India Ratings downgrades Hindustan Dorr-Oliver to `IND BBB'

India Ratings has downgraded Hindustan Dorr-Oliver Ltd’s (HDOL) Long-Term Issuer Rating to ‘IND BBB’ from ‘IND A’. The Outlook is Negative. A list of additional ratings is provided at the end of this commentary.

The downgrade reflects HDOL’s weak financial performance for the 15 months ended June 2012 (15 months). Consolidated provisional results for the 15 months indicate revenues of INR10.2bn, down 5% compared with those in FY11 (12 months). On a pro-rata basis, revenues declined 24% yoy in FY12. The cause for the fall in revenue was delays in the execution of company’s projects, particularly two major projects (cumulative value of INR4.5bn) in its mineral division. Revenue was also impacted by delays in receiving an order worth INR1.98bn in the same division.

The Outlook reflects India Ratings’ view that HDOL’s liquidity and operating margins will remain under pressure in the near term. However, the agency does not expect operating margins to deteriorate further from the FY12 levels. The company is expecting to receive around INR1.2bn of its receivables by December 2012, which are blocked in some of its projects executed in minerals and environmental divisions. This should ease some pressure on its liquidity.

The revenue decline and cost overrun of around INR530m in some of its mineral and environmental projects severely impacted operating margins as EBITDA turned negative INR252m in FY12 (FY11: positive INR848m).

Cash flow from operations slightly improved to negative INR206m for the 15 months from negative INR694m in FY11 due to a cash inflow of INR811m from a change in working capital compared with an outflow of INR1,096m. This was because trade payable increased substantially to INR4.6bn from INR2.9m which more than offset the rise in debtors and inventory.

HDOL’s debt increased to INR5.9bn (including vendor bill discounting of INR1,532m) as of end-June 2012 from INR3.7bn as of end-March 2011 (vendor bill discounting of INR993m). This resulted in an increase in interest to INR689m for the 15 months from INR277m in FY11.

HDOL’s order book remained strong at INR15.56bn as of end-June 2012 (INR14.45bn as of June 2011) which is 1.5x of its FY12 revenue. However, 75% of the order book is accounted by its top five customers, compared with 60% as of June 2011. Customer concentration is mitigated by the strong credit profile of those customers.

While assessing the credit profile of HDOL, the agency has not factored in any potential support from IVRCL Limited (the parent, ‘IND A+’/ Negative).

WHAT COULD TRIGGER A RATING ACTION?
Positive: The current rating Outlook is Negative. Therefore, India Ratings’ sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, leading to a rating upgrade. However, a significant improvement in liquidity by better working capital management and overall improved financial performance may result in a Stable Outlook.

Negative: No significant improvement in liquidity and financial performance may result in further negative rating action.

India Ratings has also downgraded HDOL’s bank loan ratings as follows:

• INR3,000m cash credit facility: downgraded to Long-Term ‘IND BBB’ from ‘IND A’
• INR12,000m non-fund-based limits (reduced from INR12,750m): downgraded to Short-Term ‘IND A3+’ from ‘IND A1’
• INR2,000m commercial paper programme (carved out of the fund based working capital limits): Short-Term ‘IND A1’ rating withdrawn as the  facility was paid in full by March 2012.

The company merged its manufacturing division with its wholly-owned subsidiary HDO Technologies Limited in April 2011.

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