Key Rating Drivers & Detailed Description

Strengths:

Established market position, aided by the extensive experience of the promoter: 

The promoters and the professional management team have diverse industry experience of about 20+ years. CEL caters to Defence, Space, Aerospace, Transportation, Automotive, Industrial & Energy and Healthcare. The company has had a long-established relationship with most of its customers like Defence Research and Development Organisation (DRDO), Indian Space Research Organization (ISRO), Space Application Centre spanning more than 10-15 years with repeat orders and a strong trust factor developed over many years of successful business relations. Due to the high technical complexity and know-how, the customers have typically stayed with their preferred and established suppliers over the decades. Products being used in critical areas, such as space and defence, bear testimony to the technical capability of the group. CEL is into 2 broad business segments namely Electronic Manufacturing Solutions (EMS), and Strategic Electronics Business Unit (SEBU) consists of Built to Specification (BTS) and Engineering R&D Services (ER&D) ensuring diversity in revenue profile.

Strong understanding of market dynamics would continue to support business risk profile. Over the decades, CEL has developed strong engineering and design capabilities which has helped it in meeting the changing demands from its customers. CEL has a healthy order book at hand of Rs.1538 Cr as on Mar 31, 2023, compared to that of Rs.1090 Cr as on Mar 31, 2022, spanning across its business segments, aided by its established track record of timely and satisfactory completion of projects. Further, established relationship with its key customer, continued innovation, and improving prospects of clean energy will support sustaining healthy growth in the medium.

Comfortable financial risk profile: Debt protection metrics are comfortable marked by interest coverage and NCATD (net cash accruals to total debt) of 3.14 times and 27% respectively in FY23. Also, in the backdrop of capex done towards improving profitability, debt protection metrics are expected to remain comfortable over the medium term. Net worth and gearing continue to remain moderate at around Rs.201 crore and 0.92 times respectively as on March 31,2023. Total outside liabilities to tangible net worth (TOL/TNW) stood at 3.78 times as on March 31,2023. However, with the expectation of healthy accretion to reserves and no major debt funded capex plans over the medium term, the capital structure is expected to improve over the medium term and would also remain a key monitorable.

Weaknesses:

Susceptibility to risks related to technology changes and sourcing policies of key customers: Any change in technology will require realignment of products in line with the end-user technology. Delays in such adjustments could weaken the group's competitive position. Also, significant portionof revenue is from various public sector undertakings and defence-related organizations such as Defence Research and Development Organisation (DRDO), Indian Space Research Organisation (ISRO), and the Ordinance factories of Government of India. This renders the company's revenue profile vulnerable to any significant change in Government of India's policies and capex plans regarding defence and space research programs.

Working capital-intensive operations: Working capital intensity remains high: gross current assets were sizeable at 260 days as on March 31, 2023, owing to inventory and debtors of 113 days and 120 days, respectively on the same date.  The same is due to high inventory requirement of the variety of components used and elongated collection cycle accounting to high receivables, as majority of customers are government bodies. However, risk related to the same is mitigated as the tenders generally cater to funded projects / project with allocated budget. Any significant stretch in working capital cycle impacting the liquidity would remain a key rating monitorable.

Key Financial Indicators

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

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