ICRA downgraded the company's line of credit (long term and short term) to A- from A and to A2+ from A1, with a negative outlook.
Bajaj Electricals share price fell 4.4 percent intraday to hit a 52-week low of Rs 312 on November 18 after ICRA downgraded its long-term rating.
The stock has corrected 40 percent in last six months. It was quoting at Rs 318.00, down Rs 8.35, or 2.56 percent, on the BSE at 1506 hours IST.
ICRA downgraded the company's line of credit (long term and short term) to A- from A and to A2+ from A1 respectively, with negative outlook. The rating agency also downgraded non-convertible debenture to A- from A, with negative outlook.
"The revision in the ratings takes into account significant decline in profitability of the engineering, procurement and construction (EPC) business of the company, particularly pertaining to the orders in rural electrification in first half of FY20 and the subsequent weakening in the company’s debt-coverage metrics," the rating agency said in its report.
The company's revenue from the EPC business declined by 39 percent to Rs 914.51 crore in first half of FY20 from Rs 1,498.86 crore reported in the corresponding period of the previous year.
High overheads in the EPC business segment and the input cost pressures moderated its EBIT (earnings before interest and taxes) margin to 0.28 percent in first half of FY20 from 4.87 percent in first half of FY19.
The sharp decline in the EBIT margin of the EPC business, coupled with the high finance cost following elevated borrowing due to high working capital requirements, impacted the company's debt coverage metrics as evident from the decline in interest coverage ratio to 1.1 times in first half of FY20 from 3.4 times in the first half of FY19.
While the company has decided not to focus on rural electrification orders and gradually optimise the cost overheads in the EPC business, its ability to secure better margin orders in the EPC business [particularly in transmission line towers (TLT) & high mast] and also improve the profitability remains a key rating sensitivity, said ICRA.
The agency also took into account the exposure of the company's operations to volatility in the raw material prices as well as the high working capital intensity of the EPC business.
The rating agency said the negative outlook reflected its view that the company’s EPC business segment’s profitability will continue to face pressure due to high cost overheads in near term and subsequently, its debt coverage metrics would remain moderate due to the increased working capital borrowings.
"The outlook will be revised to stable, if the company shows an improvement in the working capital position in a sustained manner along with consequent improvement in profitability and debt coverage metrics," it added.
However, the ratings favourably factored in the healthy performance of the company's consumer durable segment in FY19 and first half of FY20, wherein revenues grew by around 23 percent and around 20 percent, respectively, on YoY basis.Further, the EBIT margin of the consumer durable business witnessed a healthy improvement of 169 bps in FY19, supported by better inventory management under the new distribution model (Range and Reach Expansion Program, RREP).