Lucas Indian Service Limited (LISL)

 

LISL’s standalone revenues registered a 16% growth in fiscal 2023 driven by healthy demand for its core products – electrical products from parent, Lucas-TVS Ltd (Lucas-TVS, rated ‘CRISIL AA+/Stable/CRISIL A1+’) and fuel injection parts from Delphi-TVS Technologies limited (Delphi TVS). Strong aftermarket demand and addition of new products across segments further aided growth. Operating profitability declined to 4.5% in fiscal 2023 from 5% in fiscal 2022 driven by increased material costs and product mix. With acquisition of majority stake in India Nippon Electricals Limited (INEL), INEL became the subsidiary of LISL from fiscal 2023. On a consolidated basis, the revenues crossed Rs. 1300 with incremental revenue contribution of Rs.664 crores from INEL. Consolidated operating profitability for fiscal 2023 was at 6.5% due to better contribution from INEL.

 

Revenues are expected to grow by 5-7% over the medium term driven by steady demand across segments. Operating margins are also expected to sustain at over 7% with steady improvement in operating leverage and contribution from high-margin products of INEL. The financial risk profile continues to remain healthy, with low debt on its balance sheet, and consolidated liquid surplus of over Rs.252 crores in LISL as on March 31,2023.

 

LISL further acquired 19.57% stake in INEL from JV partner, Mahle group for a consideration of Rs.176 crores in June 2023, taking its stake in INEL up to 70.4%, from 50.8% earlier. The transaction was funded through additional debt, inter-corporate deposit from parent and accruals. The debt availed will be repaid by LISL by end of December 2023 with available surplus fund , following which the company will become external debt free.

 

The ratings continue to reflect the company’s leadership position in the domestic organised aftermarket segment for auto electrical components, support received from the parent, Lucas-TVS, and healthy financial risk profile. These strengths are partially offset by exposure to intense competition from the unorganised sector, low operating profitability in trading business and susceptibility to inherent cyclicality in the automobile industry.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has consolidated LISL with INEL and its subsidiaries. Also, the parent notch-up criteria have been applied factoring support from parent, Lucas-TVS. LISL, being an integral part of Lucas-TVS’s presence in the domestic aftermarket, will continue to derive significant financial, operational and managerial benefits from the parent.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Leadership position in the domestic organised aftermarket for auto electricals: LISL is the leading distributor of auto electricals in the domestic organised aftermarket. It is the main distributor for Lucas-TVS (auto electrical spares) and Delphi-TVS (fuel injection spares) and INEL, both market leaders in their respective segments. It trades in a wide variety of products, such as electrical parts, fuel injection parts, batteries, lubricants, and windings. LISL’s diversified product mix provides stability to its revenue. Besides being a part of the TVS group, LISL has a strong brand image. The aftermarket segment for auto components, including auto electricals, witnessed modest growth in the recent past due to better technology, resulting in longer life of components and fewer breakdowns. However, the importance of organised players in this segment has increased because of increased emphasis on product quality, stemming from stringent emission norms and constant upgrading of technologies by original equipment manufacturers (OEMs). LISL will continue to benefit from its strong brand, wide distribution network and diverse product portfolio.

 

INEL, which also has part ownership by Mahle Electric Drives Japan Corporation (MEDJC), Japan – a company of Mahle Group, Germany, manufactures Electronic Ignition Systems (EIS) for two-wheelers (2Ws), three wheelers (3Ws) and portable engines. Over the years, the company has enlarged its customer base and supplies to leading two wheeler (2W) OEMs, three wheeler (3W) OEMs and genset manufacturers. INEL makes both digital and analog ignition products for 2W and 2/3 Ws and general purpose machines. The addition of INEL’s auto-electricals business from fiscal 2023 onwards, has boosted LISL’s consolidated revenues, and enhanced its presence in the auto-electricals segment. Besides, INEL’s operating profitability is also superior to that of LISL, which has resulted in better consolidated operating profitability.

 

• Strong support from the parent: LISL, being a wholly owned subsidiary of Lucas-TVS, has exclusive dealership for Lucas-TVS products in the aftermarket segment all over India, except south India. In south India, as per the understanding among the TVS group companies to not compete in each other’s territories, LISL shares the business with other group companies. LISL accounts for nearly 85% of Lucas-TVS’s total aftermarket sales, while Lucas-TVS’s products account for around 40-45% of LISL’s revenue. The mutually beneficial relationship between Lucas-TVS and LISL will continue to benefit the latter’s business risk profile. Furthermore, Lucas-TVS has extended financial support to fund LISL’s investments in other associate entities, including INEL. Besides, managerial oversight is also provided, and there are common directors on board of both LISL and Lucas-TVS. CRISIL Ratings expects timely support from Lucas TVS will be forthcoming in the event of any requirements.

 

• Healthy financial risk profile: The financial risk profile continues to be healthy because of low debt and sizeable consolidated networth of around Rs 767 crore as on March 31, 2023. LISL also had sizeable liquid surplus of Rs. ~74 crores as on September 30, 2023, which will be utilised to repay the short term debt of Rs.65 crores. Hence LISL will become debt free by end of fiscal 2024 . Debt protection metrics are strong due to steady cash accruals. Consolidation with INEL has improved the financial risk profile since INEL is also debt free, with a sizeable net worth, and healthy cash surplus of Rs.175 crores as on March 31,2023

 

Going forward, annual capital expenditure (capex) is expected to be moderate at around Rs 20 crore per annum over the medium term. Capex and working capital requirement are likely to be met largely through internal accrual and liquid surplus, with continued low reliance on debt. Hence, debt protection metrics will continue to be strong – interest cover and total outside liabilities to tangible net worth ratios stood at 41.88 times and 0.41 times in fiscal 2023

 

Weaknesses:

• Exposure to intense competition: LISL faces intense competition from unorganised players, which account for a sizeable portion of the aftermarket segment. Competition is intense in semi-urban markets due to the presence of home-grown mechanics. However, with constant upgrading of technology and the implementation of the goods and services tax, the unorganised sector might find it increasingly difficult to keep pace with the OEMs’ requirements, thereby narrowing the sector’s pricing advantage. Besides, LISL has been working closely with dealers and mechanics through various programmes aimed at increasing the penetration of its products. Also, due to relatively modest size of the auto electricals aftermarket and intense competition from unorganised players, revenue growth is relatively modest, resulting in moderate scale of operations for players in this segment, including LISL.

 

• Low profitability in trading business and part susceptibility to inherent cyclicality in automobile industry: LISL’s standalone operating profitability has been range-bound at 3-5% due to largely trading nature of operations, with manufacturing accounting for only about 10% of revenues. While the aftermarket demand is relatively steadier compared to the inherent cyclicality in the domestic OEM demand, any steep and prolonged slowdown also impacts the aftermarket. Besides, in the case of components manufactured by LISL, it becomes difficult to pass on increases in input prices to customers. While this is offset by compensation from Lucas TVS, pricing pressure is more pronounced during a downturn in the auto industry.

 

Consolidated operating profitability has improved to over 6% from fiscal 2023 onwards due to consolidation with INEL which records higher profitability of 8-8.5%, also resulting in better cash generation.

Liquidity: Strong

LISL has strong liquidity, driven by expectation of support from the parent Lucas TVS to provide ongoing and need based support, in case of exigencies. On a standalone basis, LISL’s liquidity is likely to be strong over the medium term, driven by expected cash accrual of more than Rs 60 crore per annum over the medium term and liquid surplus of over Rs 74 crores as on September 30, 2023. Besides, INEL also had cash surpluses and liquid investments of ~Rs.175 crores as on March 31,2023. The company has planned capex of Rs 20 crore per annum. Capex and working capital requirement will be funded through internal accrual and sparsely bank lines of Rs.56 crores.

Outlook: Stable

CRISIL Ratings believes LISL’s revenue and profitability will benefit from good demand prospects, consolidation of INEL and better operating leverage. Its financial risk profile will also continue to remain healthy, supported by improving cash generation, and low debt levels.

Rating Sensitivity factors

Upward factors:

• Upward change in the credit risk profile of the parent by 1 notch
• Substantial and sustained improvement in revenues and profitability (operating margin of >9-10%), also benefitting cash generation
• Sustenance of strong financial risk profile

 

Downward factors:

• Steep moderation in business performance also impacting cash generation
• Large debt funded capex impacting financial risk profile
• Material reduction in cash surpluses and reduced liquidity
• Downward change in Lucas TVS’s credit risk profile by 1 or more notches, or change in stance of support.

About the Company

LISL, a 100% subsidiary of Lucas-TVS, was incorporated in 1930 as an overseas venture of Lucas Industries PLC, UK. The company primarily sells, and services auto electrical components manufactured by Lucas-TVS, and diesel fuel injection equipment manufactured by Delphi-TVS Diesel Systems Ltd. LISL holds 70.4% stake in INEL. Synergy Shakti Private Ltd (SSPL), which is 46.67% held by LISL, is engaged in the conversion of copper into components used in alternators and motors manufactured by Lucas-TVS.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Commercial Paper	NA	NA	7-365 days	5	Simple	CRISIL A1+
NA	Non-Convertible Debentures$	NA	NA	NA	25	NA	CRISIL AA/Stable
NA	Bank Guarantee#*	NA	NA	NA	10	NA	CRISIL A1+
NA	Bill Discounting*	NA	NA	NA	58	NA	CRISIL A1+
NA	Cash Credit*	NA	NA	NA	25	NA	CRISIL AA/Stable
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	5	NA	CRISIL A1+

$Yet to be issued

#Interchangeable with letter of credit of up to Rs 5 crore

*Interchangeable with working capital demand loan of up to Rs 66 crore