Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Alicon Castalloy Limited (ACL) to 'Stable' from 'Negative' while reaffirming the rating at 'CRISIL A'. The rating on the short-term bank facilities and commercial paper has been reaffirmed at 'CRISIL A1'.

 

The revision in outlook for ACL is driven by improvement in the liquidity position and consistent reduction in bank limit utilisation post equity infusion of Rs 110 crore through qualified institutional placement (QIP) and preferential allotment. The six months average bank limit utilisation (July to December 2021) dropped to 49% from over 95% that was witnessed in the last three years. The liquidity profile is supported by unutilised bank limits of Rs 90-100 crore plus cash and equivalents of Rs 11 crore.

 

Performance in fiscal 2022 is on the path of recovery despite the impact of localised lockdowns and the second wave of Covid-19 infections on the operations in the first quarter of the year. Recovery, which commenced from the second quarter of fiscal 2022, is expected to continue to be driven by healthy order book and addition of new customers. Spread of infections in the current third wave of the pandemic and any substantial decline in orders will remain monitorables. Operating margin is expected to remain stable at 10-12% over the medium term. While working capital requirements remain high, cost cutting initiatives taken by the management, shortening of inventory period and equity infusion are expected to cushion this impact.

 

ACL plans to carry out capital expenditure (capex) of about Rs 267 crore during fiscals 2022 to 2024, which is expected to be funded largely by equity and internal accrual and marginally through debt. Consequently, debt/earnings before interest, depreciation, tax and amortization (EBIDTA) is expected to reduce to below 2 times in fiscal 2022 from 4.1 times in fiscal 2021 and interest coverage ratio may improve to 7.62 times in fiscal 2023 against an expected 4.3 times in fiscal 2022.

 

In fiscal 2021, industry-wide demand slowdown due to the pandemic resulted in a decline in the operating performance of ACL but the overall revenue drop of 11% in fiscal 2021 remained lower than industry levels due to ramp-up of new orders and diversified customer profile. New orders are expected to support faster recovery over the medium term. Recovery in demand will remain a key monitorable.

 

The ratings continue to reflect the established market position of ACL in the aluminium die-casting auto components sector, driven by a diverse clientele and longstanding customer relationship. The ratings also factor in healthy financial risk profile because of low gearing, above average debt protection metrics and healthy liquidity. These strengths are partially offset by moderately large working capital requirement due to increasing exports and growth in new business and volatility in demand in the two-wheeler and passenger car segments.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of ACL and its wholly-owned subsidiaries, Austria-based Illichmann Castalloy GmbH and Slovakia-based Illichmann Castalloy s.r.o. That is because all the entities, collectively referred as ACL, have significant operational linkages and are under a common management.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths

Established market position in aluminium casting auto-component sector

ACL has a diversified product profile in the aluminium casting business, including cylinder heads, intake manifolds, engine support brackets, and compressor housings. It has an established market position in the aluminium casting auto component sector, driven by established client relationship and operations in India, Austria, and Slovakia. Clientele includes major auto original equipment manufacturers (OEMs) such as Hero Motor Corp Ltd, Bajaj Auto Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Maruti Suzuki India Ltd ('CRISIL AAA/Stable/CRISIL A1+'), and Mahindra and Mahindra Ltd ('CRISIL AAA/Stable/CRISIL A1+'). Increase in business from new customers in the auto and non-auto segments over the past three years further improved customer diversity, with the top five customers contributing 35-40% in fiscal 2021; contribution from the new business may also increase in the coming years. With increasing share of business from new customers, contribution from new products, readiness of products for electric vehicles (EV) segment and improving exports, revenue is likely to witness higher-than-industry recovery. CRISIL Ratings expects the recovery to continue with revenue likely to increase ~20% year-on-year in fiscal 2022, with a healthy growth in fiscal 2023. Any delay in recovery of revenue levels will remain monitorable.

 

Diversified revenue profile

Geographic diversity in terms of exports and domestic sales with 21% export contribution in fiscal 2021, as well as customer diversity with top five customers contributing only 35-40% of overall sales. Further, increasing sales from EV products and non-auto sales aid revenue. Expected improvement in revenue diversity due to ramp-up of new orders from existing as well as new customers with a strong, new product pipeline. New orders from Dena Corporation and Aether Energy, which have ramped-up significantly this year will be driving growth. This should help ACL to report better-than-industry growth in the medium term.

 

Healthy financial risk profile

Debt protection metrics remain healthy, with interest coverage and net cash accrual to total debt ratios of 4.3 times and 35%, respectively, estimated in fiscal 2022. Debt/EBITDA is expected at 1.7 times in fiscal 2022 and will further reduce to below 1.5 times by fiscal 2023 with improving operating performance. Cash accrual is expected to enhance to Rs ~65 crore in fiscal 2022 from about Rs 47 crore in fiscal 2021. With higher cash generation, financial risk profile may strengthen over fiscal 2022. Company is also likely to fund planned capital expenditure (capex) with a prudent mix of debt and equity. The equity infusion in July 2021 will result in limited debt addition, improvement in capital structure and liquidity position.

 

Weaknesses

Large working capital requirement, led by increasing exports and growth in new business

Operations have been working capital intensive, reflected in gross current assets, receivables and inventory all sizeable at 217, 139, and 60 days, respectively, as on March 31, 2021. Debtor days have been consistently increasing from 72 days in fiscal 2015. Improvement in liquidity, backed by lower dependence on short-term borrowings due to equity infusion, has helped improve working capital days. However, the manner in which the receivables cycle is managed will remain crucial for the company. Weakening profitability in fiscal 2021, delay in ramp-up of capex done in recent years has resulted in weak return on capital employed (RoCE) of 6-9% over the last two years. Ramp-up in scale and profits along with efficient working capital management will be crucial to improve RoCE on a sustained basis to over 10% and will remain a monitorable.

 

Susceptibility to demand in the two-wheeler and passenger car segments

High focus on research and development, wide product portfolio and faster adoption of new technologies are expected to increase the share of business with customers over the medium term. Largest customer for ACL contributes about 17% of total revenue, indicating healthy customer diversity. While the revenue profile benefits from good customer diversity, it remains exposed to risks related to cyclical demand patterns inherent to the auto industry, and ability of the OEMs to sustain their market share in the domestic and overseas markets. For instance, revenue of ACL was constrained to a certain extent due to the impact of the second wave of Covid-19 on demand for two-wheelers and passenger cars in the first quarter of fiscal 2022. Current year is expected to be the third consecutive year of decline in two-wheeler volume sales, which will act as a deterrent to the recovery of the automobile casting company. Therefore, the revival of two-wheeler demand will be a key monitorable.

Liquidity: Strong

With improving profitability, accrual is expected to increase to Rs 90-110 crore each in fiscals 2023 and 2024, as against yearly maturing debt of Rs ~40 crore. The liquidity profile is supported by unutilised bank limits of Rs 90-100 crore plus cash and equivalents of Rs 11 crore.

Outlook: Stable

CRISIL Ratings believes despite the business challenges in fiscal 2022, ACL's business risk profile will be supported by its established market presence, and improving revenue diversity. The conclusion of equity raise through QIP and preferential issue has improved the liquidity position of the company, moreover its above-average liquidity of ~Rs 113 crore (cash and equivalents of Rs 11 crore and unutilised limits of Rs 102 crore) will support the debt metrics.

Rating Sensitivity Factors

Upward Factors

• Recovery in demand resulting in improvement in scale of operations and profits, i.e. cash accrual of Rs 90-100 crore
• Prudent working capital management and improvement in debt protection metrics

 

Downward Factors

• Sharp decline in operating performance leading to cash accrual of less than Rs 45 crore
• More-than-anticipated debt-funded capex/acquisitions, or increase in working capital requirement constraining any improvement in the total outside liabilities to tangible networth ratio and leading to deterioration in debt protection metrics and liquidity.

About the Company

ACL was established as Enkei Castalloy Ltd (Enkei Castalloy), a joint venture between Pegasus Castalloy Ltd (an Indian company that manufactures cast-aluminium automotive components since 1990) and Enkei Corporation (in Japan; one of the largest manufacturers of alloy wheels in the world). Owing to sustained losses in the alloy wheels division, the promoters hived it off as a separate company, Enkei Wheels Ltd, and retained the casting business with effect from April 1, 2009. Enkei Castalloy was renamed as ACL on December 27, 2010.

 

ACL manufactures aluminium castings including cylinder heads, support brackets, intake manifolds, crankshafts, and engine brackets, for use in the auto industry. Clients include key Indian auto OEMs as well as auto and engineering OEMs in the European market through its subsidiaries. ACL has manufacturing units in Pune (Maharashtra) and Binola (Haryana).

Any other information: Not applicable