CARE downgrades Hindustan Aeronautics' rating as receivables rise

Rating agency CARE has downgraded Hindustan Aeronautics’ (HAL’s) long and short bank rating from ‘AAA’ to ‘AA-Plus’ on a build-up of receivables, leading to increased reliance on working capital debt. The downgrade reflects changes in HAL’s operating environment, involving reduced advance funding by customers, CARE said.

HAL is majorly owned by the government and has a strategic role in the defence programme. It is the only Indian company having specialised in aircraft manufacturing and also providing Maintenance, Repair and Overhauling services (MRO). Further, HAL has established a track record in offering product life cycle support.

Earlier, CARE said, HAL would get significant advance funding from the military. That resulted in negligible borrowing and robust liquidity, helping it execute projects and funding its R&D, without relying on debt. However, the liquidity profile is under pressure on continuous decline in customer advances due to delayed allocation of budgeted amounts and higher spending towards Rafale aircraft and other foreign orders.

Receivables rose from Rs 7,742 crore as on end-March 2018 to Rs 9,845 crore in end-September and Rs 14,029 crore at end-March, 2019, the rating agency said.

Also, as against a budgeted allocation (of the GoI) of Rs25,000 crore to HAL for the current financial year, only Rs 12,000 crore had been disbursed at the end of the first six months (end-September). The shortfall was met from enhanced working capital borrowing and utilisation of cash and bank balances. The latter declined from Rs 5,250 crore at end-March 2018 to Rs 45 crore at end-March 2019.

The situation has since eased with conclusion of a majority of payments. This resulted in improvement of the receivables position to Rs 10,572 crore at end-September. Still, these are likely to remain high, going forward, in the range of Rs 11,000-12,000 crore.

Its liquidity is adequate. With realisation of receivables to some extent in this financial year, dependence on short-term bank borrowing has reduced. Average utilisation of fund-based limits was 54 per cent for the 12 months ended September. The firms has unutilised limits of Rs 4,164 crore, against fund-based limits of Rs 5,250 crore as on end-September.

CARE says HAL had tried to improve operating efficiency. That includes optimising of overhead expenditure, inventory rationalisation and indigenisation, to compensate the increase in interest expense and loss in interest income.

The rating also takes note of improvement in its operating margin in 2018-19, on the back of growth in MRO income and stable revenue from sale of products. The healthy order book position, which imparts revenue visibility in the medium term, and strong R&D capabilities, have resulted in a continually improving product portfolio, says CARE.

Going forward, sustained effort to improve operating efficiency and pricing the new contracts to sustain higher operating profit to cover additional interest expense needs to be watched, it said.