Rating Rationale
January 06, 2021 | Mumbai
The Hi-Tech Gears Limited
Rating reaffirmed at 'CRISIL BBB+ / Stable'; rated amount enhanced for Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.183 Crore (Enhanced from Rs.150 Crore)
Long Term RatingCRISIL BBB+/Stable (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL has reaffirmed its rating on the long-term bank facilities of The Hi-Tech Gears Ltd (THGL; part of the Hi-Tech group) at ‘CRISIL BBB+/Stable’.

 

The rating continues to reflect the promoters’ established presence in the auto component manufacturing industry and healthy relations with reputed original equipment manufacturers (OEMs). The rating also factors in the company’s comfortable financial risk profile. These strengths are partially offset by volatility in operating profitability and moderate scale of operations of subsidiaries.

Analytical Approach

‘2545887 Ontario Inc. Canada’ has various step-down subsidiaries and is itself a wholly owned subsidiary of THGL. Hence, CRISIL has taken a consolidated approach with regard to all these companies, together referred to as ‘the Hi-tech group’ due to parent and subsidiary relationship and common promoters.

Key Rating Drivers & Detailed Description

Strengths:

  • Promoters’ established presence and relations with reputed OEMs: The three-decade-long experience of the promoters in the auto component manufacturing industry has resulted in healthy relations with reputed large customers, such as Hero MotoCorp Ltd (HMCL), JCB, Cummins, Daimler Bharat, Tata Cummins and Magna. Furthermore, diversification into international territories (through acquisition of foreign subsidiaries) should also help mitigate the risk of geographical concentration and ongoing slowdown in the domestic automobile industry.

 

  • Comfortable financial risk profile: Financial risk profile is comfortable: networth was Rs 283 crore and gearing at 1.3 times as on March 31, 2020. Moreover, despite increase in interest cost (due to additional debt) and deterioration in both revenue and operating margin, interest coverage remained comfortable at around 2.7 times in fiscal 2020. In the wake of no sizeable debt funded capex, financial risk profile should remain comfortable over the medium term despite a comparatively weaker business performance anticipated in fiscal 2021.

 

Weakness:

 

  • Moderate scale of operations of subsidiaries: Scale of operations in subsidiaries continues to remain moderate at Rs 213 crore in fiscal 2020 which is expected to deteriorate further in fiscal 2021. Decline in scale to Rs 213 crore in fiscal 2020 from Rs 266 crore in fiscal 2019, further constrained the cost efficiencies of The Hi-tech group and ability of the subsidiaries to independently service their upcoming debt obligations. Going forward, improved contribution from subsidiaries, leading to an improved business risk profile of the hi-tech group, will remain a key rating sensitivity factor.

 

  • Volatility in operating profitability: Although the group has the mechanisms in place to pass through changes in raw material prices, however, it may be delayed by some period, typically 90 days. The group’s profitability is also dependent on the order book that it receives as it changes the product mix, which also adds to volatility.

 

The severe impact on operating profitability, however, in Q1 of fiscal 2021 was largely on account of higher fixed costs incurred against lower revenue achieved because of Covid19 pandemic that affected all industries globally including Indian auto industry.

Liquidity: Adequate

Liquidity should remain adequate supported by healthy unencumbered cash balance of Rs 56 crore as on September 30, 2020 and moderately utilized bank lines at 28% for last 12 months ending August, 2020. Cash accruals, however, are expected to be lower for fiscal 2021 but will remain sufficient for covering the debt obligations to be met this fiscal.

 

Liquidity profile is also supported by ability of promoters to extend unsecured loans as and when required. This was visible in infusion of unsecured loans by promoters into its foreign operations worth Rs 7.4 crore in December, 2019 (same were outstanding as on March 31, 2020). These loans are interest bearing and are expected to continue to remain in the business over the medium term.

Outlook Stable

CRISIL believes the Hi-tech group’s credit profile will continue to be supported by established relationships with its major customers.

Rating Sensitivity factors

Upward Factors:

  • Significant improvement in annual cash accrual generation to over Rs 90 crore, predominantly driven by healthy growth in subsidiaries’ operations
  • Prudent working capital management, with no sizeable stretch in gross current assets

 

Downward Factors:

  • Deterioration in the subsidiaries performance over the medium term, thereby, impacting the group’s revenue and profitability
  • Non-acceptance of deferral in repayments by the concerned lender for period of January, 2021 to September, 2021
  • Sizeable debt-funded capital expenditure or stretched working capital cycle deteriorating the capital structure, with gearing exceeding 2 times

About the Company

Incorporated in 1986, THGL is a public limited entity listed on Bombay Stock Exchange as well as National Stock Exchange. Mr Deep Kapuria is the promoter. The company manufactures auto components, particularly transmission gears. THGL has 3 manufacturing plants in India –two in Bhiwadi, Rajasthan and one in Manesar, Haryana.

 

The group achieved operating income of Rs 265.8 crore and profit after tax (PAT) of negative Rs 4.1 crore in first half of fiscal 2021 against Rs 389.7 crore of operating income and Rs 7.7 crore of PAT in first half of fiscal 2020.

Key Financial Indicators

Particulars

Unit

2020

2019

Revenue

Rs Crore

726.8

915.1

Profit After Tax (PAT)

Rs Crore

8.3

35.6

PAT Margins

%

1.1

3.9

Adjusted Debt/Adjusted Networth

Times

1.25

1.6

Interest coverage

Times

2.7

3.9

 

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)

Complexity Level

Rating Assigned with Outlook

NA

Working capital facility

NA

NA

NA

97.0

NA

CRISIL BBB+/Stable

NA

Proposed Working capital facility

NA

NA

NA

1.4

NA

CRISIL BBB+/Stable

NA

Long-term loan

NA

NA

Mar-2025

84.6

NA

CRISIL BBB+/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

The Hi-tech Gears Limited

Full

Common management and similar line of business

2545887 Ontario Inc. Canada

Full

Wholly owned subsidiary, Common management and similar line of business

Tuetech Industries Inc.

Full

Step-down subsidiary, Common management and similar line of business

2504584 Ontario Inc.

Full

Step-down subsidiary, Common management and similar line of business

Tuetech Holding Corporation

Full

Step-down subsidiary, Common management and similar line of business

Tuetech Leasing Corporation

Full

Step-down subsidiary, Common management and similar line of business

Tuetech LLC

Full

Step-down subsidiary, Common management and similar line of business

2323532 Ontario Inc. Canada

Full

Step-down subsidiary, Common management and similar line of business

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019 2018 Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 183.0 CRISIL BBB+/Stable   -- 22-10-20 CRISIL BBB+/Stable 11-09-19 CRISIL BBB+/Stable   -- --
      --   --   -- 10-09-19 CRISIL BBB+/Stable   -- --
      --   --   -- 06-09-19 CRISIL BBB+/Stable   -- --
Commercial Paper ST   --   --   --   --   -- Withdrawn
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
Long Term Loan 84.6 CRISIL BBB+/Stable Long Term Loan 59.5 CRISIL BBB+/Stable
Proposed Working Capital Facility 1.4 CRISIL BBB+/Stable Working Capital Facility 90.5 CRISIL BBB+/Stable
Working Capital Facility 97 CRISIL BBB+/Stable - - -
Total 183 - Total 150 -
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for Consolidation

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