GMMCO LIMITED. Ratings Facilities Amount (Rs. crore) Ratings 1 Remarks Long term Bank Facilities (enhanced from ) CARE AA [Double A]

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1 GMMCO LIMITED Ratings Facilities Amount (Rs. crore) Ratings 1 Remarks Long term Bank Facilities (enhanced from ) Long/ Short term Bank Facilities (enhanced from ) Total Facilities 1, CARE AA [Double A] CARE AA/ CARE A1+ [Double A/ A One Plus] Revised from CARE AA+ [Double A Plus] Revised from CARE AA+/ CARE A1+ [Double A Plus/ A One Plus] Rating Rationale The revision in the long-term rating factors in the expected moderation in leverage indicators on account of incremental debt proposed to be availed towards the acquisition of Bucyrus dealership business. The ratings continue to take into account the position of GMMCO Ltd (GMMCO) as an exclusive dealer for Caterpillar (CAT) products (in its designated region), wide product range offered by CAT which is further strengthened by the addition of Bucyrus product line, GMMCO s existing strong financial position characterized by favourable capital structure and good profitability indicators. In addition to this, the ratings factor in favourable long-term growth prospects of the end user segments. The ratings also factor in the trading nature of business resulting in little control over pricing & supply of products. While already existing business of Bucyrus product range will give GMMCO a reasonable business potential to start with, ability of the company to improve profitability and achieve adequate levels of cash accruals from the new dealership business will be the key rating sensitivity. Background Incorporated in 1967, GMMCO, belonging to the GP-CK Birla group, is engaged in marketing and after-sales support of heavy equipment and gensets. GMMCO derives majority of its income from sales and service of Caterpillar (CAT) products. GMMCO derives income from three main segments - Machine Business Group (MBG), Power System Group (PSG) and Rental and Used Equipment Group (RUE). While MBG mainly deals with Caterpillar range of earthmoving, construction, mining, industrial and paving products, PSG deals with engines and generator sets of Caterpillar and others. The company also sells spare parts for the machineries & engines and provides after-sales service for the same. During FY13, GMMCO Singapore Pte Ltd (GSPL) was incorporated as a wholly owned subsidiary of GMMCO with an equity share capital of USD 100,000. GSPL is also in the same line of business as GMMCO, wherein it procures machineries from CAT and sells to Indian customers, due to their preference of direct import. For FY13 (June 20, 2012 to March 31, 2013), GSPL reported net profit of USD 336,219 against total revenue of USD 1,298,326. Credit Risk Assessment Exclusive dealership of Caterpillar products GMMCO is an exclusive dealer of Caterpillar (CAT) equipment and engines. As an authorized dealer for CAT products, GMMCO represents CAT in Southern, Western and Central India while the dealership for rest of the country is designated to M/s. Tractors India Private Limited. CAT, based out of North America, is the world's leading manufacturer of construction & mining equipments, diesel & natural gas engines. In CY2012 (refers to period from January 2012 to December 2012), CAT generated sales of USD bn and PAT of USD 5.68 bn. Sales contribution of Asia Pacific region amounted to USD bn (26% of total sales) in the year. Presence in wide user segments with wide product range of CAT and wide service network The main end user segments catered to by MBG are mining, road construction and general construction sectors and within each of this segment, CAT offers a wide range of products. The main end user segment of EBG includes marine, petroleum, electric 1 Complete definition of the ratings assigned are available at and other CARE publications 1

2 power and gas & industrial sectors. GMMCO deals in the entire CAT range of products such as backhoe loaders, wheel loaders, hydraulic excavators, graders, compactors, pavers, dump trucks, etc. Presence in wide user segments with wide product range enables the company to insulate against recession in any particular sector. In addition to handling a wide product portfolio of CAT, GMMCO has also taken additional dealership of international companies including Perkins, UK, Shandong SEM Machinery Co. Ltd, China (Loaders), Trimble Europe B.V., Netherlands (Technology Products and Systems), Eurotire Inc., USA (Tyres used in Dump Trucks), Terex, Northern Ireland and India (Mobile Crushing and Screening Plants), Sennebogen, Germany (Crawler & Harbour Cranes), Juntta, Finland (Hydraulic Piling Hammer), Kroll, Denmark (HD Tower cranes), Kress Corporation, USA (Steel Plant Material Handling Equipments) and Daimler India Commercial Vehicles Pvt Ltd (Mining Trucks), etc, for various other products which complement the product portfolio of CAT. Out of the above, business of Perkins is well established and Daimler business has been shaping well. As other dealerships are in nascent stage, share of income from these products to total income is low. GMMCO has a wide network of regional and branch offices of around 100, most of which are fully equipped with best product support facilities. The dealership business caters to a number of reputed customers both from public and private sectors. New dealership to provide strategic fit to the existing business of GMMCO though likely to result in increase in leverage level in the near term Bucyrus was acquired by CAT in June Product portfolio of Bucyrus includes a range of material removal and material handling equipments used in both surface and underground mining. This acquisition has given CAT a full range of mining machines in the global market from its initial coverage of 23%. Also, various components used in Bucyrus machines which are supplied by other companies, will be gradually replaced by CAT. This is expected to provide synergy, leading to optimization of operational cost. GMMCO is in the process of obtaining dealership business of Bucyrus products in India which is currently handled directly by it. This business provides a strategic fit for GMMCO, which already has presence in sales and service of mining machines in India. The already existing/ installed Bucyrus machines in India will provide ready and stable revenue in the form of parts and service business (Maintenance and Repair Contracts; MARC). Major supplies of Bucyrus equipments are towards coal companies, other mining companies (zinc, iron ore, etc.), cement companies, etc. Backed by the favorable long term outlook for infrastructure sector (power, coal, etc.), demand for Bucyrus products, is expected to grow. Based on cash flow from Bucyrus distribution business, GMMCO has arrived at a valuation which needs to be paid to CAT at the time of transfer of the business. This is expected to be completed during the calendar year. GMMCO has proposed to fund the same through term loans from banks which is being tied up. Further, part of working capital requirements of Bucyrus business is proposed to be funded through bank borrowings. Above factors are likely to result in increase in leverage levels in the near term. However, strong cash accrual from existing business, which is also term debt free, is likely to support repayments of new business in the immediate term. GMMCO expects to gain synergies in operations as the costs pertaining to the already established branch network and man power will get amortised over a higher volume of sales. The healthy order book of Bucyrus (under implementation), provides revenue visibility in the short to medium term and services/ spare parts/ tools business provides a long term revenue visibility as these contracts include after sales service contracts. Also, service income from Bucyrus machines is expected to be higher as these are high value (ranging from USD 0.5 mn to 53.1 mn per unit) machines. Strong financial position characterised by favourable capital structure and good profitability The financial position of GMMCO is characterized by strong earnings profile and profitability as well as favorable capital structure with low term debt. Though PBILDT margin declined in FY13, it continues to be high at 31.37%. Drop in PBILDT margin in FY13 is primarily on account of increase in operating costs. It may be noted that on account of shorter credit period (around 30 days) offered by CAT, GMMCO generally does not hedge its foreign currency exposure. Currently, GMMCO has hedged 90% of its forex exposure and reviews the open position on a continuous basis. Leverage indicators such as overall gearing ratio and LT debt equity ratio remained low at 0.31 times and 0.01 times as on March 31, On account of the proposed increase in borrowings for obtaining the dealership of Bucyrus business and also to support the increasing scale of operations of the existing business, leverage indicators are expected to increase in FY14. In the long run, in addition to cash accruals of existing business, the new business is also likely to generate positive cash flows, which is expected to improve the leverage indicators. 2

3 Favourable long term growth prospects of the industry Heavy engineering equipment industry is driven by the construction and mining sectors. The industry is characterized by high capital intensity, direct dependence on infrastructure expansion in the country, frequent technological up gradations, small market size, lack of focus on indigenous R&D and high dependence on collaborators/principals. With respect to the Indian mining industry, 80% of the mining is in coal and the remaining 20% is in other metals and minerals. Long term outlook for the coal mining industry remains positive on account of the criticality of this industry to the country s plans of investment in infrastructure. Coal production for FY13 stood at mn tonnes, registering a growth of 3.6% (y-o-y) with 1.42% de-growth in Q4FY13. Demand-supply mismatch in coal is expected to rise to ~30% CAGR over the next five years. Increased opportunities in the form of GoI s plans to augment coal capacity and production through increased private participation and increased requirement of iron ore on the back of increasing steel capacity, provide considerable scope for the business prospects of mining equipments. With the company entering into dealership of Bucyrus machines which pertain to mining industry, the revenue visibility remains comfortable in the medium to long term. The Government of India had announced that the investments in infrastructure is expected to total USD 1 trillion in the 12th Five Year Plan ( ) compared to USD 514 billion in the 11th Five Year Plan. With continued thrust given by GoI to infrastructure development, long-term growth prospects of the construction industry continue to remain positive. The construction equipment industry is expected to realise considerable benefits on account of increased thrust in infrastructure spending by both public as well as private entities. It is worthwhile to note that GMMCO generates significant amount of MBG sales from sale to construction sector. Prospects Long-term growth prospect of its various customer segments is likely to enable GMMCO to maintain its consistent financial performance. In the near term leverage levels are expected to increase on account new business acquisition. Going forward, with its strong position in domestic market by virtue of CAT dealership and acquisition of strategically fit Bucyrus business, financial performance is expected to improve. However, ability of the company to successfully reap benefits from newly acquired business and improve the leverage indicators post the expected moderation are key rating sensitivities. Financial Performance (Rs. Cr) For the period ended/ as at Mar.31, (12m, A) (12m, A) (12m, A) Working Results Trading Profit Other Income Total Income PBILDT Interest 3 11* 13* Depreciation PBT PAT (after deferred tax) Gross Cash Accruals Financial Position Equity Capital Networth Total Debt Key Ratios Growth Growth in Total income (%) Growth in PAT (after D.Tax) (%) Profitability PBILDT Margin (%)

4 For the period ended/ as at Mar.31, (12m, A) (12m, A) (12m, A) PAT Margin (%) ROCE (%) Solvency Long Term Debt Equity ratio (times) Overall Gearing (times) Interest Coverage (times) Total Debt/Gross Cash Accruals (years) Liquidity Current Ratio(times) Quick Ratio(times) Turnover Average Collection Period (days) Average Creditor Period (days) Average Inventory Period (days) Operating Cycle (days) *includes forex losses; A- Audited (This follows our brief rational for entity published on 1 st October 2013) DISCLAIMER CARE s ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments. 4

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