Fitch Ratings-Mumbai/Singapore-12 May 2009: Fitch Ratings has today assigned India's Hightemp Furnaces Limited (HTF) a National Long-term rating of 'BBB-(ind)' with a Stable Outlook, as well as 'BBB-(ind)' ratings to HTF's INR275.3m long-term bank loans and INR80m cash credit facilities. The agency has also assigned a 'F3(ind)' rating to its INR50m short-term bank loan facility.
HTF has three divisions, namely furnace manufacturing, commercial heat treatment (CHT) and auto components; the bulk of earnings and margins come from the furnace and CHT operations. The ratings reflect the company's proven track record in providing heat treatment solutions, primarily to the automotive sector. The ratings also reflect the technology-focused nature of HTF's heat treatment solutions, supported by its wide range of technological collaborations for speciality heat treatment processes. The technology strengths of the company are reflected in its improving operating margins over the past few years. This margin improvement was also seen during FY09, amid a challenging operating environment. The commercial heat treatment division acts as an outsourcing unit for auto component manufacturers and helps HTF provide stability of margins and revenue growth (HTF has long term contracts with auto component manufacturers for the same).
The ratings are primarily constrained by the dependence of the company on the capex cycle of the auto sector (accounting for over 70% of the divisions' sales), and the working capital intensive nature of the business, which has constrained short-term liquidity. The inventory days increased to 30 days in FY08 from 21 days in FY07, while the receivable days increased to 65 days from 60 days during this period. The ratings are also constrained by its loss-making auto component business, which has suffered due to the downturn in the auto sector over FY08. This downturn has also impacted its furnace business, with many customers deferring inspection and delivery of their orders, and has led to a fall in the company's order book position. Concerns also arise from the lengthening working capital cycle, which reflects the liquidity pressures being faced by the auto sector.
HTF has been looking to expand into higher margin areas like aerospace and renewable energy, which should help it over the medium- to long-term. As part of these initiatives, the company has entered into a joint venture with Vac Aero Canada to focus on the aerospace sector and is in final stages to get NADCAP certification, as well as a tie-up with the Indian Institute of Science for renewable energy generation.
Fitch notes that any further deterioration in the company's earnings and leverage due to further pressure on the company could act as a negative rating trigger, as could further deterioration in the working capital cycle and liquidity. Furthermore, any material debt-led capex could also put downward pressure on the ratings. In any case, a net debt/EBITDA above 2.5x could act as a negative trigger.
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HTF has been engaged in the manufacturing of industrial heat treatment furnaces since 1970 and has a 40% market share in the electrically heated industrial heat treatment furnaces segment. In FY08 revenue growth was 33% amounting to INR761m, EBITDA margins increased to 17.2% in FY08 (FY07: 14.8%), mainly due to an increased proportion of furnace manufacturing. The net debt/EBITDA fell to 2.0x in FY08, compared to 2.5x in FY07 due to higher EBITDA margins.
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