Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A/Negative/CRISIL A1' ratings on the bank facilities and debt instruments of Alicon Castalloy Limited (ACL).

 

Operating performance in fiscal 2022 is expected to show muted growth due to impact on operations in the 1st quarter of fiscal 2022 on account of localised lockdowns and the second wave of coronavirus pandemic (covid). ACL’s recovery Q3 fiscal 2022 onwards is expected to be driven by healthy orderbook and addition of new customers with Rs 350-380 crore of new business to be executed in current fiscal. Operating margins are expected to remain stable over 11-12% level in fiscal 2022. While working capital requirements remain high, cost cutting initiatives taken by the management and high operating leverage owing to low contribution of fixed costs in the cost structure are expected to cushion this impact with interest cover expected to remain moderate at 2.5-3 times in this fiscal.

 

Earlier in fiscal 2021, industry wide demand slowdown due to the coronavirus pandemic resulted in decline of operating performance but the overall revenue decline 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 medium term. Moreover, the production under the contract signed with global OEMs is expected to start soon. This will further support the business risk profile. Recovery in demand will remain key monitorable.

 

The liquidity profile is supported by unutilised bank limits of about Rs 30-35 crore plus undisbursed emergency covid lines as well as timely expected realisation of receivables over coming months. ACL plans to carry out debt-funded capital expenditure (capex) of about Rs 150 crore expected during fiscals 2022 to 2023 which is expected to keep debt levels stable despite regular repayments. Debt/EBIDTA is expected to reduce to below 2 times in fiscal 2023, compared to 3.8 times in fiscal 2021. However, bank limit utilisation will be a key rating monitorable.

 

The ratings continue to reflect ACL’s established market position in the aluminium die-casting auto components sector, driven by a diverse clientele and longstanding customer relationship. The ratings also factor in an above-average financial risk profile because of adequate gearing and debt protection metrics. These strengths are partially offset by susceptibility to high bank limit utilisation reflecting constrained liquidity, volatility in demand in the two-wheeler and passenger car segments, and moderately large working capital requirement due to increasing exports.

Analytical Approach

For arriving at the ratings, CRISIL 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 about 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 segment and improving exports, revenue is likely to witness lower than industry decline. CRISIL expects recovery to start from Q2 onwards and to normal levels from Q3 onwards. 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 5 customers contributing only 35-40% of overall sales. Further, increasing sales from EV products and non-auto sales aid the revenue profile. 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 is expected to ramp up significantly this year will be driving growth. This should help Alicon 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 estimated 2.4 times and 15%, respectively, estimated in fiscal 2021. Debt/earnings before interest, tax, depreciation and amortization is expected at 2.5 times in fiscal 2022 and will further reduce to below 2 times by FY23 with improving operating performance. Cash accrual is expected to improve to Rs 70-80 crore in fiscal 2022 from about Rs 47 crore in fiscal 2021. With the higher cash generation, the financial risk profile may strengthen over fiscal 2022. Company is also likely to fund planned capital expenditure with prudent mix of debt and equity. Any equity infusion resulting limited debt addition, improvement in capital structure and liquidity position will remain key rating sensitivity factor.

 

 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 about 217 days, 139 days, 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 borrowing, will be closely monitored. Furthermore, the manner in which the receivables cycle is managed will remain crucial for the company. Weakening profitability in FY21, delay in ramp up of capex done in recent years has resulted in weak RoCE of 6-9% range over last 2 years. Ramp up in scale and profits along with efficient working capital management will be crucial to improve RoCE on sustained basis to over 10% and will remain 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 12% of total revenue, indicating healthy customer diversity for ACL. 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, the revenues of ACL will be impacted to certain extent with the expected impact of covid 2nd wave on demand for two wheelers by and passenger cars in fiscal 2021.

Liquidity: Adequate

Average bank limit utilisation was 81% over the six months through March 2021. ACL has also availed emergency covid lines extended by banks of which Rs 30-35 crore remain undisbursed. With improving profitability, accruals are expected to improve to Rs 70-80 crore in fiscal 2022, as against yearly maturing debt of Rs 25-28 crore.

Outlook: Negative

CRISIL believes despite the business challenges expected in fiscal 2022 owing to COVID-19, ACL's business risk profile will be supported from an established market presence, and improving revenue diversity. The financial risk profile is expected to remain restricted by weak return metrics and continued capex requirement over the medium term

Rating Sensitivity factors

Upward factors

• Recovery in demand resulting in improvement in scale of operations and profits, i.e. cash accruals over Rs 60-70 crore
• Prudent working capital management and improvement in debt protection metrics, for instance gearing improving below 1.2 times on a sustained basis

 

Downward factors

• Sharp decline in operating performance, leading to margin below 10%
• More-than-anticipated, debt-funded capex/acquisitions, or increase in working capital requirement, increasing the total outside liabilities to tangible networth ratio and deteriorating the debt protection metrics.

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).

Key Financial Indicators

Particulars for period ended March 31	Unit	2021	2020
Revenue	Rs crore	849	958
PAT	Rs crore	-2	17
PAT margins	%	-0.2	1.8
Adjusted debt/adjusted networth	Times	1.07	1.15
Interest coverage	Times	2.38	2.76

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon rate (%)	Maturity Date	Issue size (Rs Crore)	Complexity Level	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	200	NA	CRISIL A/Negative
NA	Letter of credit & Bank Guarantee	NA	NA	NA	19.2	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	5.9	NA	CRISIL A/Negative
NA	Term Loan	NA	NA	Dec-19	11.8	NA	CRISIL A/Negative
NA	Term Loan	NA	NA	Mar-20	7.3	NA	CRISIL A/Negative
NA	Term Loan	NA	NA	Oct-23	29.4	NA	CRISIL A/Negative
NA	Term Loan	NA	NA	Apr-21	26.4	NA	CRISIL A/Negative
NA	Commercial Paper	NA	NA	7-365 days	100	Simple	CRISIL A1

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Illichmann Castalloy GmbH	Full	Subsidiary
Illichmann Castalloy s.r.o.	Full	Subsidiary
Alicon Holding GmbH	Full	Subsidiary