Fitch Ratings has revised India-based Crompton Greaves Limited's (CGL) Outlook to Negative from Stable. Its National Long-Term Rating has been affirmed at 'Fitch AA+(ind)'. CGL manufactures power and distribution transformers, as well as electrical products for industrial and consumer use. A list of additional rating actions is provided at the end of this commentary.

The Outlook revision reflects the recent significant increase in CGL's net financial leverage (net adjusted debt/operating EBITDA) from FY12 levels (0.2x). This is driven by a sharp rise in its debt levels amid the declining trend of its operating margins. Fitch has included CGL's liquid investments, debt-oriented mutual funds as cash equivalents, and bills discounted as part of debt. Although net leverage is likely to remain below the negative rating guideline of 1.5x for FY13, there has been a significant reduction in the rating
headroom.

Fitch estimates debt levels to have risen 60%-70% from FY12 (year end March) levels, following the acquisition of ZIV group (Spain) in July 2012. The EUR150m acquisition was funded by a mix of debt and internal accruals. Operating margin has been sequentially falling for the last five quarters to 5.9% in June 2012 from 13.4% in FY11.

Fitch believes that a significant revival in CGL's profitability is unlikely in FY13. The company's overseas operations are likely to remain impacted by the continued slowdown in the industrial and real estate sectors, the on-going sovereign debt crises in Europe, and the social unrest in the Middle East and North Africa region. CGL's key markets India, Europe and North America, which contributed to about 51%, 18% and 15%, respectively, to FY12 revenue, are currently experiencing an economic slowdown.

The ratings continue to reflect CGL's diversified revenue streams due to its presence across power, industrials and consumer products segments, which contributed 65%, 16% and 19%, respectively, to consolidated revenue in FY12. The ratings also reflect the company's leading market position in each of its
businesses.

Fitch also notes CGL's comfortable liquidity position as illustrated by its large cash and equivalents of Rs. 9,700.6m as at FYE12 (though likely to reduce by around Rs. 2,000m due to the ZIV acquisition) and the underutilised fund-based limits of Rs. 4,000m. Also, its large unexecuted order book (Rs. 91,720m as at 30
June 2012) provides revenue visibility for the power division for the next 15 months.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

• Financial leverage above 1.5x on a sustained basis due to further profitability pressures, additional debt-funded acquisitions or otherwise
• A further decline in consolidated EBITDA margins from FY12 levels, possibly implying a structural deterioration in cash flow generation ability relative to historical trends

Positive: The current Rating Outlook is Negative. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade. However, an economic upturn in key markets leading to margin expansion from FY12 levels and Fitch's expectation that the favourable trend will be sustained could result in the Outlook being revised back to Stable.

• For FY12, on a consolidated basis, CGL reported revenue of Rs. 112,485.8m (FY11:
• Rs. 100,051.1m), EBITDA of Rs. 8,036.4m (Rs. 13,437.8m), total adjusted debt of
• Rs. 11,312.1m (Rs. 5,711.8m) and EBITDA gross interest coverage of 14.2x (38.2x).

Fitch has also affirmed CGL's bank loan ratings as follows:

• Rs. 4,000m fund-based limits: affirmed at National Long-Term 'Fitch AA+(ind)'
• Rs. 25,000m non-fund-based limits: affirmed at National Long-Term 'Fitch AA+(ind)' and National Short-Term 'Fitch A1+(ind)'
• Rs. 30.8m term loan: affirmed at National Long-Term 'Fitch AA+(ind)'
• Rs. 1,000m commercial paper (carved out of the fund-based limits): affirmed atNational Short-Term 'Fitch A1+(ind)'
• Rs. 660m derivative limits: affirmed at National Short-Term 'Fitch A1+(ind)'