Rating Rationale
September 22, 2020 | Mumbai
Universal Cables Limited
Rating outlook revised to 'Stable'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1694.37 Crore
Long Term Rating CRISIL A/Stable (Outlook revised from 'Positive' and rating reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.100 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Universal Cables Limited (UCL; part of the MP Birla group) to 'Stable' from 'Positive' and reaffirmed the rating at 'CRISIL A'. The short-term rating and commercial paper programme.has been reaffirmed at 'CRISIL A1'. 
 
The outlook revision factors in the lower than anticipated improvement in the business and financial risk profiles of UCL, given the impact of Covid in fiscal 2021. As a result, revenues are expected to remain lower than fiscal 2020 and anticipation, which will also lead to reduction in EBIDTA and net cash accruals. Further, due to the same, with debt levels remaining intact due to the high working capital requirements, financial metrics including interest coverage are expected to weaken over the medium term. Further, with anticipated enhancement in working capital limits, liquidity is expected to remain adequate and, though gearing will remain in moderate range, given lower than anticipated improvement in net worth levels.
 
The outlook revision also factors in the expected impact of measures taken by the government to contain the Covid-19 pandemic and the subsequent economic slowdown on the company's business risk profile. The measures include a nationwide lockdown imposed from March 25, 2020, partial easing of which from June 8, 2020, should limit the impact, with performance expected to recover in the second half of fiscal 2021.
 
CRISIL has also noted the Calcutta High Court order dated September 18, 2020, restraining Mr. HV Lodha from holding all the positions within the M P Birla Group of Companies. However, CRISIL believes that this judgement does not materially impact the business or day to day operations of the company and also does not have a bearing on the credit profile. CRISIL will remain in discussions with the management to understand the further implications of the same.
 
The ratings continue to reflect the strong technical and financial support derived by UCL from the MP Birla group, the company's longstanding track record in the cables business backed by strong market presence in the extra-high voltage (EHV) cables segment, high medium-term revenue visibility and comfortable capital structure. These strengths are partially offset by large working capital requirement, modest interest coverage ratio and susceptibility to regulatory changes.

Analytical Approach

To arrive at the ratings, CRISIL has factored in support from the MP Birla group, as it has common promoters with the company and extends financial support whenever required. Furthermore, UCL is critical to the group, as it is one of the largest players in the EHV cables sector and has a strong market position in the electrical cables segment.

Key Rating Drivers & Detailed Description
Strengths
* Technical and financial support from the MP Birla group
The group manufactures cement, power cables and optical fibre cables and undertakes engineering, procurement and construction (EPC) contracts in the transmission and telecom industry. It holds a 62% stake in UCL. In 2012-2015, when the power industry was facing headwinds and UCL incurred losses, the group funded the company's losses and the incremental working capital requirement. It extended inter-corporate deposits (ICDs) of Rs 175 crore as on March 31, 2015. With improvement in the industry and in UCL's performance, ICDs declined to Rs 78 crore as on March 31, 2017. However, they increased again in fiscal 2020 to Rs 123 crore in order to fund the incremental working capital requirement and have also increased in fiscal 2021, in order to support the working capital requirements. The company has also benefitted from the technical support provided by the group over the years. The ratings centrally factor in timely support from the MP Birla group, likely to continue over the medium term. More-than-expected delay or shortfall in support will remain a key rating sensitivity factor.
 
* Longstanding track record in cable manufacturing
UCL has been manufacturing power cables and capacitors for five decades across all major segments, such as EHV and low-voltage, medium-voltage and rubber cables. The company is an approved cable vendor for major state electricity boards and has presence in Bangladesh and Mauritius. It is a leading player in the EHV segment and has entered into turnkey contracts from pure-play supply of EHV, thus strengthening the market position.
 
* Strong revenue visibility backed by healthy orders
Revenue increased 11% to Rs 1,569 crore in fiscal 2020. Sales stood at Rs 205 crore in the first quarter of fiscal 2021, supported by policy change regarding power distribution, Smart City projects and underground cable lines in metro cities. Revenue growth is expected to continue over the medium term, with healthy orders of Rs 1,063 crore.
 
* Comfortable capital structure
Networth was large at Rs 377.68 crore and gearing was comfortable at 1.7 times as on March 31, 2020. The company brought in equity of Rs 57.00 crore in fiscal 2016 to support the working capital requirement. Total outside liabilities to tangible networth ratio increased slightly but remained moderate at 2.7 times as on March 31, 2020, compared with 2.63 times two years earlier on account of increase in the working capital requirement.
 
Weaknesses
* Large working capital requirement
Gross current assets were 267 days as on March 31, 2020, driven by sizeable receivables of 194 days. This is because majority of the clients (largely state or central government entities) receive credit of 90 days, and payments are stretched. The company also maintains inventory of 60 days (30 days for raw material and the remaining for finished goods) and some work-in-progress for EPC projects. Though UCL gets supplier credit (101 days as on March 31, 2020), it is not sufficient to meet the incremental working capital requirement. Cash flow was negative in four of the last five fiscals, leading to dependence on working capital debt.
 
* Modest debt protection metrics
Interest coverage ratio was modest at 2.16 times in fiscal 2020 because of working capital debt, interest-bearing corporate borrowings and bank charges related to non-fund-based facilities. The ratio is expected to improve with better revenue and profitability. Net cash accrual to total debt ratio, however, was comfortable at 0.12 time in fiscal 2020.
Liquidity Strong

Cash accrual, expected at Rs 60-90 crore per annum, will sufficiently cover yearly debt obligation of Rs 14-22 crore in fiscals 2020 and 2021. Bank limit utilisation averaged 91% over the 11 months through August 2020. Current ratio was comfortable at 1.3 times as on March 31, 2020. Liquidity is further supported by unsecured loans from the MP Birla group (Rs 123 crore as on March 31, 2020).

Outlook: Stable

CRISIL believes UCL will continue to benefit from its strong order book, longstanding presence, improving financial risk profile and support from the MP Birla group.

Rating Sensitivity Factors
Upward Factors
* Significant growth in revenue and stable operating margin
* Increase in interest coverage to beyond 3.0 times, with reduced dependence on outside borrowings
* Efficient working capital management

Downward Factors
* Steep decline in revenue and operating margin
* Sizeable debt-funded capital expenditure (capex) weakening the credit metrics (on a net basis)
* Increase in the working capital requirement constraining liquidity.

About the Company

Incorporated in 1962, UCL manufactures power cables and capacitors for the power industry and rubber cables for original equipment manufacturers and other industries, such as railways, steel plants, petrochemical plants, cement plants, oil rig manufacturers, shipbuilding and mining. Power cables are sold under the 'Unistar' brand.
 
The company also has a technical collaboration with Furukawa Electric Company Ltd, Japan, in the EHV cable sector and adopts the vertical continuous vulcanisation and pressurised liquid salt bath curing technologies to manufacture power and rubber cables, respectively. UCL has two plants, one in Satna, Madhya Pradesh, and the other in Goa. It is listed on the Bombay Stock Exchange.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs.Crore 1568.96 1416.55
Profit After Tax (PAT) Rs.Crore 64.55 69.0
PAT Margin % 4.11 4.87
Adjusted debt/adjusted networth Times 1.70 1.70
Interest coverage Times 2.16 2.83

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Bank Guarantee NA NA NA 820 NA CRISIL A1
NA Capex Letter of Credit NA NA NA 13.5 NA CRISIL A1
NA Cash Credit NA NA NA 435 NA CRISIL A/Stable
NA Foreign Exchange Forward NA NA NA 26 NA CRISIL A1
NA Inland/Import Letter of Credit NA NA NA 125 NA CRISIL A1
NA Long Term Loan NA NA 31-Dec-20 49.87 NA CRISIL A/Stable
NA Commercial paper NA NA 7-365 days 100 Simple CRISIL A1
NA Proposed Short Term Bank Loan Facility NA NA NA 160 NA CRISIL A1
NA Proposed Long Term Bank Loan Facility NA NA NA 65 NA CRISIL A/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1  18-02-20  CRISIL A1  22-02-19  CRISIL A1  06-03-18  CRISIL A1  30-12-17  CRISIL A1  -- 
            04-01-19  CRISIL A1  27-02-18  CRISIL A1       
                08-01-18  CRISIL A1       
Fund-based Bank Facilities  LT/ST  735.87  CRISIL A/Stable/ CRISIL A1  18-02-20  CRISIL A/Positive/ CRISIL A1  22-02-19  CRISIL A/Positive/ CRISIL A1  06-03-18  CRISIL A/Stable/ CRISIL A1    --  -- 
            04-01-19  CRISIL A/Positive/ CRISIL A1  27-02-18  CRISIL A/Stable/ CRISIL A1       
Non Fund-based Bank Facilities  LT/ST  958.50  CRISIL A1  18-02-20  CRISIL A1  22-02-19  CRISIL A1  06-03-18  CRISIL A1    --  -- 
            04-01-19  CRISIL A1  27-02-18  CRISIL A1       
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
Bank Guarantee 820 CRISIL A1 Bank Guarantee 780 CRISIL A1
Capex Letter of Credit 13.5 CRISIL A1 Capex Letter of Credit 13.5 CRISIL A1
Cash Credit 435 CRISIL A/Stable Cash Credit 400 CRISIL A/Positive
Foreign Exchange Forward 26 CRISIL A1 Foreign Exchange Forward 14 CRISIL A1
Inland/Import Letter of Credit 125 CRISIL A1 Inland/Import Letter of Credit 125 CRISIL A1
Long Term Loan 49.87 CRISIL A/Stable Long Term Loan 50.16 CRISIL A/Positive
Proposed Long Term Bank Loan Facility 65 CRISIL A/Stable Proposed Long Term Bank Loan Facility 61.71 CRISIL A/Positive
Proposed Short Term Bank Loan Facility 160 CRISIL A1 Proposed Short Term Bank Loan Facility 250 CRISIL A1
Total 1694.37 -- Total 1694.37 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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