Transformers and Electricals Kerala Ltd.

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 245.66 Crs. of Transformers and Electricals Kerala Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (04 Feb 2021)	Present
Fund Based	37.50	35.26	Long Term	BWR BBB / Stable Reaffirmation	BWR BBB /Stable Reaffirmation
	114.00	114.00	Short Term	BWR A3 Reaffirmation	BWR A3 Reaffirmation
Non Fund Based	96.40	96.40	Short Term	BWR A3 Reaffirmation	BWR A3 Reaffirmation
Grand Total	247.90	245.66	(Rupees Two Hundred Forty Five Crores and Sixty Six lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure

RATING ACTION / OUTLOOK

The reaffirmation of the ratings reflects the established position of the Company as a joint venture between Government of Kerala and NTPC Ltd with an operational track record of over 5 decades, professional and experienced management, near to medium term revenue visibility with a current order book position of ~Rs.306 Crs as on 31 March 2022, long-standing relationships with reputed clientele and a steady demand scenario. However, the ratings remain constrained by the modest scale of operations in a competitive landscape, customer concentration risk, geographical concentration of business in South India, working capital intensive nature of operations. 

BWR also takes note continuation of the auditor's qualified opinion and the observation of the Comptroller and Auditor General of India (CAG) in the financial statements of the company along with a subdued performance during FY21 (P) due to the uncertain business environment on account of CoVid-19, resulting in an average financial profile marked by losses and weak debt protection metrics during FY 21(P). A similar trend continued till 9MFY22, post which the company has reportedly achieved significantly improved performance in Q4FY22. BWR expects the company to sustain the recovery during FY23 supported by its orderbook and established position.

BWR also notes that the company had availed relief under the COVID-19 moratorium package during Mar'20 - Aug'20 including sanction of emergency credit lines. The company has been regular in debt obligation payments in the post-moratorium period, as confirmed by the lender. BWR also notes the company has not availed the one-time restructuring (OTR) of loans under RBI Resolution Framework for Covid-19 related Stress.

The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. Brickwork Ratings believes that Transformers and Electricals Kerala Ltd.’s (‘TELK’ or ‘the Company’) business risk profile will be maintained over the medium term. The outlook may be revised to positive if a sustained significant increase in the scale of operations and higher than envisaged improvement in profitability results in an improved financial risk profile and there is customer and geographical diversification. The outlook may be revised to negative in case of its inability to increase sales and profitability on a sustained basis, a decline in the order book position with drop-in fresh order accretion, deterioration in the capital structure due to debt-financed capital expenditure and stretch in cash conversion cycle, thus weakening the financial risk profile of the Company.

KEY RATING DRIVERS

Credit Strengths:

• Established operational track record and experienced management :

  Established in 1963, TELK is a joint venture between the Government of Kerala (54.56%) and NTPC Ltd. (44.60%). Since 1966 when TELK rolled out its first product, it has established a significant market presence. The earlier technological collaboration with M/s. Hitachi Limited, Japan, and the entry of NTPC Ltd as a significant equity shareholder in 2007 have provided the Company with unique brand value and technological prowess to establish it as a prominent player in the transformer industry. The operations are effectively managed by a well-qualified and experienced team of professionals. Mr. Bipin Satya is the current managing director. The key managerial personnel are nominated by NTPC and appointed by the government of Kerala

• Steady demand scenario :

  Demand for the Company’s products arises from the overall industrial and economic growth of the country. With the improvement in per capita disposable income and increasing industrialization and urbanization, the demand for electricity will grow in India and consequently the demand for electricity distribution transformers. This indicates favorable demand conditions for the Company in the medium to long term.

• Operational track record :

  The Company is in the Indian transformer market for over 5 decades. Starting off with power transformers in 1966, it extended its product range to Instrument Transformers, SF6 Gas Circuit Breakers, Shunt and Series Reactors, Isolated Phase Bus Ducts, Tap Changers etc. TELK gave India, its first 400 kV Class Transformer, first 315 MVA Auto Transformer and Generator Transformer for India's first 500 MW Thermal Unit. It is an ISO 9001 certified company since 1995. It has been able to maintain long term relationships with its main customers and suppliers over the years. Currently, it has a healthy order book of ~Rs.306 as on 31 March 2022 to be completed over the next 1 year,

Credit Risks:

• Modest scale of operations and intense competition :

  Despite being in the business for over 5 decades, the Company’s scale of operations is modest among industry peers. The industry is characterized by many small and mid-size transformer manufacturers producing outputs of similar technical specifications. This restricts the pricing power of the incumbents. To acquire more market share they often compete based on margins. This places pressure on the profitability of the industry. Also, they have to compete with big and established players in terms of both scale and technology. The modest scale of operations constrains financial and operational flexibility and limits economies of scale. 

• Working Capital Intensive Operations :

  The nature of the power transformer business is such that it generally takes 6-8 months to complete the order. Though the company obtains advances from some customers, the raw materials and overheads incurred during the manufacturing of these transformers have to be met by TELK which generally stretches the working capital. Further, as the customers usually enjoy 3 months credit period, it further constrains the cash conversion cycle. The cash conversion cycle of the company remains stretched at 281 days as on 31 March 2021 (P) (PY: 222 days).

• Impact of Covid-19 on the operations of the company and average financial profile :

  The TOI of the company has decreased from Rs.203.13 Crs during FY 20 to Rs.146.48 Crs during FY 21 (P) mainly on account of the pandemic-induced disruptions. The covid-19 related disruptions resulted in a loss of man-hours and supply chain constraints. The company has also incurred losses at the EBITDA level to the extent of Rs.27.06 Crs in FY 21 (P) as compared to the EBITDA profit of Rs.9.66 Crs recorded in FY 20. BWR also notes that the loss includes a one-time expense of ~Rs.16 Crs towards liquidated damages for the period from FY12 to FY21 in accordance with the observations of CAG. PAT has moved in line with the fall in EBITDA with the company recording a loss of Rs.22.76 Crs in FY 21(P) as against profit of Rs.6.34 Crs recorded in FY 20. The TNW of the company has deteriorated from Rs.91.57 Crs during FY 20 to Rs.70.93 Crs during FY 21(P) on account of the losses in FY21. The gearing has deteriorated from 0.20 times as on 31 March 2020 to 0.49 times as on 31 March 2021 (P), yet remains comfortable.  Debt protection metrics were below average as on 31 Mar 2021 (P) on account of the losses.

ANALYTICAL APPROACH - Standalone

For arriving at its ratings, BWR has considered the standalone financials of Transformers & Electricals Kerala Ltd and has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale). The company does not have any subsidiaries.

RATING SENSITIVITIES

The ability of the company to significantly ramp up its scale of operations, improve profitability, ensure timely completion of orders on hand and secure fresh orders, ensure steady cash inflows, efficiently manage working capital requirements and strengthen its overall credit profile would be the key rating sensitivities. The company has outstanding contingent liabilities amounting to ~Rs.105.49 Crs comprising of Corporate Guarantee/ Bank Guarantees /disputed claims/disputed income tax liabilities as on 31 March 2020. Any crystallization of the above contingent liabilities or prolonged recovery of receivables and the impact of the same on the financial risk profile of the company would be the key rating sensitivity factors.

Positive: 

• Substantial growth in revenue and profitability driven by increased capacity utilisation thereby strengthening the financial risk profile
• Significant fresh order accretion resulting in improvement in the unexecuted orderbook position.
• Diversification of customer base

Negative:

• Substantial decline in scale of operations and profitability owing to the prolonged impact of Covid 19 and its variants, slowdown in the pace of execution of existing orders, lower-order accretion on a sustained basis.
• Specific credit metrics that may result in a downward rating action include (1) Total Debt/ Tangible Net worth above 1.5 times on a sustained basis (2) Current ratio below 1.00 times on a sustained basis.

LIQUIDITY INDICATORS - Stretched

The company's liquidity is considered stretched considering the near-full utilisation of its working capital limits and availment of Adhoc limits during the previous 12 months. The unencumbered cash and cash equivalents as on 31 Mar 2021 (P) and 31 March 2020 have remained low at Rs.0.25 Crs and Rs.0.24 Crs respectively. The company recorded an EBITDA loss of Rs.27.06 Crs during FY 21 (P). The current ratio has remained stable at 1.62 times as on 31 March 2021 (P) as against 1.89 times as on 31 March 2020. Although, the company does not have any meaningful long-term debt, BWR notes that the repayment of the GECL loan amounting to ~ Rs.8 Crs is spread out in FY23 and FY24 is expected to be met by the company's envisaged net cash accrual during the corresponding period. The company's ability to ramp up its scale of operations and generate sufficient net cash accrual to cover the principal debt obligations remains a key monitorable

 

ABOUT THE ENTITY

Transformers and Electricals Kerala Limited (‘TELK’ or ‘the company’) was incorporated on 09Dec1963 and has registered address at Ernakulam, Kerala. The Company is involved in the manufacture, supply, erection, and commissioning of Power Transformers and other related power equipments like, bushings, on Load Tap Changers etc. It was set up by the Government of Kerala in technical and financial collaboration agreement with M/s. Hitachi Limited, Japan. In the year 2007, TELK entered into a Business Collaboration & Shareholders Agreement with M/s NTPC Limited, under which the latter acquired 44.60% of equity shares of the former. The major revenue contributing product of the company are power transformers which are manufactured by the company at a specification of 20 MVA and above. The Government of Kerala holds majority stake of 54.56%. Mr. Bipin Satya is the current managing director of the company. Mr. Joseph Chacko, Mr. Shibu A.S., Mr. Shiva Kumar Ram, Mr. Anil Nautiyal and Mr. Animesh Jain are the other directors on the board of the company.

 

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 19-20 (Audited)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	203.13	204.47
EBITDA	Rs.Crs.	9.66	6.27
PAT	Rs.Crs.	6.34	3.85
Tangible Net Worth	Rs.Crs.	91.57	86.32
Total Debt/Tangible Net Worth	Times	0.20	0.24
Current Ratio	Times	1.89	1.62

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction of the rated facilities include standard covenants normally stipulated for such facilities.

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

NA

ANY OTHER INFORMATION

NA

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2022)			2021		2020		2019
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	35.26	BWR BBB/Stable (Reaffirmation)	04Feb2021	BWR BBB Stable (Reaffirmation)	26Nov2019	BWR BBB Stable (Reaffirmation)	21Nov2018	BWR BBB Stable (Reaffirmation)
Fund Based	ST	114.00	BWR A3 (Reaffirmation)	04Feb2021	BWR A3 (Reaffirmation)	26Nov2019	BWR A3 (Reaffirmation)	21Nov2018	BWR A3 (Reaffirmation)
Non Fund Based	ST	96.40	BWR A3 (Reaffirmation)	04Feb2021	BWR A3 (Reaffirmation)	26Nov2019	BWR A3 (Reaffirmation)	21Nov2018	BWR A3 (Reaffirmation)
Grand Total		245.66	(Rupees Two Hundred Forty Five Crores and Sixty Six lakhs Only)

Rating Advisory, as on 04Feb2022
Press Release, as on 04Feb2022
Advisory was issued due to the delay in review on 04 Feb 2022

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Hyperlink/Reference to applicable Criteria

• General Criteria
• Approach to Financial Ratios
• Manufacturing Companies
• Short Term Debt

Analytical Contacts
Vineetha Ann Varughese Senior Ratings Analyst vineetha.v@brickworkratings.com	Saakshi Kanwar Senior Manager Ratings saakshi.k@brickworkratings.com
1-860-425-2742 | media@brickworkratings.com

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	South Indian Bank	Cash Credit - Sanctioned	15.00	_	15.00
2	South Indian Bank	Bills Purchase (BP) - Sanctioned	_	15.00	15.00
3	South Indian Bank	Bill Discounted (BD) - Sanctioned	_	55.00	55.00
4	State Bank Of India (SBI)	Bank Guarantee - Sanctioned	_	80.40	80.40
5	State Bank Of India (SBI)	Letter of Credit - Sanctioned	_	16.00	16.00
6	State Bank Of India (SBI)	Working Capital Demand Loan - Out-standing	0.20	_	0.20
7	State Bank Of India (SBI)	Bill Discounted (BD) - Sanctioned	_	44.00	44.00
8	State Bank Of India (SBI)	Working Capital Term Loan - Out-standing	8.04	_	8.04
9	State Bank Of India (SBI)	Cash Credit - Sanctioned	12.02	_	12.02
Total			35.26	210.40	245.66
TOTAL (Rupees Two Hundred Forty Five Crores and Sixty Six lakhs Only)