Transformers and Electricals Kerala Ltd.

Brickwork Ratings reaffirms/revises the ratings for the Bank Loan Facilities of Rs.247.90 Crs. of Transformers and Electricals Kerala Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous(26 Nov 2019)	Present
Fund Based
Cash Credit - Sanctioned	27.02	27.02	Long Term	BWR BBB /Stable Reaffirmation	BWR BBB /Stable Reaffirmation
Working Capital Demand Loan - Sanctioned	00.00	10.48
Bill Discounted (BD) - Sanctioned	99.00	99.00	Short Term	BWR A3 Reaffirmation	BWR A3 Reaffirmation
Bills Purchase (BP) - Sanctioned	10.00	15.00
Sub Total	136.02	151.50
Non-Fund Based
Bank Guarantee - Sanctioned	80.40	80.40	Short Term	BWR A3 Reaffirmation	BWR A3 Reaffirmation
Letter of Credit - Sanctioned	21.00	16.00
Sub Total	101.40	96.40
Grand Total	237.42	247.90	(Rupees Two Hundred Forty Seven Crores and Ninety 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 ratings continue to reflect the established position of the Company as a joint venture between Government of Kerala and NTPC Ltd. with operational track record of over 5 decades, professional and experienced management, consistent financial performance, near to medium term revenue visibility based upon current order book position of Rs. 207 Crs. and steady demand scenario with potential future growth in per capita consumption of electricity in India. The ratings remain constrained by the modest scale of operations, thin profitability, customer concentration risk, geographical concentration of business in South India, working capital intensive nature of operations, and intense competition among numerous incumbents.

 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 increase in 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 inability to increase sales and profitability on a sustained basis, 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 isa 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 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 has provided the Company unique brand value and technological prowess to establish it as a prominent player in transformer industry. The operations are effectively managed by a well qualified and experienced team of professionals. Mr. N.C. Mohanan is the Chairman of the Board of Directors, andMr. Prasad B. the Managing Director of the Company. They have been appointed by the Governmentof Kerala and the NTPC Ltd. respectively.

• 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 InstrumentTransformers, SF6 Gas Circuit Breakers, Shunt and Series Reactors, Isolated Phase Bus Ducts, TapChangers etc. TELK gave India, its first 400 kV Class Transformer, first 315 MVA Auto Transformerand Generator Transformer for India's first 500 MW Thermal Unit. It is an ISO 9001 certified company since 1995. The major customers of TELK include Kerala State Electricity Board, Nuclear Power Corporation, APTransco, Siemens, GE T&D India, Megha Engineering etc. Currently, it has a healthy orderbook of Rs. 207 Crs. as on 31Oct2020 to be completed over the next 1-1.5 years.

• Consistent Financial performance :

  In FY20, operating income remained relatively flat at Rs.203.25Crs as against Rs.204.47Crs in FY19. Approximately 96% of total revenue is derived from sale of power transformers and the remaining is service charges. During April 2020 to December 2020, the company achieved ~Rs70.00Crs as against 9MFY20, the company reported total sales of Rs.104Crs. The decrease is due to slowdown in business operations during Q1FY21 on account of COVID-19 outbreak and nationwide lockdown. Operating profit margin improved from 3.06% in FY19 to 6.85% in FY20 (Provisional) due to reduction in operating overheads and expenses.Net profit margin remained flat in FY20 at 1.62% as against 1.888% in FY19. Current ratio is moderate at 1.73 times as on March 31, 2020 (Provisional). Company's TNW is moderate at Rs. 90.03 Crs. as on 31Mar2020(P). With total debt at Rs. 18.31 Crs, the gearing translates into 0.20 times on 31Mar2020(P).ISCR improved over the period from 0.99 time to 2.42 times in FY20.

Credit Risks:

• Modest scale of operations :

  Despite being in the business for over 5 decades, the Company’s scale of operations is modest among industry peers. Modest scale of operations constrains the financial and operational flexibility, and limits economies of scale.

• Intense competition in industry :

  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 profitability of industry. Also, they have to compete with big and established players in terms of both scale and technology. The Company needs to increase its scale of operations, keep up with the technological upgradations, enter into appropriate technological collaboration agreements and enhance its brand value to overcome the competition.

• Working Capital Intensive Operations :

  The nature of power transformer business is such that it generally takes 6-8 months to complete the order. Though the company obtains advance from some customers, the raw materials and overheads incurred during 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 constrain the cash conversion cycle. As on March 2019, cash conversion cycle stood at 218 days.

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

Ability of the the company’s ability to execute projects in a timely manner within the estimated costs, achieve its targeted turnover and profitability margins and liquidity levels shall be the key rating sensitivities.

Positive : 

• Healthy growth in revenues and earnings with improvement in competitive position on a sustained basis.

• Customer and geographical diversification of revenue.

• Efficient realization of receivables.

Negative : 

• Weakening of operational revenue on sustained bases.

• Material impact on the financial risk profile due to non realization of receivables / debt-funded capital expenditure.

LIQUIDITY INDICATORS - Adequate

Working capital utilization was moderate at around 61% for past 1 year. The Company has the flexibility to opt for debt-financed expansion as and when needed. The Company has no term loan as on 31Mar2020(P). The company's cash accruals stood at Rs.4.58Crs in FY20 and Rs.14.6Crs for FY21 (Projected). Current Ratio is adequate at 1.73 times as on 31Mar2020P). Cash and cash equivalents were Rs. 1.30 Cr. as on 31Mar2020(P). Overall, due to sufficient net cash accruals and EBITDA, low gearing, underutilized sanctioned lines of credit and adequate Current Ratio, the liquidity position appears adequate.

ABOUT THE ENTITY

TELK was incorporated on 09Dec1963 with current registered address at , Ernakulam, Kerala - 683573. The Company is involved in Manufacture, Supply, Erection, and Commissioning of Power Transformers and other related power equipments like power Transformers, Bushings, On Load Tap Changers etc. It was set up by 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, the largest Power Utility in India under which the latter acquired 44.60% of equity shares of the former. Government of Kerala holds majority stake of 54.56%. Mr. N.C. Mohanan is the Chairman of the Board of Directors since 08Sep2016.  Mr. Prasad B. is the Managing Director of the Company since 09Jan2016 The current order book of the Company as on 31Oct2020 is of Rs. 207.40 Crs, which is expected to be completed within a year.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 18-19 (Audited)	FY 17-18 (Audited)
Operating Revenue	Rs.Crs.	204.47	153.78
EBITDA	Rs.Crs.	6.27	-5.00
PAT	Rs.Crs.	3.85	2.64
Tangible Net Worth	Rs.Crs.	86.32	82.32
Total Debt/Tangible Net Worth	Times	0.24	0.34
Current Ratio	Times	1.62	1.63

KEY COVENANTS OF THE FACILITY RATED

NA

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  (2021)			Rating History (2020)
Type	Tenure	Amount	Rating	26Nov2019
Fund Based
Cash Credit - Sanctioned Working Capital Demand Loan - Sanctioned	Long Term	27.02 10.48	BWR BBB/Stable	BWR BBB/Stable
Bill Discounted (BD) - Sanctioned Bills Purchase (BP) - Sanctioned	Short Term	99.00 15.00	BWR A3	BWR A3
Non-Fund Based
Bank Guarantee - Sanctioned Letter of Credit - Sanctioned	Short Term	80.40 16.00	BWR A3	BWR A3
Grand Total		247.90	(Rupees Two Hundred Forty Seven Crores and Ninety lakhs Only)

Facilities	Current Rating  (2021)			Rating History (2019)
Type	Tenure	Amount	Rating	21Nov2018
Fund Based
Cash Credit - Sanctioned Working Capital Demand Loan - Sanctioned	Long Term	27.02 10.48	BWR BBB/Stable	BWR BBB/Stable
Bill Discounted (BD) - Sanctioned Bills Purchase (BP) - Sanctioned	Short Term	99.00 15.00	BWR A3	BWR A3
Non-Fund Based
Bank Guarantee - Sanctioned Letter of Credit - Sanctioned	Short Term	80.40 16.00	BWR A3	BWR A3
Grand Total		247.90	(Rupees Two Hundred Forty Seven Crores and Ninety lakhs Only)

Facilities	Current Rating  (2021)			Rating History (2018)
Type	Tenure	Amount	Rating	25Jul2017
Fund Based
Cash Credit - Sanctioned Working Capital Demand Loan - Sanctioned	Long Term	27.02 10.48	BWR BBB/Stable	BWR BBB/Stable
Bill Discounted (BD) - Sanctioned Bills Purchase (BP) - Sanctioned	Short Term	99.00 15.00	BWR A3	BWR A3
Non-Fund Based
Bank Guarantee - Sanctioned Letter of Credit - Sanctioned	Short Term	80.40 16.00	BWR A3	BWR A3
Grand Total		247.90	(Rupees Two Hundred Forty Seven Crores and Ninety lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - NA

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.

Analytical Contacts
Karthick G Rating Analyst Board : +91 80 4040 9940 karthick.g@brickworkratings.com	Parvathavardhini N Associate Director Ratings parvathavardhini.n@brickworkratings.com
1-860-425-2742 | media@brickworkratings.com

SL.No.	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	Cash Credit - Sanctioned	15.00	_	15.00
2	Bills Purchase (BP) - Sanctioned	_	15.00	15.00
3	Bill Discounted (BD) - Sanctioned	_	55.00	55.00
4	Letter of Credit - Sanctioned	_	_	0.00
5	Working Capital Demand Loan - Sanctioned	10.48	_	10.48
6	Cash Credit - Sanctioned	12.02	_	12.02
7	Bill Discounted (BD) - Sanctioned	_	44.00	44.00
8	Bank Guarantee - Sanctioned	_	80.40	80.40
9	Letter of Credit - Sanctioned	_	16.00	16.00
Total		37.50	210.40	247.90
TOTAL (Rupees Two Hundred Forty Seven Crores and Ninety lakhs Only)