| Craftsman Automation Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL BBB+/Stable/CRISIL A2' ratings on the bank facilities of Craftsman Automation Limited (CAL). |
| Analytical Approach |
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For arriving at its ratings, CRISIL has considered the standalone business and financial risk profiles of CAL. |
| Key Rating Drivers & Detailed Description |
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Strengths: * Strong market position, backed by healthy customer relationships CAL is a leading player in the engineering contract-manufacturing sector, with a diversified clientele across industries. It has three business segments: automotive - power train, automotive - aluminium products, and industrial and engineering. The automotive - power train segment caters to commercial vehicles, farm equipment, construction and mining equipment, and passenger car sub-segments of the automotive industry. The automotive - aluminium products division supplies aluminium components to two- and four-wheeler manufacturers. The industrial and engineering segment offers goods and services such as castings, gears, material handling equipment, railway products, storage products, special purpose machines and other general engineering products to various end user industries. The addition of capacity, products, and customers and healthy customer relationships have led to revenue registering compounded annual growth rate (CAGR) of 14% over the five fiscals through 2020. Steady offtake by key customers is expected to help with maintenance of the healthy market position over the medium term. * Healthy, improving operating efficiency Higher margin from machining operations led to a better-than-industry operating margin of over 25% until fiscal 2015. In fiscals 2016-2018, the more profitable machining business was stagnant and export volume declined, resulting in moderation in the operating margin. Since fiscal 2019, a niche product profile and better technical capabilities due to cost optimisation measures have improved the operating efficiency. The setting up of a non-ferrous foundry and aluminium die-casting facilities has helped broaden the product range. Furthermore, the general-purpose machines used by the company have the operational flexibility to be deployed across various products and locations depending on the customer and operational requirement. In fiscal 2020, the company additionally undertook cost control initiatives through automation, employee base optimisation, and wastage reduction; this should sustain and support the operating efficiency over the medium term. * Moderate financial risk profile Gearing was 1.56 times as on March 31, 2020, higher than 1.31 times a year earlier on account of rise in borrowing to fund the capex on increasing capacity of aluminium pressure die-casting facilities. Debt protection metrics moderated as well, indicated by interest coverage and net cash accrual to total debt ratios of about 2.7 times and 0.22 time, respectively, in fiscal 2020 compared to 3.23 times and 0.25 time, respectively, in fiscal 2019. While gearing is likely to improve over the medium term, driven by limited capex requirement and steady repayment of loans, the metrics should remain subdued in fiscal 2021 due to expected moderation in cash accrual. Weaknesses: * Large capex and working capital requirement Operations are intrinsically capex and working capital-intensive. In the past, the company has funded these requirements predominantly through debt. As a leading player in the contract manufacturing sector, the company had incurred substantial upfront investment in setting up machining infrastructure and aluminium pressure-die-casting facilities in an attempt to diversify its customer and product base. Given the reduced demand in fiscals 2020 and 2021, significant expansions are unlikely until fiscal 2022, as the company will strive to monetise the current asset base. However, in the event of significant uptick in demand, the company may resort to higher capex given the capital-intensive operations. The company has to maintain considerable inventory given its customer and product portfolio. Also, with a large clientele and strong export presence, receivables are high, too, and could get stretched during a slowdown, leading to pressure on the working capital. * Exposure to cyclical demand in end-user industries The company caters to the automotive, farm equipment, construction and earthmoving equipment, and locomotive industries, demand from which is typically linked to economic activity. It is diversifying into non-automotive industries, such as aluminium-casting for power transmission and storage solutions, to mitigate the concentration risk. However, the business risk profile is expected to remain susceptible to any sharp slowdown in the automotive industry over the medium term. |
| Liquidity Adequate |
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Despite moderation, cash accrual is expected at Rs 150 crore in fiscal 2021 vis-a-vis debt obligation of Rs 129 crore. Utilisation of fund-based limit of Rs 335 crore was 67% during March 2020. The company had surplus cash of Rs 70 crore as on March 31, 2020. Internal cash accrual, unutilised bank lines, and surplus cash should sufficiently cover the debt obligation as well as the incremental working capital requirement. While maturing debt is expected to be high at Rs 213 crore in fiscal 2022, business performance should recover significantly by that time, after being subdued in fiscals 2020 and 2021. The extent of performance recovery will remain a key monitorable. |
| Outlook: Stable |
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CRISIL believes CAL will continue to benefit from its strong market position, healthy customer relationships, and efficient utilisation of resources. CRISIL also expects anticipated decline in performance to be mitigated by improving operating efficiency, addition of customers, and diversification into non-automotive industries. |
| Rating Sensitivity factors |
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Upward factors * Diversification in revenue and steady improvement in the market share in operating segments, with healthy revenue growth (more than 10% CAGR) and stable operating margin leading to sustained increase in cash accrual * Strengthening of the financial risk profile, with gearing below 1.0 time Downward factors * Sustained decline in revenue or weakening of the operating margin to 18% or lower * Large, debt-funded capex or acquisition or significant stretch in the working capital cycle weakening the gearing and decreasing the cushion between cash accrual and debt obligation |
| About the Company |
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Incorporated in 1986 in Coimbatore, Tamil Nadu, by Mr S Ravi, CAL manufactures several components and sub-assemblies on a supply and job-work basis according to client specifications in the automotive, industrial, and engineering segments. Key products in the automotive segment include power train products, cylinder blocks, cylinder heads, cam shafts, and crank cases for commercial vehicles, sports utility vehicles, two-wheelers, farm equipment, and earthmoving and construction equipment. |
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| *Provisional |
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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) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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