Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB+/Positive/CRISIL A2’ ratings on the bank facilities of HPL Electric and Power Limited (HPL, part of the HPL group).

 

The reaffirmation factors in HPL group’s performance during fiscal 2022 despite the anticipated impact on the performance amid Covid-19 pandemic. Group generated an operating income and EBITDA (earnings before depreciation, interest and tax) of Rs 1014 crore and Rs 125 crore during fiscal 2022, broadly in line with CRISIL Ratings’ expectations. During fiscal 2022, there has been a recovery in operating income backed by good traction in retail segment and increased orders from state utilities. Operating margin was ~12.3% during the fiscal backed by the various price hikes taken by the group amid the sharp rise in raw material costs. Return on capital employed (RoCE) remained subdued at 6.3% in fiscal 2022 however with expected gradual improvement in operating margin and no significant rise in total debt, RoCE is expected to improve going ahead. While the working capital requirements continue to remain high, the gross current asset (GCA) days have started to restore to pre-pandemic level: GCA days were 393 days as on March 31, 2022 as against 434 days and 367 days as on March 31, 2021 and March 31, 2020.

 

The positive outlook factors in the expected improvement in HPL group’s business profile as execution of orders of smart meters follows the bids that are placed by the group. The smart meter tendering got deferred on account of Covid-19 pandemic. However, the group is expected to benefit from the progress in smart meter tendering in current fiscal, backed by  government’s focus on conversion of conventional meters to smart meters and increased tenders floated by state utilities for smart meters. This is expected to support the revenue growth as well as improved operating margin for the group and the same would remain monitorable.

 

The ratings continue to reflect HPL's established presence in metering industry, operating efficiencies due to in-house research and development facilities, diversified product profile and robust networth & healthy capital structure. These strengths are partially offset by working capital intensive operations, moderate debt protection metrics, susceptibility to tender-based operations and subdued RoCE.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of HPL and its subsidiary, Himachal Energy Private Limited (HEPL) and majority owned JVs, namely HPL -Shriji Designs (HPLSD) and HPL - Shriji Designs - Trimurthi Hitech Co. Private Limited (HPLTS). This is because all these entities, together referred as the HPL group, operate in the same industry and have operational and financial linkages.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Established presence in the metering industry: The group is an established player in the market with its brand ‘HPL’ for around 3 decades now. Mr. Lalit Seth (Chairman, HPL group) began importing meters from Europe in 1956 and has been involved in the business of metering segment since then. The group commissioned its first manufacturing facility dedicated to metering in 1998 and currently manufactures 50-60 lakh meters on an annual basis. Also, notably all players in metering industry are supposed to provide a 5-year guarantee to the customer (usually state power utilities or private utilities) for the meters supplied and there has never been any invocation of any guarantee by its customers. This extensive experience of providing quality products is backed by complete backward integration and quality controls being followed by the group. CRISIL Ratings believes that experience of over 3 decades in the industry will continue to support business risk profile over the medium term.

 

Operating efficiencies due to in-house Research and Development: The group has 3 research and development (R&D) facilities (two in Gurgaon and one in Kundli). The in-house R&D has helped group in innovating and developing new products on a consistent basis. One of the major breakthroughs has been in the form of smart meters. The group has bagged orders for the same and is expected to ride the smart meter installation wave over the next few years as Government of India has indicated installation of 25 crore smart meters in the near to medium term. Apart from metering, group has also developed solar and agricultural switchgears which are expected to provide further boost to its business profile over the medium term.

 

Diversified product profile: Over the years, the group has diversified its product portfolio by adding products at regular intervals in allied industries. The group has a diversified product portfolio which serves both the B2B (meters) and B2C (lighting, switchgears, wires & cables) segments. The metering segment contributes to around 40-45% of the total revenue and the remaining is from other segments. Group has an established pan India distribution network of over 900 authorised dealers and distributors and over 35000 retailers which provide significant reach. The diversification is reflective of strong understanding of market dynamics owing to long-standing presence of promoters in electronics industry and healthy relations with its customers and suppliers.

 

The group’s diversified product basket mitigates the risk of obsolescence in any single product as well as it protects revenue against downswing in any one product stream. CRISIL Ratings, thus, believes that a diversified product profile along with continuous investments in R&D should lead to sustainable growth in revenue in the medium to long term.

 

Robust networth and healthy capital structure: Backed by steady and healthy accretion to reserves, group has a robust networth and the same provides financial flexibility to the group. The networth stood at Rs 760 crore as on March 31, 2022. Supported by a robust networth as against the debt level, the capital structure is healthy, as reflected in low gearing and TOLTNW of 0.79 time and 1.11 times as on March 31, 2022. CRISIL Ratings expects capital structure to remain healthy over the medium term supported by higher profitability anticipated in smart metering orders and lower working capital cycle of B2C segment which would, in turn, lead to lower reliance on debt to fund working capital requirements. Further with no debt-funded capital expenditure plans, long term debt is also not expected to increase significantly from the existing levels.

 

Weaknesses:

Working capital intensive operations: Group has high working capital requirements as reflected in gross current asset (GCA) days of 393 days as on March 31, 2022, driven by debtor days and inventory days of 182 days and 210 days, respectively. The group operates in both B2B and B2C segments, wherein revenue contribution was 34% and 66% respectively by both the segments in fiscal 2022. Both these segments have different working capital cycle. The working capital cycle in B2C segment is shorter compared to B2B as group deals with power utilities in B2B segment wherein the manufacturing takes place over a period of 2-3 months and with the customer being government entities, the payments are released on milestone basis, therefore inventory and debtor days are high. In B2B segment, working capital cycle for an entire order can be over 365 days. However, GCA should improve because of expectation of slightly shorter working capital cycle in smart metering orders. For B2C segment, working capital cycle is shorter as the payments are received in 3-4 months from the dealer network and private parties and group keeps inventory equivalent to 3-4 months largely because of high number of stock-keeping-units (SKUs) and continuous supply of material. The inventory levels are expected to further reduce because of improving brand recognition and rationalization of SKUs of various products.

 

Moderate debt protection metrics: Debt protection metrics have remained moderate as reflected by interest coverage of around 2 times over the last 8 years but with no debt funded capex anticipated over the medium term, interest coverage is expected to improve from FY23 onwards. Net cash accruals to adjusted debt (NCAAD) has slowly been improving over the years since low of 0.04 times in FY15 and FY16. Although at 0.09 time for FY22 it continues to remain moderate. With no debt funded capex anticipated, and accruals expected to fund incremental working capital requirements, CRISIL Ratings expects NCAAD to improve over the medium term. Also, with expectation of higher proportion of smart metering orders in the total order book, CRISIL Ratings expects debt protection metrics to improve over medium term as higher profitability of the aforementioned orders should lead to improvement in debt protection metrics. Thus, the proportion of smart metering orders in total order book and their operating profitability will be key monitorables over the medium term.

 

Susceptibility to tender-based operations: For the meter segment, revenue and profitability entirely depend on the ability to win tenders from PSUs. Also, entities in this segment face intense competition, thus requiring to bid aggressively to get contracts, which restricts the operating margin to a moderate level.

 

Subdued RoCE: The scale of operations has moderated over the past few fiscals, however, the group witnessed recovery in operating income in fiscal 2022; 16% y-o-y growth to Rs 1014 crore in fiscal 2022. Group’s RoCE was low at 6.3% in fiscal 2022. The moderation in RoCE has been happening since fiscal 2016 largely because of increasing deployment of capital in enhancing capacities and capabilities for producing smart meters and also in developing new generation of switchgears which involve agricultural and solar switchgears. Also, the end users residing in real estate and power sectors in B2B and B2C segments, respectively, have faced several headwinds in last few years owing to which the order flow has been impacted. With focus on smart metering and group’s enhanced product profile, CRISIL Ratings believes that the RoCE should improve going ahead. Any delay in recovery of RoCE will be a key monitorable over the medium term.

Liquidity: Adequate

Liquidity is adequate marked by moderately high bank limit utilization however supported by adequate net cash accrual vis-à-vis repayments and healthy unencumbered cash. Group has access to fund based working capital limits of Rs 557 crore and the same have been utilized at an average of 91% over the 12 months ended Jun-22. Group is expected to generate net cash accruals of around Rs 70-90 crore annually against which the repayment obligations are expected to be around Rs 30 crore in FY23 and around Rs 14-20 crore over FY24 and FY25. Hence, there will be more than adequate cushion between net cash accruals and repayment obligations going ahead. The cash accruals would support the incremental working capital requirements and capex. Unencumbered cash and bank balance stood at Rs 39.08 crore as on March 31, 2022. This further supports the liquidity of the group. Current ratio was 1.44 times as on March 31, 2022.

Outlook: Positive

CRISIL Ratings believes that HPL group’s business profile will improve as execution of orders of smart meters follows the bids that are placed by HPL. The group has all necessary approvals and certifications in place to participate in government tenders and private orders for smart meters.

Rating Sensitivity Factors

Upward Factors

• Significant improvement in operating income along with sustenance of operating margin leading to return on capital employed improving to over 10%
• Improvement in adjusted interest coverage to over 2.4 times on a sustained basis
• Sustained improvement in working capital cycle

 

Downward Factors

• Decline in revenue and operating margin resulting in return on capital employed falling to below 6%
• Large debt-funded capital expenditure weakening the capital structure and liquidity
• Any substantial increase in its working capital requirements thus weakening its liquidity & financial profile.

About the Group

Incorporated in 1992, HPL is engaged in the business of manufacturing electric meters, lighting equipment, switchgear, wires and cables. The company is promoted by Mr. Lalit Seth, Mr. Rishi Seth and Mr. Gautam Seth have 7 manufacturing facilities based out of Haryana and Himachal Pradesh. HPL is listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

 

HEPL is engaged in the manufacturing of energy saving meters and other related products.

 

HPLSD is Joint Venture (JV), which undertakes lighting projects.

 

HPLTS is a JV, which undertakes lighting projects.

Any other information: Not applicable