Rating Rationale
May 14, 2020 | Mumbai
Alicon Castalloy Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.300 Crore
Long Term Rating CRISIL A/Negative (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.100 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A/Negative/CRISIL A1' ratings on the bank facilities and commercial paper of Alicon Castalloy Ltd (ACL).
 
Operating performance in fiscal 2021 is likely to be impacted following measures taken by the Government of India towards containment of the Novel Coronavirus (Covid-19), which includes temporary closure of non-critical establishments and inter-state transportation, along with severe restrictions on travel and visiting areas of mass gatherings. These measures are expected to impact the business profile of the group on account of temporary closure of its and its customers' production facility. ACL's revenue is expected to decline by 20% in fiscal 2021 corresponding to similar trend expected in Indian automobile industry. Operating margins expected to moderate by upto 200 bps in the same period from 12% level in fiscal 2020. 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 arrest significant fall in the margins.
 
The liquidity profile of the company, in this temporary closure of operations, is supported by unutilised bank limits of about Rs 20 crore plus undisbursed term loan of Rs 30 crore along with expected realisation of receivables of about Rs 80-100 crore over next 2 months. Company also has Rs 20 crore sanctioned working capital limit however it is not yet available. ACL has also postponed the debt-funded capital expenditure (capex) of about Rs 160 crore expected during fiscals 2021 to 2022 which will lead to lower overall debt level compared to earlier expectation. Debt/EBIDTA is expected to increase to 3.5 times in fiscal 2021, compared to estimated 2.4 times in fiscal 2020. The management is taking prudent steps to maintain a proper cushion in liquidity in the current situation. However, bank limit utilisation will be a key rating monitorable.
 
Earlier in fiscal 2020, industry wide demand slowdown resulted in decline of operating performance but the overall decline remained lower than industry levels due to new orders received by the company. The revenue decline of about 16% is estimated for fiscal 2020 while the operating margin is estimated to remain stable at 12% level.  New orders are expected to support faster recovery over medium term. Moreover, the production under the contract signed with global OEMs in fiscal 2020 is expected to start soon. This will further support the business risk profile.
 
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 - Details of Consolidation, 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/FAAA/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 30% in fiscal 2019 against 61% in fiscal 2011; contribution from the new business may also increase in the coming years.
 
Recently, ACL has also received a contract for Rs 810 crore from global OEMs to be executed over the next five 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.
 
* Healthy financial risk profile: Debt protection metrics remain healthy, with interest coverage and net cash accrual to total debt ratios of estimated 3.63 times and 21%, respectively, estimated in fiscal 2020. Debt/earnings before interest, tax, depreciation and amortization is expected at 2.41 times in fiscal 2020 and increase to 3.56 times in fiscal 2021 with moderation in operating performance. Cash accrual is expected to moderate to Rs 45-50 crore in fiscal 2021 from about Rs 65 crore in fiscal 2020. With the impact on cash generation, the financial risk profile may remain moderate over fiscal 2021, however, it will improve as the situation normalises.
 
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 149 days, 109 days, and 42 days, respectively, as on March 31, 2019. Debtor days have been consistently increasing from 72 days in fiscal 2015.  The working capital requirement may further rise in the current situation. 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.
 
* 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 decline in demand for two wheelers by 14-16% and passenger cars by 16-18% in fiscal 2020.
Liquidity Adequate

Average bank limit utilisation was 89% over the six months through April 2020. The utilisation increased to Rs 190crore on total limit of Rs 209.5 crore (Rs 200crore + additional sanctioned limit of Rs 9.5 crore) in April 2020. ACL has also received sanction term loan of which Rs 30 crore remain undisbursed. The utilisation may come down as the company has got sanction of additional Rs 20 crore working capital limit and will be available post required documentation.  The same provides additional liquidity cushion in current situation. With reduced profitability, accruals are impacted and cash accruals are projected at Rs 50-60 crore in fiscal 2021 and 2022, as against yearly maturing debt of Rs 28-30 crore.

Outlook: Negative

CRISIL believes despite the business challenges expected in fiscal 2021 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 the increased receivables due to focus on exports; expected reduction in profitability in fiscal 2021 and debt funded capex plan over the medium term.

Rating Sensitivity factors
Upward factors
* Prudent working capital management, resulting in bank limit utilisation of below 85% on a sustained basis
* Substantial scale up in operations, driven by improving diversity and sustained profitability
* Improvement in debt protection metrics, for instance gearing improving below one time on a sustained basis
 
Downward factors
* Continued high bank limit utilisation (above 90%), constraining liquidity
* 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).
 
For the first nine months in fiscal 2020, ACL reported a profit after tax (PAT) of Rs 23 crore on operating income of Rs 762 crore as compared to Rs 37 crore and Rs 875 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars for period ended March 31 Unit 2019 2018
Revenue Rs crore 1190 1019
Profit After Tax (PAT) Rs crore 53 39
PAT Margins % 4.5 3.8
Adjusted debt/adjusted networth Times 1.02 1.08
Interest coverage Times 4.3 4.0

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 Crore)		 Rating Assigned
with Outlook
NA Cash Credit NA NA NA 200 CRISIL A/Negative
NA Letter of credit & Bank Guarantee NA NA NA 19.2 CRISIL A1
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 5.9 CRISIL A/Negative
NA Term Loan NA NA Jun-20 11.8 CRISIL A/Negative
NA Term Loan NA NA Dec-21 7.3 CRISIL A/Negative
NA Term loan NA NA Oct-23 29.4 CRISIL A/Negative
NA Term loan NA NA Apr-21 26.4 CRISIL A/Negative
NA Commercial Paper NA NA 7-365 days 100 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
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1      23-12-19  CRISIL A1  19-01-18  CRISIL A1    --  -- 
            13-02-19  CRISIL A1           
            31-01-19  CRISIL A1           
Fund-based Bank Facilities  LT/ST  280.80  CRISIL A/Negative      23-12-19  CRISIL A/Negative  19-01-18  CRISIL A/Stable  14-11-17  CRISIL A/Stable  CRISIL A-/Positive/ CRISIL A2+ 
            13-02-19  CRISIL A/Negative      29-05-17  CRISIL A-/Positive/ CRISIL A2+   
            31-01-19  CRISIL A/Negative           
Non Fund-based Bank Facilities  LT/ST  19.20  CRISIL A1      23-12-19  CRISIL A1  19-01-18  CRISIL A1  14-11-17  CRISIL A1  CRISIL A2+ 
            13-02-19  CRISIL A1      29-05-17  CRISIL A2+   
            31-01-19  CRISIL A1           
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
Cash Credit 200 CRISIL A/Negative Cash Credit 200 CRISIL A/Negative
Letter of credit & Bank Guarantee 19.2 CRISIL A1 Letter of credit & Bank Guarantee 19.2 CRISIL A1
Proposed Long Term Bank Loan Facility 5.9 CRISIL A/Negative Proposed Long Term Bank Loan Facility 5.9 CRISIL A/Negative
Term Loan 74.9 CRISIL A/Negative Term Loan 74.9 CRISIL A/Negative
Total 300 -- Total 300 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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