Rating Rationale
January 12, 2021 | Mumbai
Alf Engineering Private Limited
'CRISIL BBB+ / Positive / CRISIL A2 ' assigned to Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.25 Crore
Long Term RatingCRISIL BBB+/Positive (Assigned)
Short Term RatingCRISIL A2 (Assigned)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL has assigned its ‘CRISIL BBB+/Positive/CRISIL A2’ ratings to the bank facilities of Alf Engineering Private Limited (AEPL).

 

The ratings reflect the extensive experience of the promoters in the automotive (auto) components industry, an established relationship with the key customer, Mahindra & Mahindra Ltd (M&M; rated ‘CRISIL AAA/Stable/CRISIL A1+’), and a healthy financial risk profile. These rating strengths are partially offset by exposure to cyclicality in the auto industry, customer concentration in revenue and susceptibility to volatility in raw material prices.

 

Revenue declined to Rs 600 crore in fiscal 2020 from Rs 750 crore in fiscal 2019, and is likely to remain muted at Rs 550-575 crore in fiscal 2021 because of the impact of the Covid-19 pandemic on the performance in the first half. The company supplies chassis and other components for utility vehicles (UVs) and commercial vehicles (CVs). The demand from key customers has been increasing since the past three months and a strong growth is expected in fiscal 2022.  

 

The financial risk profile remains healthy and liquidity comfortable supported large unencumbered liquid investments.

Analytical Approach

Unsecured loans from the promoters (Rs 93.38 crore as on March 31, 2020) are treated as neither debt nor equity as these loans are expected to remain in the business over the medium term.

Key Rating Drivers & Detailed Description

Strengths:

  • Extensive industry experience of the promoters and an established industry presence: The promoters have an experience of over four decades in auto industry, primarily for manufacturing of chassis. This has given them an understanding of the dynamics of the market, and enabled them to establish relationships with suppliers and key customers, M&M and Ashok Leyland Ltd (ALL). The promoters’ experience and their fund support were also instrumental in profitable ramp-up in sales over the years.

 

  • The company has been associated with M&M for over three decades and has been manufacturing chassis for over two decades. It has successfully established its presence as a key supplier of chassis to the M&M group, as reflected in it being among the top three suppliers to the group for UVs, sports UVs (SUVs) and light CVs (LCVs). Further, it is diversifying into new products and technologies to tap more customers.

  • Healthy financial risk profile: The networth was healthy at  Rs 267.5 crore, and the gearing and total outside liabilities to tangible networth ratio low at 0.13 time and 0.32 time, respectively, as on March 31, 2020. Debt protection metrics were adequate, with interest coverage and net cash accrual to total debt ratios at over 6 times and 1 time, respectively, in fiscal 2020. Further, the company has healthy surplus liquidity parked in short-term mutual funds. Despite capital expenditure (capex) plans over medium term, the financial risk profile should remain comfortable backed by healthy accretion to reserves.

 

Weakness:

  • Exposure to customer concentration in revenue and to cyclicality in the auto industry: The industry is highly cyclical as it is dependent on the level of economic activity. Consequently, in fiscal 2020, revenue dipped by about 20% fiscal-on-fiscal on account of the slowdown and overall demand decline in the auto industry. Revenue is likely to dip further by 5-10% in fiscal 2021, impacted by the lockdown imposed to contain the pandemic and subsequent pressure on demand.

 

Over 80% of revenue was derived from the M&M in fiscal 2019, particularly the LCV, UV and SUV segments. The concentration in M&M reduced in fiscal 2020 due to subdued demand. Despite the healthy relationship with M&M, dependence on a single customer weakens bargaining power and overall scalability. The company also has an established relationship with ALL and other customers such as Tata Motors Ltd and Isuzu Motors, which, however, contribute only a small portion of sales currently.

 

  • Vulnerability to volatility in raw material prices: Key raw materials, steel sheets, plates, and tubes, constitute over 70% of the overall cost of production. Raw material prices have been volatile over the past three years. Agreements with customers include price escalation clauses to periodically adjust selling prices based on movements in raw material prices; however, there is a lag in implementing price changes. Adverse raw material prices had partly impacted operating profitability in the past.

Liquidity: Adequate

Cash accrual is expected at Rs 45-50 crore against debt obligation of around Rs 7 crore in fiscal 2021. The company has not utilised it bank limit, but avails a bill discounting facility to manage working capital requirement. Cash and equivalents stood at Rs 28 crore and short-term mutual fund investments at Rs 86 crore as on March 31, 2020. The company has proposed capex in fiscal 2022 for a new unit in Pune, Maharashtra, to be funded through a mix of debt and cash accrual; the extent of capex remains a key monitorable. The company also had unsecured loans of Rs 93.38 crore as on March 31, 2020, from the promoters.

Outlook: Positive

The business profile should improve over the medium term, supported by steady demand from key original equipment manufacturers (OEMs).

Rating Sensitivity factors

Upward factors

  • Strong demand from OEMs, leading to sharp revenue growth and consistent net cash accrual of more than Rs 70 crore per fiscal.
  • Controlled working capital management and sustained healthy financial risk profile and liquidity.

Downward factors

  • Muted revenue growth and operating margin, leading to cash accrual of less than Rs 45 crore in fiscal 2022
  • Higher-than-expected debt-funded capex or a stretch in the working capital cycle

About the Company

AFPL was incorporated in 2006, promoted by Mr Joseph D’souza and Mr Pierrie D’souza. It manufactures auto chassis and other components for auto OEMs, and currently manufactures over 1,400 frames per day across its plants in India.

Key Financial Indicators

As on/for the period ended March 31

Unit

2020

2019

Operating income

Rs crore

599.59

749.71

Reported profit after tax (PAT)

Rs crore

20.36

24.41

PAT margin

%

3.4

3.3

Adjusted debt/adjusted networth

Times

0.13

0.34

Interest coverage

Times

6.59

5.86

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN

Name of instrument

Date of Allotment

Coupon Rate (%)

Maturity Date

Issue Size

(Rs.Cr)

Complexity

Levels

Rating Assigned

with Outlook

NA

Vendor Financing

NA

NA

NA

4.32

NA

CRISIL A2

NA

Term Loan

NA

NA

Ma-2023

20.68

NA

CRISIL BBB+/Positive

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 20.68 CRISIL BBB+/Positive   --   --   --   -- --
Vendor Financing ST 4.32 CRISIL A2   --   --   --   -- --
All amounts are in Rs.Cr.
 
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Term Loan 20.68 CRISIL BBB+/Positive - - -
Vendor Financing 4.32 CRISIL A2 - - -
Total 25 - Total 0 -
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition

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