Rating Rationale
October 31, 2020 | Mumbai
Lucas Indian Service Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.98 Crore
Long Term Rating CRISIL AA/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.25 Crore Non Convertible Debentures CRISIL AA/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Rs.5 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities and non convertible debentures of Lucas Indian Service Limited (LISL) to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL AA'. The rating on the short-term bank facility and commercial paper programme has been reaffirmed at 'CRISIL A1+'.

The outlook revision follows a similar rating action on the parent, Lucas-TVS Ltd (Lucas-TVS; 'CRISIL AA+/Negative/CRISIL A1+'), following two consecutive years of moderation in business performance, due to prolonged slowdown in the automotive (auto) industry, across business segments, which has been exacerbated by the Covid-19 pandemic.

LISL's operating performance is also expected to remain subdued in fiscal 2022 marked by revenue decline of 6-8%, this follows 10% decline in fiscal 2020. The pandemic led slowdown is driving domestic automobile demand (barring tractors) to consecutive years of double digit decline in fiscal 2021. While LISL derives about 80% of revenue from the aftermarket segment, replacement demand will also decline in fiscal 2021 largely due to weak sales in the first quarter. Besides, loss of sales in March 2020 and higher provisioning as a prudent financial policy resulted in steep decline in operating margin to 0.15% in fiscal 2020, compared with 2.3% in fiscal 2019. However, with various cost improvement measures, the operating margin is expected to improve to 1-2% in fiscal 2021. Revenue growth is likely to recover in fiscal 2022 with anticipated demand revival.
 
Despite moderation in operating performance, the financial risk profile continues to be healthy because of low debt and adequate networth of Rs 176 crore as on March 31, 2020. LISL also had sizeable liquid surplus of over Rs 70 crore as on September 30, 2020.
 
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 because of the risks inherent in the trading business and susceptibility to inherent cyclicality in the automobile industry.

Analytical Approach

For arriving at the ratings, CRISIL has factored in support from 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.

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), 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.
 
* Strong business 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% of LISL's revenue. The mutually beneficial relationship between Lucas-TVS and LISL will continue to benefit the latter's business risk profile. Furthermore, in the past, Lucas-TVS has extended financial support to fund LISL's investments in other associate entities. 
 
* Healthy financial risk profile
The financial risk profile is supported by low total outside liabilities to tangible networth ratio of 0.68 time as on March 31, 2020, and adequate adjusted return on capital employed ratio of 17% in fiscal 2020, which is also supported by steady non-operating income from rentals and dividend. Debt protection metrics are strong due to steady cash accrual and nominal bank debt.
 
Going forward, capital expenditure (capex) is expected to be moderate at Rs 10-15 crore per annum over the medium term. Capex and working capital requirement are likely to be met largely through internal accrual, with continued low reliance on debt. Hence, LISL will maintain its healthy financial risk profile over the medium term despite decrease in operating performance in fiscal 2021.
 
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.
 
* Low profitability due to trading nature of operations and part susceptibility to inherent cyclicality in automobile industry
LISIL's profitability has been range-bound at 1-3% due to largely trading nature of operations, with manufacturing accounting for only about 6% of revenue. 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.
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 10 crore per annum in fiscals 2021 and 2022 and liquid surplus of over Rs 70 crore as on September 30, 2020. LISL has no external term debt obligation and only Rs 12 crore debt outstanding from the parent. The company has planned capex of Rs 10-15 crore in fiscal 2021. Capex and working capital requirement will be funded through internal accrual and unutilised bank lines. Besides, with gearing of 0.13 time as on March 31, 2020, LISL has sufficient headroom to raise additional debt to meet internal requirements.

Outlook: Negative

CRISIL believes LISL's revenue and profitability will remain subdued in fiscal 2021 due to slowdown in the auto sector. However, the financial risk profile will continue to be healthy. Furthermore, the ratings will remain sensitive to any change in the credit risk profile of the parent.
 
Ratings 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
 
Downward factors
* Downward change in Lucas TVS's credit risk profile by 1 or more notches.
* Longer-than-expected recovery in business performance, resulting in sustained weak cash generation
* Steep moderation in financial risk profile
* Change in stance of support from the parent.

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 45.9% stake in India Nippon Electricals Ltd, a joint venture with Kokusan Denki Co Ltd, Japan (group company of Hitachi Japan), for manufacturing electronic ignition systems for two- and three-wheelers.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs.Crore 509 565
Profit After Tax (PAT) Rs.Crore 27 17
PAT Margin % 5.4 3.0
Adjusted debt/adjusted networth Times 0.13 0.20
Interest coverage Times 10.8 7.6

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 Commercial Paper NA NA 7-365 days 5.0 Simple CRISIL A1+
NA Non-Convertible Debentures$ NA NA NA 25.0 NA CRISIL AA/Negative
NA Bank Guarantee# NA NA NA 10.0 NA CRISIL A1+
NA Bill Discounting NA NA NA 58.0 NA CRISIL A1+
NA Cash Credit* NA NA NA 25.0 NA CRISIL AA/Negative
NA Letter of Credit^ NA NA NA 5.0 NA CRISIL A1+
$Yet to be issued
#Interchangeable with letter of credit of up to Rs 5 crore
^Interchangeable with bank guarantee
*Interchangeable with working capital demand loan of up to Rs 3 crore
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
Commercial Paper  ST  5.00  CRISIL A1+      31-10-19  CRISIL A1+  16-10-18  CRISIL A1+  24-10-17  CRISIL A1+  CRISIL A1+ 
Non Convertible Debentures  LT  25.00
31-10-20  		CRISIL AA/Negative      31-10-19  CRISIL AA/Stable  16-10-18  CRISIL AA/Stable  24-10-17  CRISIL AA/Stable  CRISIL AA/Stable 
Fund-based Bank Facilities  LT/ST  83.00  CRISIL AA/Negative/ CRISIL A1+      31-10-19  CRISIL AA/Stable/ CRISIL A1+  16-10-18  CRISIL AA/Stable/ CRISIL A1+  24-10-17  CRISIL AA/Stable/ CRISIL A1+  CRISIL AA/Stable/ CRISIL A1+ 
Non Fund-based Bank Facilities  LT/ST  15.00  CRISIL A1+      31-10-19  CRISIL A1+  16-10-18  CRISIL A1+  24-10-17  CRISIL A1+  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
Bank Guarantee# 10 CRISIL A1+ Bank Guarantee# 10 CRISIL A1+
Bill Discounting 58 CRISIL A1+ Bill Discounting 58 CRISIL A1+
Cash Credit* 25 CRISIL AA/Negative Cash Credit* 25 CRISIL AA/Stable
Letter of Credit^ 5 CRISIL A1+ Letter of Credit^ 5 CRISIL A1+
Total 98 -- Total 98 --
#Interchangeable with letter of credit of up to Rs 5 crore
^Interchangeable with bank guarantee
*Interchangeable with working capital demand loan of up to Rs 3 crore
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 Auto Component Suppliers
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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