Rating Rationale Elecon Engineering Company Ltd. 11 Dec 2018 Brickwork Ratings reviews the rating of the bank loan facilities of Rs. 1256.93 Cr and assigns rating to the proposed NCD issue of Rs.150 Cr of Elecon Engineering Company Ltd. Particulars of Bank Loan Rating Facility / Instruments Amount Rated (Rs. Cr) Previous Rating Rating based on current review (Reaffirmation of Rating Previous Present Tenure (May, 2018) with change in Outlook) Term Loans 179.75 144.43 Long Term Fund Based Working Capital 323 318 Long Term BWR A- (Pronounced as BWR A Minus) Outlook - Negative Non-Fund Based Working Capital 779 795 Long Term Total Bank Loan Amt 1281.75 1257.43 * Please refer to BWR website www.brickworkratings.com/ for definition of the ratings Particulars of NCD Instrument Amount (Rs. Cr) Tenor Rating Assigned* NCD Issue 150 (Rs. One Hundred and Fifty Crore Only) Long Term BWR A- (Stable) (Pronounced as BWR A Minus) Outlook - Stable BWR A- (Pronounced as BWR A Minus) (Outlook: Stable) Rating Reaffirmation with Change in Outlook: BWR has principally relied upon the Audited standalone and consolidated financial results of Elecon Engineering Company Ltd. (EECL) upto FY 18, limited review results of H1FY19, projected financials, publicly available information and information/clarifications provided by the Company s management. 1 11 Dec 2018
Change in outlook follows the improved operating performance of Material Handling as well as Transmission business of the company both in terms of top-line and profitability coupled with gradual improvement in its receivables position. The rating continuous to derive strength from long and established track record of the promoters in business with EECL s leading position in domestic Industrial Gears and Power Transmission Equipment industries coupled with comfortable gearing. The rating is, however, constrained by stressed working capital cycle as substantial funds are blocked in inventories and receivables, due to the nature of business. Analytical Approach: EECL has analyzed both the standalone and consolidated financials of the Company, with Transmission Equipment and Material handling Equipment businesses. The consolidated entities are their subsidiaries operating abroad, and names of key companies are provided in the end. Rating criteria is appended below. Key Risk Drivers for rating: Experienced and Qualified Management with established track record: Elecon Engineering Company Ltd. (EECL) was established in 1951 in Mumbai by Ishwarbhai B. Patel. Mr. Prayasvin Patel is Chairman and Managing Director of the Company with 40 years of experience in Engineering Industry. He joined EECL as Joint Managing Director in 1983. Mr. Prashant Amin is the Executive Director with 35 years of experience. Leading position in domestic industrial gears and Power Transmission Equipment Industry: EECL is one of the large Power Transmission Equipment (PTE) and industrial gears manufacturing companies in India. It has a leadership position in the PTE business with a market share of ~30%. Their MHE Division also is well known and caters to segments such as coal, steel, power, chemical and marine industries. Comfortable gearing: EEC L has consolidated net worth of Rs. 768 Cr as on September 30, 2018 with the comfortable gearing of 0.9x. Company s rated exposure has moderate level of TL 2 11 Dec 2018
and Working Capital Facilities. Company has ISCR and DSCR of 1.8x and 1.2x at standalone level and 1.8x and 1.0x at consolidated level, indicating adequate debt protection matrix. Major WC exposure is in the form of non-fund facilities comprising of LCs/Bank Guarantees. Company s track record of meeting commitments under such facilities is satisfactory. High Receivables: Though the recovery process of receivables has been initiated by the company, it still stands at Rs.585 Cr as on standalone level and Rs. 633 Cr at consolidated level as on September 30, 2018. Of these receivables, approximately Rs.400 Cr pertains to Material Handling Equipment (MHE) division at consolidated as well as standalone level and balance pertains to Gear business. As per the management, entire focus during 1HFY19 was to improve collections for MHE business. The company has recovered the amount of Rs. 119 Cr during 1HFY19 out of MHE receivables. Recovery of Retention money, which is held up when the company s products are used along with others in major projects continues to be an issue, as payment is held up until completion of the projects. Rating Outlook: Stable BWR believes the EECL s business risk profile would be maintained over medium term. Going forward, the ability of the company to achieve projected level of revenues and profitability in both the divisions, and bring down the receivables level will be the key rating sensitivities. Any deterioration in operating performance or receivables management will be negative for the rating. Draft Terms of the NCD: Instrument Senior, Secured, Rated, Listed NCD Amt (Rs. Cr) 150 Tenure Upto 5 years Principal Moratorium Upto 18 Months Repayment Schedule Quarterly Instalment after principal moratorium Interest Rate Coupon of 12.25% p.a compounded monthly payable quarterly Redemption Premium 2.5% p.a compounded monthly payable along with each principal repayment Put Option Post 48 months 3 11 Dec 2018
Debt Service Reserve Account (DSRA) Debenture Trustee 1 Quarter's interest DSRA in the form of FDs charged in favor of Debenture Trustee Vistra (ITCL) India Ltd. About Elecon Engineering Company Ltd. (EECL): Elecon Engineering Company Ltd. is one of Asia s largest gear manufacturing companies with vast experience of about five decades and significant business presence in India and abroad. Their major overseas subsidiaries operate in US and UK. The Company designs and manufactures worm gears; parallel shaft and right angle shaft; helical and spiral level helical gears; fluid geared and flexible couplings, as well as planetary gear boxes. The Company also manufactures material handling equipment, mining equipment, casting processes amongst others. The company was incorporated in 1960 by Shri Ishwarbhai B Patel and has its headquarters in Vallabh Vidyanagar, Gujarat. This is a listed company and the promoters hold 58.64% of the equity. Brief financial details are given below: Financials: Consolidated Standalone Consolidated Standalone Rs. Crore FY17 FY18 FY17 FY18 1HFY18 HFY19 1HFY18 1HFY19 Operating Income 1275 1189 996 920 492 624 354 494 EBITDA 173 121 164 111 15 82 8 64 Net Profit 11 7 21 8-44 57-43 7 Adjusted Net Profit 20 Total Debt 583 590 468 497 562 543 441 451 Networth 710 709 729 731 663 768 680 735 Debt to Equity 0.82 0.83 0.64 0.68 0.85 0.7 0.65 0.6 Current Ratio 1 1.1 0.9 1.0 0.95 1.1 0.87 1.0 Rating History for the last three years: (including withdrawn/suspended ratings) 4 11 Dec 2018
Status of non-cooperation with previous CRA (if applicable): Reason and comments N/A Any other information: List of Key Companies which are consolidated: Overseas Subsidiaries Elecon Transmission International Ltd. Elecon Singapore PTE Ltd. Elecon Middle-east FZE Benzlors System AB Radicon Transmission UK Ltd. AB Benzlers Radocin Drive Systems, Inc Benzler Transmission A.s. Benzler TBA BV 5 11 Dec 2018
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