Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities of Schneider Electric India Private Limited (SEIPL). CRISIL Ratings has also withdrawn its rating on fund-based facilities of Rs.50 crores at the request of the company and No Objection Certificate received from the lender. The withdrawal is in line with CRISIL Ratings’ withdrawal policy.

 

The ratings continue to reflect SEIPL’s strong business risk profile, healthy operating efficiency and strong operational, managerial, and financial linkages with the ultimate parent, Schneider Electric SE (Schneider; rated 'A-/Stable/A2' by S&P Global Ratings). These strengths are partially offset by moderate yet improving debt protection metrics, susceptibility of profitability to capital investment cycles and structural issues in the power sector, and exposure to intense competition in the capital goods industry.

 

SEIPL's strong business risk profile is driven by its established market position in the electrical equipment and automation solutions industry, diversified product portfolio and strong clientele.

 

The business risk profile further strengthened with the acquisition of the electrical and automation (E&A) business of Larsen & Toubro Ltd (L&T; ‘CRISIL AAA/Stable/CRISIL A1+’). The E&A business was acquired for a consideration of Rs 14,000 crores. SEIPL has brought in an investment partner Temasek Holdings Ltd, Singapore, (Temasek Holdings (Private) Limited; ‘S&P AAA/ Stable/ A1+’) which has taken a 35% stake in the company with rest of the 65% with Schneider group entities which are ultimately held by Schneider S.E.: Schneider Electric Industries SAS (56% stake) and Schneider Electric Services International (9% stake). The transaction was completed on August 31, 2020, accordingly, SEIPL has started reporting combined numbers from FY2021 onwards.

 

The acquisition was done with the intent to increase product offering, target various market segments and benefit from L&T’s existing distribution channels for electrical equipments.

 

The envisaged synergies have started to accrue, which is reflected in revenue reporting growth of ~57% in fiscal 2022 (Rs 10,361 crore) followed by ~19% in fiscal 2023 (Rs 12,349 crore). Further, the operating margins have also improved on sequential basis FY2021: Rs 1,063 crore (16.05%), FY2022: Rs 1,940 crore (18.62%) and FY2023: Rs 2,424 crore (19.63%). The business risk profile is expected to remain healthy over medium on account of established synergies, robust capex cycle across industries and lower-than-expected integration and implementation costs than initial estimates of the company.

 

No debt was transferred as part of the acquisition of L&T’s E&A business. However, to fund the large acquisition, SEIPL has availed of long-term debt of Rs 5,500 crore from a Schneider group entity: Schneider Electric IT Business India Private Limited. In fiscal 2023, company has utilized its accruals to prepay Rs 1,000 crore of the long-term debt and has Rs 4,500 crores outstanding as on March 31, 2023, the repayment for which starts in FY2026.

While the integration and implementation costs were much lower than previously envisaged; the benefits from the acquisition were superior to initial expectations resulting in sooner than expected improvement in debt protection metrics of the company.

 

The financial risk profile is expected to continue to improve over the medium term backed by improved profitability post acquisition, lower than expected integration costs and a strong networth of above Rs 7,000 crore over the medium term. SEIPL has ample liquidity, backed by healthy cash equivalent of Rs 2,171 crore as on March 31, 2023, and access to fund-based bank lines of approx. Rs 2,850 crore, which are largely unutilized.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support available to SEIPL from its ultimate parent, Schneider Electric S.E.

Key Rating Drivers & Detailed Description

Strengths

• Strong business risk profile, backed by established market position and synergies from E&A business kicking in: SEIPL is Schneider’s largest subsidiary in India, and has maintained strong market position in low and medium 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 has enhanced SEIPL’s business risk profile significantly through expansion in product segments, such as switchgears and metering solutions, where E&A had an established market position. While Schneider already had strong presence in metros and large cities, it now has reach across tier 3 and 4 cities, small towns, and rural markets. The established Schneider brand also helps SEIPL maintain its market position. SEIPL continues to maintain both the brands separate to strengthen its market position at the pan-India level.

 

• Healthy operating efficiency which is expected to continue over the medium term: SEIPL had combined operating margin of ~19.63% in fiscal 2023 up from 8-12% before the acquisition. Operating margin is expected remain healthy on account of successful integration of the E&A business, 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

• Improving debt protection metrics: The debt protection metrics were impacted due to the large debt-funded acquisition and upfront integration and implementation costs (albeit lower than initial estimates). However, with sooner than expected realisation of synergies, lower than expected integration costs and part prepayment of group debt, the metrics have and are expected to improve. Interest coverage ratio will remain at 6.5-7.3 times in fiscals 2024 and 2025, while the net cash accrual to total debt ratio improving to 0.4-0.5 times. SEIPL does not have any debt obligation till August 2025, and the company’s ability to sustain improvement in topline and margins while keeping the integration costs low 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. Government ‘s push towards smart cities, smart grid, EV, and renewable energy provide new opportunities for the business over the medium term. While the acquisition of the E&A business has strengthened 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.

Liquidity: Superior

Liquidity should remain strong, backed by healthy unencumbered cash equivalent of Rs 2,171 crore as on March 31, 2023, and expected annual cash accrual of Rs 1,900- 2,100 crore in fiscals 2024 and 2025, against no long-term debt obligation till fiscal 2026. Liquidity is also supported by fund-based bank lines of approx. Rs 2,850 crore, which remain largely unutilised. CRISIL Ratings believes the unutilised bank lines are more than sufficient to meet incremental working capital needs over the medium term.

Outlook: Stable

CRISIL Ratings believes the acquisition of the E&A business will strengthen SEIPL’s already strong market position. The financial risk profile should remain healthy, driven by minimal external debt and absence of debt obligation till fiscal 2026, and backed by ample liquidity and support from Schneider.

Rating Sensitivity Factors

Downward factors:

• Higher-than-expected implementation or integration costs, leading to operating margin of less than 8% on sustained basis
• Material weakening of the credit risk profile of Schneider, leading to downward revision in its rating by S&P or change in the stance of support by the parent

About the Company

Incorporated in 1995, SEIPL provides energy management products and solutions for utilities, infrastructure, building and residential projects, and industries. Its portfolio includes industry automation solutions, building automation and security installation systems, power monitoring and control systems, and other electrical equipment, including a wide range of low and medium voltage products.

 

Schneider holds 65% equity stake in SEIPL through its subsidiaries, Schneider Electric Industries SAS and Schneider Electric Services International. The balance 35% stake was held by MacRitchie Investments Pte Ltd (wholly owned subsidiary of Temasek Holdings) as on September 1, 2020.

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 level	Rating assigned with outlook
NA	Fund-Based Facilities*	NA	NA	NA	875	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities*	NA	NA	NA	850	NA	CRISIL A1+
NA	Fund-Based Facilities	NA	NA	NA	175	NA	CRISIL A1+
NA	Non-Fund Based Limit*	NA	NA	NA	225	NA	CRISIL AAA/Stable
NA	Non-Fund Based Limit	NA	NA	NA	725	NA	CRISIL AAA/Stable
NA	Fund-Based Facilities	NA	NA	NA	50	NA	Withdrawn

*Fully interchangeable between fund-based and non-fund based facilities