Eimco Elecon India Limited

Ratings Reaffirmed

Total Bank Loan Facilities Rated Rs.810 Million Long Term Rating CRISIL AA-/Stable (Reaffirmed) Short Term Rating CRISIL A1+ (Reaffirmed)

(Refer to Annexure 1 for Facility-wise details)

Rs.50 Million Non Convertible Debentures CRISIL AA-/Stable(Reaffirmed) Rs.170 Million Commercial Paper CRISIL A1+(Reaffirmed)

CRISIL's ratings on the bank facilities and debt instruments of Eimco Elecon (India) Ltd (Eimco Elecon) continue to reflect Eimco Elecon's continued leadership in the underground mining equipment segment, backed by technological support from foreign collaborators, and its healthy financial risk profile. These rating strengths are partially offset by the company's vulnerability to the prolonged sluggishness in the underground mining segment and its dependence on Coal India Ltd (CIL; rated 'CRISIL AAA/Stable/CRISIL A1+') and its subsidiaries (collectively referred to herein as CIL) for revenue.
 
Eimco Elecon has a near monopoly in the underground coal mining equipment industry in India, with a market share of over 90 per cent. Its established market position is further supported by an extensive after-sales service network. The company's technical capabilities are supported by its collaboration with foreign partners. During 2008-09 (refers to financial year, April 1 to March 31), Eimco Elecon entered into a technical collaboration with Huta Stalowa Wola SA, a Polish company, to manufacture loaders with applicability in multiple industries such as coal mining, construction, and road-building. CRISIL believes that Eimco Elecon is likely to maintain its leadership position and gradually increase its scale of operations, over the medium term.
 
Eimco Elecon has a strong financial risk profile, marked by healthy debt protection metrics and comfortable liquidity. The company has maintained a debt-free balance sheet since 2010-11, as a result of which its debt protection metrics, such as interest coverage ratio, are healthy. During 2013-14, it extended a guarantee covering the bank facilities of the subsidiaries of its group company - Elecon Engineering Co Ltd - for a sum of Rs.307 million. However, Eimco Elecon's capital structure remains healthy even after factoring in this support; moreover, the management intends to cap the support to group entities at the current level. Also, the company's steady accruals and unencumbered liquid surplus (about Rs.350 million as on September 30, 2014), provide headroom to weather exigencies.
 
Eimco Elecon's high revenue dependence on CIL historically has exposed it to concentration risks. As CIL's operations have been impacted by regulatory and policy changes, Eimco Elecon's revenue growth has remained sluggish in the recent past; the company's revenue registered a low compound annual growth rate of 5 per cent over the five years through 2013-14. While Eimco Elecon has undertaken initiatives to diversify its clientele, CIL remains its largest revenue contributor (about 65 per cent of revenue in 2013-14 as against 96 per cent in 2010-11). Over the medium term, CRISIL believes that CIL's contribution will remain high, and sustained diversification will be required before Eimco Elecon's revenue concentration risks are minimised.
 
Eimco Elecon derives over 90 per cent of its revenue from the underground mining segment, which has witnessed prolonged sluggishness in ramp-up over the past decade. Underground mines currently account for only 9 per cent of coal produced in India as against about 15 per cent a decade ago. This sluggishness is among the key inhibitors for Eimco Elecon's revenue growth. CRISIL believes that the company's efforts with respect to new product launches and re-entering into the opencast mining segment will be critical to increase its growth over the medium term.

CRISIL believes that Eimco Elecon will continue to benefit over the medium term from its healthy capital structure and leading market position in the underground mining segment. The outlook may be revised to 'Positive' if the company significantly improves its revenue, mainly by way of diversification of its customer profile or enhanced offtake from its new product offerings. Conversely, the outlook may be revised to 'Negative' if there is any significant pressure on Eimco Elecon's revenue or profitability due to prolonged issues in the coal mining sector, or in case of further support to its group companies.

Eimco Elecon, incorporated in 1974, is a joint venture between the Elecon group and Sandvik AB, Sweden, the world's leading manufacturer of rock-drilling tools and underground mining equipment. Eimco Elecon produces a very wide range of underground mining machinery, such as air-powered rocker shovels, electro-hydraulic side-dump loaders, and electro-hydraulic and air-powered load-haul dumpers, used as loading machines in underground coal mines. The company has its manufacturing facilities at Vallabh Vidyanagar (Gujarat). Its major clients are the subsidiaries of CIL: Bharat Coking Coal Ltd and Eastern Coalfields Ltd. Other clients include The Singareni Collieries Company Ltd, Uranium Corporation of India Ltd, and Bharat Gold Mines Ltd. During 2011-12, Eimco Elecon sold its surface drilling product line to Sandvik Asia Pvt Ltd (rated 'CRISIL AA-/Stable/CRISIL A1+') for a consideration of Rs.165 million and booked a profit of Rs.89.9 million after writing off inventory worth Rs.75.1 million related to the segment.
 
Eimco Elecon reported a profit after tax (PAT) of Rs.201.6 million on net sales of Rs.1.9 billion for 2013-14, against a PAT of Rs.151.3 million on net sales of Rs.1.7 billion for the previous year. For the six months ended September 30, 2014, the company reported a PAT of Rs.47.5 million on net sales of Rs.698.6 million, against a PAT of Rs.71.4 million on net sales of Rs.637.4 million for the corresponding period of the previous year.

Annexure 1 - Details of various bank facilities

Current facilities Previous facilities Facility Amount (Rs.Million) Rating Facility Amount (Rs.Million) Rating Cash Credit 20 CRISIL AA-/Stable Cash Credit 50 CRISIL AA-/Stable Letter of Credit * 260 CRISIL A1+ Letter of Credit * 260 CRISIL A1+ Letter of Credit 250 CRISIL A1+ Letter of Credit 320 CRISIL A1+ Proposed Long Term Bank Loan Facility 280 CRISIL AA-/Stable Proposed Long Term Bank Loan Facility 130 CRISIL AA-/Stable -- 0 -- Short Term Loan 50 CRISIL A1+ Total 810 -- Total 810 -- * Interchangeable with bank guarantee