Murugappa Holdings Limited

Rating Reaffirmed

Rs.450 Million Non Convertible Debentures CRISIL AA/Stable (Withdrawal) Rs.1 Billion Non Convertible Debentures* CRISIL AA/Stable/CRISIL A1+ (Withdrawal) Rs.1,200 Million Commercial Paper Programme CRISIL A1+ (Reaffirmed) *With put/call option exercisable at the end of first year.

CRISIL has reaffirmed its rating on commercial paper programme of Murugappa Holdings Limited  (MHL) at 'CRISIL A1+' while withdrawing its ratings on Non-convertible debentures (NCDs), as there is no amount outstanding.

CRISIL's rating on the debt programmes continue to reflects MHL's strong financial flexibility as the holding company of, and largest shareholder in, key operating companies in the Murugappa group'EID Parry (India) Ltd (EID; rated 'CRISIL AA-/Stable/CRISIL A1+'), Carborundum Universal Ltd (CUMI; 'CRISIL AA+/Stable/CRISIL A1+'), and Tube Investments of India Ltd (TI; 'CRISIL AA/Stable/CRISIL A1+'). The rating is also underpinned by the healthy credit risk profiles of the key operating companies and the reputation of the Murugappa group. These rating strengths are partially offset by MHL's exposure to market-related risks and its average financial risk profile.

CRISIL has followed the holding company approach for analysing the credit profile of MHL. For arriving at the rating, CRISIL has considered the standalone business and financial risk profiles of MHL.

MHL's strong financial flexibility with respect to the rated debt stems from its 29.46 per cent stake in CUMI, 33.41 per cent stake in EID, and 34.23 per cent stake in TI. CRISIL believes that MHL will maintain its shareholding in all these operating companies except for the sake of retiring the rated debt. The market value of MHL's stake in CUMI, EID, and TI amounted to Rs.39.5 billion (as on June 16, 2015); this, CRISIL believes, is substantial in relation to MHL's rated debt programme, leading to a healthy cover.

With MHL holding leading stakes in CUMI, EID, and TI, CRISIL believes that MHL will receive steady dividend income from these entities, which will enable the company to service its interest obligations and a portion of the principal repayment on the rated long-term debt. The rating also factor in the diversified nature of MHL's investment portfolio, the healthy credit profile of CUMI, EID, and TI, as well as the reputation of the Murugappa group.

CRISIL believes that MHL will remain susceptible to market-related risks as the company's financial flexibility, in terms of cover available, will, to some extent, depend on prevailing market sentiments and the share prices of CUMI, EID, and TI. Any deterioration in systemic risks, leading to a sharp decline in the share prices of CUMI, EID, and TI, will act as a key risk to the rating. Furthermore, MHL has an average financial risk profile and is largely dependent on dividend inflows from the key operating companies to service its debt.

CRISIL has noted SEBI's recent order where it is investigating into alleged insider trading charges levied against Mr. A Vellayan, promoter Director of the Murugappa group and three others. CRISIL understands that the SEBI order is interim in nature. CRISIL has also noted that Mr. A Vellayan has resigned from the Chairmanship of the Murugappa Corporate Board, EID Parry and CIL, until the matter is resolved, while he will continue to be a director on the board of these entities.

CRISIL believes that the current order of SEBI will not have any material impact on the credit quality of the CRISIL rated Murugappa Group companies including MHL. This is because operations are not expected to be affected by the order and the financial risk profile will be unaffected. CRISIL will continue to monitor the developments in this regard and await the final order.

MHL (formerly, Parry Agro Industries Ltd) is a key holding company in the Chennai-based Rs.243 billion Murugappa group. The group has presence in diverse businesses, such as engineering, abrasives, finance, general insurance, cycles, sugar, farm inputs, fertilisers, plantations, bio-products, and nutraceuticals. Ambadi Investments Private Ltd, the Murugappa family's investment vehicle, holds 77.82 per cent of the equity in MHL, while the promoters, in their individual capacity, hold much of the remainder of the equity.

MHL is the holding company for key listed operating companies in the Murugappa group, namely EID, TI, and CUMI. MHL, until 2010-11 (refers to financial year, April 1 to March 31), was also engaged in the tea plantation business. In 2011-12, the Murugappa group's holding companies underwent a restructuring exercise following which MHL operates primarily as a core investment company.

For 2014-15, MHL reported net profit of about Rs.169.2 million on net income of Rs.321.1 million against net profit of Rs.71.1 million on net income of Rs. 225.7 million for 2013-14.