Key Rating Drivers & Detailed Description

Strengths

• Strong business risk profile, backed by established market position and acquisition of L&T’s E&A business: SEIPL is Schneider’s largest subsidiary in India, and has maintained strong market position in low voltage product segment and industrial automation solutions, supported by diverse product portfolio and access to the latest technology and brand equity of its parent.

The acquisition of L&T’s E&A business is expected to enhance SEIPL’s business risk profile significantly as the acquisition will help establish presence in product segments, such as switchgears and metering solutions, where E&A has an established market position. Moreover, the E&A business will help expand SEIPL’s reach across tier 3 and 4 cities, small towns and rural markets while Schneider’s products have strong presence in metros and large cities. The established Schneider brand will also help SEIPL maintain its market position. SEIPL will continue to maintain both the brands separate to strengthen its market position at the pan-India level.

• Healthy operating efficiency which should improve over the medium term: SEIPL had combined operating margin of ~13% in fiscal 2021. Operating margin is expected remain healthy on account of significant synergies between both the companies, strong growth potential and lower-than-expected integration and implementation costs related to the acquisition.

• Strong operational, managerial and financial linkages with the ultimate parent: SEIPL was Schneider’s first 100% subsidiary in India even as the group has extensive experience of over five decades in the Indian market. SEIPL benefits significantly from the strong Schneider brand, as well as latest products and technology from the parent.

Schneider has complete management control over SEIPL with majority representation on the latter’s board and with all business heads, including treasury, reporting to the respective global department heads. Hence, the parent is involved in all strategic decisions of SEIPL.

Schneider also has a strong track record of supporting its group entities financially, as indicated by minimal external debt across all entities in India. The Schneider group has infused around Rs 9,000 crore in SEIPL by way of debt and equity, to fund the acquisition of L&T’s E&A business.

Considering the large investment by the group in SEIPL and the strong operational and managerial linkages, SEIPL should remain strategic to the parent and will continue to receive need-based support.

Weaknesses

• Modest debt protection metrics: Due to the debt-funded acquisition and upfront integration and implementation costs, SEIPL’s debt protection metrics will remain modest in the near term. Interest coverage ratio will remain at 4-6 times in fiscals 2022 and 2023, while the net cash accrual to total debt ratio will remain below 0.3 time. SEIPL does not have any debt obligation till August 2025, and the company’s ability to successfully integrate the businesses and increase cash accrual will remain a key monitorable.

• Susceptibility of profitability to capital investment cycles and structural issues in the power sector: SEIPL’s profitability is susceptible to downturn in demand, and structural issues and volatility in the power sector. Any deferral of a large project can lead to cost overruns, which would impact profitability given the limited flexibility to pass on cost overruns. While the company has mitigated these risks through gradual diversification of its revenue since fiscal 2016, in addition to efficient cost and resource management, the profitability will remain susceptible to structural issue.

• Exposure to intense competition: SEIPL operates in an increasingly competitive market on account of the presence of many domestic and international players. Furthermore, the macroeconomic slowdown has resulted in heightened competition and pressure on profitability. While the acquisition of the E&A business should strengthen the market position in the energy management and automation solutions industry, the company will continue to face intense competition, which will limit flexibility to pass on any increase in raw material prices.

Key Financial Indicators- (CRISIL Ratings-adjusted numbers

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