Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of MH Ecolife Emobility Private Limited (MH Ecolife) from ‘Rating Watch with Developing implication’ and has reaffirmed the rating at ‘CRISIL A (CE)/CRISIL A1 (CE)’, while assigning a ‘Stable’ Outlook to the long term rating. The rating is based on the strength of unconditional and irrevocable corporate guarantee by JBM Auto (‘CRISIL A/Stable’).

 

CRISIL Ratings has resolved the Rating Watch as it has received the final amended corporate guarantee deed with defined invocation and payment mechanism. For more details on the revised approach, kindly refer to the CRISIL Ratings criteria document, ‘Criteria for rating instruments backed by guarantees’.

 

The ratings are based on the strength of unconditional and irrevocable corporate guarantee by the company’s parent, JBM Auto Ltd (JAL; rated ‘CRISIL A/Stable/CRISIL A1’). The Stable outlook on this rating reflects CRISIL’s outlook on the rating of the guarantor, JAL. The ratings continue to reflect the successful implementation and more than a year track record of operations, healthy growth prospects for e-buses in India and also factors in the healthy DSCR. These strengths are partially offset by evolving understanding on battery replacement and limited track record of e-buses.

  

The ratings reflect the successful implementation and more than a year’s track record of operations of  the 150 ( 105 12M and 45 9M) buses on intercity routes for Navi Mumbai Municipal Transport (NMMT) Authority by MH Ecolife. The operational parameters (minimum bus availability/minimum km run/ no run time delays as per the schedule) remained in line with the concession agreement and the collections from the authority has been received for the operational period. The payment is received with a lag of 1.5-2 months, though the counterparty risks in the project are mitigated by the escrow arrangement, wherein the escrow account is to be funded with two months of estimated revenue payable upfront and maintained throughout. Also the authority is obligated to deposit the revenue from ticket collections in escrow account along with maintaining two months of revenue payable.

CRISIL also notes that the company has high cashflow visibility as the concession agreement signed between MH Ecolife and NMMT, the company will receive an assured fee per km basis (Rs 69.9 per kilometre [km] for 12-metre bus and Rs 52.2 per km for 9-metre bus) , subject to fulfilling of the operational parameters for a period of 12 years from its commencement of operations (COD). The company has received the entire capital subsidy of Rs 78 crore post the successful completion and delivery of the bus fleets under the FAME II scheme of the Government of India (GoI).  The rating further takes into account the support provided by the parent company -JAL as a 100% shareholder, thereby increasing the financial flexibility for MH Ecolife. Furthermore, MH Ecolife has entered into an AMC agreement with JAL for maintenance of  the buses, thereby mitigating operational risks to a certain extent.

 

JAL has a heathy credit risk profile driven by its established market position in the auto component industry with longstanding client relationships, diverse business segments and a comfortable financial risk profile. JAL has reported revenue of Rs. 3884 crores in fiscal 2023 with operating margin at 10.9% compared to 11.3% in the preceding year. JAL also has prior experience in supplying and operating 30 e-buses to NMMT for more than a year.

Analytical Approach

The ratings are based on CRISIL Ratings criteria for rating instruments backed by guarantees. The (CE) suffix in the rating reflects the payment structure that is designed to ensure full and time-bound payment to lenders owing to corporate guarantee by JAL.

 

To arrive at its unsupported rating, CRISIL Ratings has considered MH Ecolife on a standalone basis

Key Rating Drivers & Detailed Description

Strengths:

• Unconditional and irrevocable corporate guarantee by JAL and strong experience of the JBM Group

The ratings are based on an unconditional, continuing and irrevocable guarantee from JAL, and an unconditional undertaking by the latter for securing principal and interest obligations on the entire debt of MH Ecolife. This guarantee covers the entire principal and interest payment obligations on the guaranteed bank facility. The CE rating is based on Reserve Bank of India’s 12 point framework and is adequate to ensure timely payment. As per the guarantee document, JAL will make immediate payment within 10 business day upon invocation of guarantee by the bank within five business days of such non-payment. The capital structure of JAL is comfortable, with gearing of 2.07 times as on March 31, 2023, which is expected to improve to below 1 time over the medium term owing to healthy accrual. Also, the central treasury team of JAL will closely monitor the repayments and provide timely support. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the guaranteed bank loan.

 

The parent, JAL, which along with being a Tier-I component supplier to auto OEMs, is also an OEM (original equipment manufacturer) bus supplier itself, and has been manufacturing buses since fiscal 2017 with current capacity of 1,500 buses per year.  The group has incurred capex in a new company, JBM Electric Vehicles Private Limited, which has a capacity of 5000 buses, manufactured in double shifts. Additionally, JAL supplied 30 e-buses in August 2019, which are running successfully in Mumbai from the Turbhe Depot under NMMT. It has dedicated manpower for depot management under its sales team operating at various locations in the country. The parent has the required expertise and capability to manufacture, supply and operate e-buses.

 

• High revenue visibility with assured offtake; financial risk profile to improve as operations have fully commenced

As per the terms of the concession agreement, the authority would pay MH Ecolife fixed rate for a minimum assured distance subject to meeting the operational metrics. Company’s availability of the buses for the past 6 months stands at 99%, higher than the threshold of 94%. Given this arrangement, the company’s business model essentially translates into an annuity model with high cash flow visibility over the concession period. Company is expected to generate revenue of Rs 70-75 crores along with EBITDA margin of 40-45% per annum culminating to an average DSCR of over 1.2x till the tenure of the loan. Further, counterparty NMMT has a strong credit profile with timely repayments being made to JAL for an earlier project. In fiscal 2023 company earned a revenue of Rs 63 crore with EBITDA margins of 49.7%. The financial performance is expected to improve from FY2024 onwards, FY2024 being the first full year of operations. Company has successfully received all the three tranches of subsidy amounting to Rs 78 crore.

 

•  Healthy growth prospects for e-buses in India

The Government of India is focusing significantly on promoting electric vehicles (EVs) as a cleaner and sustainable form of transportation, with special focus on the commercial segment. To support faster adoption of EVs in India, the government has introduced various schemes such as FAME, offering upfront subsidies (to reduce capital costs), exemptions or reductions on road tax, registration tax, subsidised electricity tariffs, among others. The tender to operate e-buses for NMMT is part of the FAME II scheme, with MH Ecolife eligible for a subsidy of Rs 55 lakh per bus for 12-metre bus and Rs 45 lakh per bus wherein the entire amount will be released in three tranches within six months of commencement of operations. Company has successfully received all the three tranches of subsidy amounting to Rs 78 crore.

 

Weaknesses:

• Limited track record of operations

The electric bus sector in the country is still evolving and has limited track record of operations and performance of these buses. Despite the government’s focus on developing the EV industry and various orders being given to multiple players, the performance of these buses is yet to be seen. Any underperformance in operation vis-à-vis agreed specifications, especially that which impacts the availability and reliability of buses, has potential to impact the project viability, and hence, would be a key monitorable.

 

• Exposure to battery replacement risks and evolving understanding on the sector

The company will incur a battery replacement cost of approximately ~ Rs.25-30 crore around 6-7th year of operations (i.e. FY2027) for electric buses. CRISIL notes that the operational cashflows should be sufficient to fund the replacement cost and in case of any shortfall, parent JAL, will infuse the funds. However, timely creation of reserves to fund the battery replacement and any adverse movement in prices of lithium-ion batteries along with political relations between India and China, given the dependence on China for battery and EV components will remain key monitorables.

Liquidity: Adequate

Liquidity derives comfort from credit enhancement available in the form of an unconditional and irrevocable corporate guarantee by the parent. JAL is likely to provide financial support in the event of an exigency. Company has DSRA of Rs 18.28 crore which is equivalent to 6 months of principal and interest maintained in the form of fixed deposit which provide liquidity buffer. Company is expected to generate net cash accruals of Rs 25-30 crore per annum against the  debt servicing obligations of Rs 24-29 crore per annum which provides comfort.

Outlook: Stable

The outlook is based on the 'Stable' outlook on the guarantor's debt instruments. The ratings will remain sensitive to any change in CRISIL's rating on JAL

Rating Sensitivity factors

Upward factors:

• Improvement in the overall credit risk profile of the guarantor by 1 notch
• Track record of timely revenue receipts from the authority leading to improvement in the liquidity and credit metrics of the company.

 

Downward factors:

• Deterioration in the overall credit risk profile of the guarantor by 1 notch or more
• Delay in revenue receipts from the current expected timelines resulting in dependence on the external debt leading to moderation in liquidity and credit metrics

Adequacy of credit enhancement structure

The rating on the guaranteed bank facility of MH Ecolife reflects the unconditional and irrevocable guarantee from JAL on the bank loan facilities amounting to Rs 224.76 crore, which is in-line with the revised CRISIL Ratings’ approach towards credit enhancement provided by the guarantee. The revised approach is based on guidance from the Reserve Bank of India (RBI) on factoring credit enhancement in the ratings of bank loan facilities. CRISIL Ratings understands that the corporate guarantee includes the invocation terms and is designed to ensure full and timely payment to the lender even in case of non-invocation. Also, CRISIL Ratings understand that JAL will make payments not later than 10 calendar days of non-payment by MH Ecolife of bank guarantee on invocation ; in case MH ecolife fails to service its debt obligations, irrespective of the lender invoking the guarantee, without any set off. The suffix CE (credit enhancement) reflects the payment structure, which is designed to ensure full and time-bound payment to lenders.

 

Stress Scenario:

CRISIL Ratings has fully consolidated the business and financial risk profiles of the borrower and JAL. The financials of the borrower, including the entire guaranteed debt, are loaded on the guarantor. CRISIL Ratings believes that guarantor will be able to fully service guaranteed debt obligation in timely manner even under a stress scenario, where the cash flows in the SPV may not be suffice to meet the debt obligation.

Unsupported ratings CRISIL A-

CRISIL Ratings has introduced 'CE' suffix for instruments having an explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL Ratings has considered the standalone business and financial risk profiles of MH Ecolife. The rating factors in the strong revenue visibility for the project with fixed charges over a minimum assured distance, support in the form of subsidy for bus procurement, presence of escrow mechanism and the strategic importance of MH Ecolife to its parent, given the synergies to its operations and criticality of the project for the strategy of JAL to focus on its bus manufacturing and operating segment. These are partially offset by the susceptibility of the project to limited track record of e-buses in the country, and evolving understanding around battery replacement.

About the Company

MH Ecolife was incorporated as a private limited company under the Companies Act, 2013, in 2020. It was established to supply, operate and maintain  150 EV buses in Navi Mumbai through a concession agreement with NMMT under the GOI’s FAME-II scheme. As per concession agreement MH Ecolife would be operating the buses for a period of 12 years on a GCC basis and it has already received subsidy of Rs. 78 cr ( Rs 55 lakh per bus for 12M bus and Rs 45 lakh per pus for 9M bus). The 150 buses have already been supplied and started operations from July 2022. The company is a wholly owned subsidiary of JAL, which is a part of the JBM group.

About the Group

Incorporated in 1996, JAL manufactures sheet metal components, assemblies and sub-assemblies, tools, dyes and moulds. JAL is primarily a Tier-1 supplier of key systems and assemblies to the automotive OEM industry and caters to esteemed clients such as Ashok Leyland, Bajaj, Daimler, Fiat Chrysler, Ford, Honda, Hero, JCB, Mahindra, Maruti Suzuki, Renault, Nissan, TATA, Toyota, TVS, Volvo Eicher, and Volkswagen. The group has alliances with more than 15 renowned companies globally, including Arcelor Mittal, Cornaglia, Dassault Systemes, JFE Steel, Ogihara, Solaris Bus & Coach, and Sumitomo. The structure of JAL enables each business unit to chart its own future and simultaneously leverage synergies across its competencies. The company has 16 manufacturing facilities: 14 for sheet metal components and tooling and 2 for buses and 1 Skill Development Centre (SDC).

Key Financial Indicators – MH Ecolife

As on March 31	Unit	2023	2022
Revenue	Rs crore	61.60	24
Profit after tax (PAT)	Rs. crore	3	3
PAT margin	%	5	12.5
Adjusted debt/networth	Times	7.75	7.82
Adjusted interest coverage	Times	2.50	2.88

 

List of covenants

• Any cost overrun/shortfall in debt servicing to be borne by JAL
• Any unsecured/promoter loans to be subordinate to bank loans

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  levels	Rating assigned with outlook
NA	Term Loan	NA	NA	Jan-30	157.91	NA	CRISIL A (CE) /Stable
NA	Bank Guarantee	NA	NA	NA	66.85	NA	CRISIL A1 (CE)