TEXT-Fitch assigns 'B+(ind)/F4(ind)' to India's MEIPL

(The following statement was released by the rating agency)

Nov 4 - Fitch Ratings has today assigned India's Mayur Electrical Industries Private Limited (MEIPL) a 'B+(ind)' National Long-Term rating, and ratings of 'B+(ind)/F4(ind)' to its INR75m fund based and INR70m non-fund based facilities.

MEIPL's ratings are derived from the experience of its promoters in dealing with state electricity boards and state power utilities, its low leverage levels, reasonable order book position, and consecutive growth in EBITDA margins over the last few years.

Fitch notes that rating concerns emanate from the modest size of operations and small market share (which results in low bargaining power), and the tender-based nature of the business, which makes the company prone to order cyclicality. The ratings are also constrained by exposure to the counter-party credit risk of MEIPL's customers, many of whom are State Power Utilities with weak credit profiles. However, the ultimate use of MEIPL's products, that is power cables under the Government of India funding schemes for the power sector, partially mitigates this counterparty credit risk.

The ratings also factor in MEIPL's low profitability margins and the competitive nature of operations in the industry. MEIPL's capacity utilisation levels in FY09 have been low (FY09: 39%), and Fitch notes the company remains exposed to input cost and forex volatility, with the main raw materials being procured at international spot prices. The existence of price pass-through clauses in most of the government sale contracts provides partial comfort against this risk. Fitch also notes that MEIPL has extended corporate guarantees to group companies, and the quantum of these guarantees is larger than the company's own net worth.

MEILP is proposing to set up a distribution transformer manufacturing facility in Greater Noida and has begun the land acquisition process. Fitch has not factored this project into the ratings as it is in the preliminary stages and project costing has yet to be completed.

Positive rating factors are increases in size, capacity utilisation and operating margins. Negative rating triggers include a fall in operating EBITDA margins, an increase in working capital intensity, unplanned capital expenditure or contraction of additional debt particularly to fund the proposed transformer project or further guarantees extended to group companies that could potentially increase leverage would also constitute negative rating guidance.

Incorporated in 1992, MEIPL is a Noida-based company engaged in the manufacturing of power cables. At FYE09, the company reported sales of INR374.2m and an operating EBITDA of INR22.9m. MEIPL's leverage as denoted by Total Debt/EBITDA was 3.2x as at FYE09 (FYE08:1.82x).