Rating Rationale
August 30, 2019 | Mumbai
Mahindra EPC Irrigation Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.80 Crore (Enhanced from Rs.50 Crore)
Long Term Rating CRISIL A+/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A+/Stable' rating on the long-term bank facilities of Mahindra EPC Irrigation Limited (Mahindra EPC; formerly EPC Industrie Ltd [EPC]).

The ratings continue to reflect support from parent, Mahindra and Mahindra Ltd (M&M; rated 'CRISIL AAA/Stable/CRISIL A1+') as Mahindra EPC is in the micro-irrigation systems (MIS) business, which is an important segment in the agri-business vertical for M&M. The ratings also factor in a healthy financial risk profile. There was strong revenue growth of 27% in fiscal 2019, while operating margin also improved to 7.9% from 6.0% in the previous fiscal, supported by positive operating leverage and stable commodity prices. 

These strengths are partially offset by a modest scale of operations, susceptibility of MIS operations to regulatory changes, and a stretched working capital cycle given high receivables, which are prone to delays in release of subsidies by state governments. Also, profitability remains susceptible to raw material costs, given the regulated-pricing of the products. 

Analytical Approach

CRISIL has applied its parent notch-up framework to factor in the extent of support available from M&M.

Key Rating Drivers & Detailed Description
Strengths
* Synergies with the agricultural vertical of the parent: The parent's thrust on agri-business and majority control underscore its strategic objective and moral obligation to support the subsidiary, which is also reflected in the change in its name. Mahindra EPC also has presence in the parent's 'Mahindra Samriddhi' centers across India that provide farm solutions. 

* Healthy capital structure with no long-term debt:  Gearing should remain less than 0.1 times, with the net cash accrual to adjusted debt ratio at 2.5-3.0 times, over the medium term. Moreover, with capital expenditure (capex) funded through internal cash accruals, the company is expected to remain free of any long-term debt over this period.

Weaknesses
* Modest scale of operations: With a market share of less than 7%, the company is a relatively small player in the MIS segment. Larger competitors have more sophisticated in-house research and development R&D capabilities and manufacture a more diverse product portfolio.

Nevertheless, there was a strong 27% revenue growth in fiscal 2019, after it remaining largely stagnant between fiscals 2016 and 2018. The company has recently set up a manufacturing facility in Vadodara, Gujarat, and is in the process of setting up a similar plant in Coimbatore, Tamil Nadu, which is expected to boost sales in nearby regions. Moreover, benefits are expected from the growth of MIS in India in the medium to long term. 

* Susceptibility to changes in government policies or delays in receipt of subsidies: Government subsidies are the major drivers for sale of MIS products in India. Thus the company, and the MIS sector in general, will remain sensitive to government policies. The company's working capital cycle is stretched due to high receivables, given the long payment period and frequent delays in receipt of government subsidies. Moreover, during fiscal 2019, most of the states in which the company operates discontinued open-market sales that entail a shorter payment period. Overall receivables remained high at about 210 days, while receivables above six months stood at about Rs 52 crore (35% of total debtors), as on March 31, 2019.

Liquidity: Strong
Liquidity is strong, supported by the superior liquidity of the parent, M&M. Mahindra EPC can undertake short-term inter-company deposits from the parent if required at any time. 

Cash accrual is expected at Rs 12-14 crore for fiscal 2020, which should cover capex requirement of about Rs. 3-4 crore. There was no long-term debt as on March 31, 2019, and hence no repayment obligation in fiscal 2020. However, liquidity is constrained by a stretched working capital cycle, given the high receivables due to subsidy-linked sales to states that have a long payment cycle with frequent delays. Although average bank limit utilization has been low at about 25% during the 12 months through July 2019, delays in disbursal of subsidies by certain key states resulted in utilization of 90-95% over the past few weeks, underscoring the risk inherent in this sector. However, this situation is expected to ease following the proposed enhancement in the bank limit of Rs. 20 crore, and eventual realization of the subsidies.
Outlook: Stable

CRISIL believes Mahindra EPC will remain strategically important to M&M in the agri-solutions space and hence will continue to receive strong operational, management, and financial support from the parent over the medium term.

Rating Sensitivity Factors
Upward Factor
* Increased strategic importance to M&M, demonstrated through greater integration and oversight, along with investment in growth capital
* Structural improvement in the working capital cycle, with sustained reduction in gross current assets (GCAs) to below 220 days
* Substantial increase in scale and profitability

Downward Factor:
* Change in M&M's rating, or in its support to the company
* Deterioration in the working capital cycle with sustained increase in GCAs to over 300 days.

About the Company

Mahindra EPC was originally established in 1981 as Exomet Plastics and Chemicals Pvt Ltd by Mr K Khanna. In August 1992, it was reconstituted as a public limited company and renamed EPC. In February 2011, M&M acquired a 38% equity stake in EPC for Rs 43.3 crore. M&M raised its stake to 54.8% in June 2012 through a rights issue, and held 54.6% as on June 30, 2019.

Mahindra EPC manufactures MIS consisting of drip and sprinkler irrigation systems at its facility in Nashik in Maharashtra, and Vadodara. The company is registered in 17 states as an approved manufacturer of MIS.

Key Financial Indicators
As on/for the period ended March 31 Unit 2019 2018
Revenue Rs crore 260 205
Profit After Tax (PAT) Rs crore 11 5
PAT Margin % 4.4 2.4
Adjusted debt/Adjusted networth Times 0.02 0.03
Interest coverage Times 15 24

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Assigned with Outlook
NA Cash Credit* NA NA NA 44.50 CRISIL A+/Stable
NA Proposed Working Capital Facility NA NA NA 25.50 CRISIL A+/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 10.00 CRISIL A+/Stable
*Interchangeable with working capital demand loan, letter of credit, and bank guarantee limits.
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  80.00  CRISIL A+/Stable      31-05-18  CRISIL A+/Stable  24-02-17  CRISIL A+/Stable      CRISIL A+/Stable 
Non Fund-based Bank Facilities  LT/ST     --     31-05-18  CRISIL A1  24-02-17  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
Cash Credit* 44.5 CRISIL A+/Stable Bank Guarantee 1.04 CRISIL A1
Proposed Long Term Bank Loan Facility 10 CRISIL A+/Stable Cash Credit# 44.5 CRISIL A+/Stable
Proposed Working Capital Facility 25.5 CRISIL A+/Stable Proposed Long Term Bank Loan Facility 4.46 CRISIL A+/Stable
Total 80 -- Total 50 --
#Interchangeable with working capital demand loan to the extent of Rs 30.00 crore, letter of credit to the extent of Rs 33.00 crore; interchangeable with bank guarantee to the extent of Rs 26.00 crore
*Interchangeable with working capital demand loan, letter of credit, and bank guarantee limits.
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 Construction Industry
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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