TEXT-Fitch rates Crown Corporation at 'Fitch BB-(ind)';outlook stable

Mon Aug 6, 2012 7:36am EDT

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(The following statement was released by the rating agency)

Aug 06 - Fitch Ratings has assigned India's defence products exporter Crown Corporation Private Limited (CCPL) a National Long-Term rating of 'Fitch BB-(ind)' with Stable Outlook.

The rating is constrained by the irregular nature of CCPL's revenue and significantly high customer concentration, as 100% of revenue is derived from a single customer. The company is currently engaged in the export of submarine batteries to the Ministry of Defence, Algeria. The rating is also constrained by CCPL's dependence on a single supplier, the limited number of alternative Indian suppliers, and forex risks on exports.

The rating is, however, supported by CCPL's 20 years of experience in the export of defence equipment, as well as a long-standing relationship with its clients.

The rating also derives comfort from the nature of CCPL's current trading business which has resulted in positive operational cash flow with low working capital requirements. Fitch notes that the company does not require any long-term or fund-based banking facilities for its trading operations and currently has only unsecured loans form its founders as debt. In addition, minimal operational costs result in the company able to report profit, through rental and other income, even in the absence of revenue from defence orders.

The ratings also derive comfort from the limited technical risk borne by CCPL on equipment supplied, due to the pass through of such risk to contract manufacturers and/or suppliers.

WHAT COULD TRIGGER A RATING ACTION?

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

- gross interest coverage below 1.5x on a sustained basis due to an unexpected increase in debt levels or deterioration of operating profitability

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- an increase in the size and stability of revenue and cash flow along with credit metrics remaining at same level

Established in 1978, CCPL is engaged in the export of defence products. The company reported nil revenue from defence orders in FY10-FY11. It subcontracts its order to a domestic vendor. FY12 provisional results indicate revenue of INR454m (FY11: INR44m), net income of INR53m (FY11: INR2m), and interest coverage of above 2x. The company has two subsidiaries - Dynatron Services Private Limited ('Fitch BB-(ind)'/Stable) and Crown Infracon Private Limited.

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