Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the long term bank facilities of Schwing Stetter India Pvt Ltd (SSIPL) at ‘CRISIL A/ Stable’.

 

SSIPL’s performance during the calendar year (CY) 2020 was impacted due to slowdown in the order flow from end markets mainly due to lockdown restrictions leading to delays in restart of stalled large projects. As a result, the greenfield capacity in Cheyyar, Tamil Nadu could not be monetized in a timely manner. Ergo, revenues declined by ~10% to ~Rs.1562 crore in CY2020, though operating profitability improved to 4.2% (3.4% in CY 2019), due to cost optimization measures. Higher share of lower margin traded sales, though, limited material improvement in operating profitability. 

 

After pandemic induced lockdowns in the second quarter of CY2020, and weak demand with onset of monsoon in major parts of the country in the third quarter, the construction equipment sector began reviving from September 2020, supported by healthy pent up demand from the infrastructure segment, also leading to good order build-up for SSIPL. This along with higher enquiries from export market and product launch initiatives in collaboration with its ultimate parent, China based Xuzhou Construction Machinery Group (XCMG), should enable SSIPL register healthy double digit revenue growth in CY2021. Consequently, revenues are expected to increase by 15-20% during CY 2021, despite some disruption in operations in May 2021, due to non-availability of oxygen for industrial use, and second covid wave induced lockdowns. Operating profitability will also improve driven by higher pricing for its new BS-IV compliant products, better product mix, ramp up of utilisation levels at Cheyyar unit, and continued cost optimization measures.

 

With the recent completion of major capital expenditure (capex) of over Rs.300 crore at Cheyyar unit (spread over 2 years), future capex requirements are expected to be moderate. Along with improving cash generation and progressive debt repayment, debt metrics are expected to witness steady improvement over the near to medium term; interest cover is expected at over 5 times (compared to 2.9 times in CY2020), while the gearing level too will remain comfortable ranging between 0.5-0.7 times (0.82 times at December 31, 2020). However, the ratio of total outside liabilities to tangible net worth (TOL/TNW), will still remain moderate at ~2.4 times (2.8 times at December 31, 2020), due to high credit period on goods traded on behalf of XCMG. As XCMG is a new player in the domestic construction equipment market and is using the facilities and network of SSIPL to establish its products, high credit period is offered to SSIPL, which is also in turn passed on to customers.

 

The ratings continue to reflect SSIPL’s strong brand and dominant market position in the ready-mix concrete (RMC) handling equipment industry, and technology and product support of its immediate parent Schwing, a global leader in the RMC handling equipment sector and XCMG, a global leader in construction machinery segment. The ratings also reflects SSIPL’s moderate though improving financial risk profile and adequate liquidity. These strengths are partially offset by susceptibility of performance to business cycles and the working capital-intensive nature of operations, especially higher creditors.

Analytical Approach

For arriving at its rating, CRISIL Ratings has considered the standalone business and financial risk profiles of SSIPL.

Key Rating Drivers & Detailed Description

Strengths

Strong brand and dominant market position

The company has an established position in the domestic RMC-handling equipment market on the back of a strong and customisable product profile, robust marketing and service network, and established clientele. Its product strengths have also helped SSIPL maintain its leading market shares across product categories. SSIPL’s products are perceived to be of high quality, and usually enjoy a premium over comparable products in the market. Established pan-India service network also provides an edge. Moreover, SSIPL has been steadily augmenting its product portfolio through periodic new launches in collaboration with XCMG. While the product basket has expanded due to higher proportion of traded sales, service income generated on same, also supports revenues.

 

Technology support from parents, Schwing and XCMG

The Schwing group, headquartered at Herne, Germany, has 12 manufacturing facilities spread over Germany, Austria, the US, Brazil, Russia, China, and India; and sells products in more than 100 countries. SSIPL markets its products under the Schwing-Stetter brand. The brand has a healthy franchise in the global premium RMC-handling equipment market as Schwing continues to be one of the world's leading players in this segment.

 

Support from Schwing has enabled SSIPL to introduce new products based on customer-specific requirements, while traded goods on behalf of XCMG has enlarged its product offerings. Besides, technical skillsets of SSIPL’s team has also improved, due to the need to provide service for XCMG’s products. CRISIL believes that such support extended by the parents to SSIPL will continue over the medium term and will facilitate further strengthening of operations.

 

Moderate though improving financial risk profile

Financial risk profile, though moderate, is improving over time. Gearing improved to 0.8 time as on December 31, 2020 (from 1.3 times as on December 31, 2019) driven by lower capital spending, and moderately better inventory management. Also, the large credit period offered by XCMG on its products, has enabled SSIPL to lower working capital borrowings. While this has benefitted gearing, the TOL/TNW ratio was high at 2.8 times at December 31, 2020, and is expected at 2.4-2.5 times at the end of the current CY.

 

With progressive debt repayment, better cash generation and continued prudent debtor and inventory management, debt metrics are expected to further improve over the near to medium term. Major improvement in TOL/TNW is likely only when creditors, especially on traded goods, reduce over time, once XCMG’s products are more established in the domestic market.

 

Weaknesses

Vulnerability to business cycles in the RMC segment

SSIPL’s revenues have high correlation to infrastructure investment activity in the country. This is reflected in moderation in turnover during the slowdown in the infrastructure and real estate sector in 2009, 2012 and 2013 as well as 2020. SSIPL took the initiative to include small and mid-sized customers over the past few years to mitigate the impact of down-cycle. While this indeed benefits the company, any sharp decline in off-take by the construction/infrastructure sectors will continue to impact its performance.

 

Working capital-intensive operations

Gross current assets remain high at 236 days as on December 31, 2020 due to high inventory levels, though overall there was a slight moderation from the earlier levels. SSIPL, on an average, has to maintain high inventory levels because of large share of imported stocks maintained to cope with long delivery lead time for imported goods, and criticality of some spares that mandates continuous availability. High working capital intensity is also on account of a material increase in receivable cycle, with higher share of traded goods, especially from XCMG. SSIPL is also required to maintain finished goods and spares inventory at various service centres across India for ensuring timely and quality service. In turn, SSIPL also receives extended credit of up to a year from XCMG.

Liquidity: Adequate

Liquidity should remain adequate over the medium term driven by improving annual accruals of Rs 75-100 crore.  Repayment obligations remains moderate at about Rs 50 crore per annum for CY 2021 and CY 2022, which can be funded from accruals. Against its working capital bank lines of Rs.455 crores, the company had drawing power (DP) to the extent of ~55% at March 31, 2021. Utilisation against DP was high at ~90% in February and March 2021, and averaged about 56% in the last 10 months to March 2021. SSIPL also has established relationships in the lending community and is able to arrange for refinancing, when required, at attractive interest rates, as demonstrated in past years.

Outlook Stable

CRISIL Ratings believes SSIPL's business performance will benefit from demand recovery in the construction equipment sector, and steady monetization of expanded capacities. Financial risk profile will benefit from higher accruals, progressive debt repayment, and moderate capital spending over the medium term.

Rating Sensitivity factors

Upward Factors

• Sustained healthy double digit revenue growth, and monetization of expanded capacity leading to enhanced market share
• OPBDIT margin improving to 6.0-7.0% levels over the medium term, also leading to better cash generation
• Continued improvement in financial risk profile, supported by better than anticipated cash generation, and prudent working capital management including reduction in creditors; TOL/TNW of below 2.2-2.4 times

 

Downward Factors

• Weak business performance leading to flattish revenues and decline in operating profitability (below 3-4%), impacting cash generation
• Steep deterioration in debt metrics due to lower cash generation, and higher debt levels due to capex or working capital elongation; TOL/TNW in excess of 3.2 times

About the Company

SSIPL, a wholly owned subsidiary of Schwing, was registered in 1998 and began operations in 1999. It initially imported truck mixers and pumps in a semi-knocked-down form from Germany, and assembled and sold them in the Indian market under the Schwing Stetter brand. Schwing was acquired by XCMG, in 2012. XCMG is a Chinese multinational, government-owned, heavy machinery manufacturing company with headquarters in Xuzhou, Jiangsu. SSIPL is now a stepdown subsidiary of XCMG.

About parent, Schwing group

The Schwing group is one of the world’s largest manufacturers of construction equipment concerning concrete. Schwing GmbH, Germany, manufactures concrete mixing equipment (batching plant), truck mixers, concrete pumps, and shotcrete machines used for concreting tunnels and recycling plants for conversion of waste concrete. The group has been operating in the industry for over seven decades across 11 countries.

 

Schwing was acquired by XCMG, in 2012. SSIPL is now a step-down subsidiary of XCMG.

 

About the ultimate parent - XCMG

XCMG is one of the leading Chinese manufacturers of construction machinery equipment. It was established in 1989 in Xuzhou and ranks among the largest manufacturers in the global construction machinery industry. It manufactures heavy machinery equipment such as cranes, loaders, heavy-duty trucks, and special-purpose vehicles.

Key Financial Indicators

As on / for the period ended December 31		2020	2019
Revenue	Rs crore	1562	1740
Profit after tax (PAT)	Rs crore	22	12
PAT margin	%	1.4	0.7
Adjusted debt/adjusted net worth	Times	0.82	1.32
Interest coverage	Times	2.93	1.91

 

Any other information: Not applicable

Annexure - Details of Instrument(s)