Rating Rationale
August 30, 2024 | Mumbai
Diffusion Engineers Limited
'CRISIL A-/Stable/CRISIL A2+' assigned to Bank Debt
 
Rating Action
Total Bank Loan Facilities RatedRs.65 Crore
Long Term RatingCRISIL A-/Stable (Assigned)
Short Term RatingCRISIL A2+ (Assigned)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A-/Stable/CRISIL A2+’ ratings to the bank loan facilities of Diffusion Engineers Ltd (DEL; a part of the Diffusion group).

 

The ratings reflect the group's longstanding market presence, supported by the extensive experience of the promoters, healthy operating efficiency, diverse revenue profile and strong financial risk profile. These strengths are partially offset by vulnerability to intense competition and fluctuation in raw material prices and large working capital requirements.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of DEL and its subsidiaries. This  is because all these entities, collectively referred to as the Diffusion group, operate in the same industry and have operational and financial linkages.

 

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:

  • Longstanding market presence, supported by extensive experience of the promoters: DEL has been in the welding industry since 1982; it initially started with trading these products and then shifted to manufacturing in 1993. The group is currently engaged in manufacturing welding consumables, wear plates/parts and heavy engineering equipment. The longstanding presence of promoters in the industry, their strong understanding of market dynamics and healthy relationships with customers and suppliers should continue to support the business. This can be reflected in the increase in the scale of operations to Rs 280 crore in fiscal 2024 (from Rs 156 crore in fiscal 2021), backed by healthy demand of products in the industry and continuous repeat orders from customers.

 

  • Diversified end-user industry base and customers: DEL caters to a diversified pool of industries such as cement, power, sugar, steel, engineering etc. Further, DEL has a longstanding relationship with customers of more than 5-10 years. The group has a large customer profile catering to both domestic and export markets, with presence across 35+ countries. The top 10 customers contributed about 25% to the total revenues in fiscal 2024. A diversified end-user industry along with diversified customer base allows it to mitigate the risk of obsolescence in case of any new technology coming into the market and overcome the risk of slowdown in a particular industry, thus achieving higher growth.

 

  • Comfortable financial risk profile: The group has a strong financial profile, marked by networth of Rs 190 crore as on March 31, 2024. The capital structure has been healthy due to low reliance on working capital debt, marked by gearing and total outside liabilities to adjusted networth ratio both less than 0.5 time as on March 31,  2024. The debt protection metrics have also been robust due to low leverage and adequate profitability.  The interest coverage ratio stood at 26.3 times and net cash accrual to total debt ratio at 0.95  time for fiscal 2024. The debt protection metrics may remain at similar levels over the medium term. Financial risk profile is expected to remain comfortable over the medium term backed by steady accretion to reserves and absence of any debt funded capex.

 

Weaknesses:

  • Susceptibility of the operating margin to volatility in raw material prices and exposure to intense competition: The operating margin is exposed to volatility in the cost of the key raw material – steel, which accounts for 55-65% of the operating revenue. Absence of long-term contract with suppliers regarding price and absence of fully order-backed inventory accentuates DEL's exposure to volatility in raw material prices. Thus, the operating margin has fluctuated between 11.5% and 15% for the five fiscals through 2024. Furthermore, the welding industry comprises welding consumables, equipment and related services, which is highly fragmented in nature. The welding consumables industry is intensely competitive due to the presence of numerous unorganised players in the segment. Further, DEL faces competition from existing players in the domestic as well as international markets. This restricts the company's pricing power with customers and suppliers and hence affects the scale of operations. Steady increase in scale of operations while maintaining  stable operating margins remains a key rating sensitivity factor.

 

  • Large working capital requirement: Operations are working capital intensive as reflected by high gross current assets (GCA) of 175-190 days for the past four fiscals and stood at 188 days as on March 31, 2024, driven by high debtors of 101 days and inventory of 83 days. Debtors are due to high credit period of 60-90 days extended to customers as well as presence of retention money. Inventory has been high as the company needs to maintain inventory of around 60 days to meet customer requirements on time. The working capital cycle is likely to remain stretched and will be closely monitored.

Liquidity: Strong

Bank limit utilisation stood at around 50% for the 12 months through July 2024. In the absence of any yearly maturing debt over the medium term, the entire cash accrual -- expected at more than Rs 35 crore per annum – will aid financial flexibility. The current ratio stood healthy at 1.89 times and cash and bank balance  at around Rs 12 crore as on March 31, 2024 (of which Rs 7.8 crore is unencumbered). Liquid investments stood at around Rs 18 crore in shares, debentures and mutual funds as on March 31, 2024. Low gearing and moderate networth support its financial flexibility and provides the financial cushion available in case of any adverse conditions or downturn in the business.

Outlook: Stable

The Diffusion group will continue to benefit from the extensive experience of its promoters and their established relationship with clients.

Rating sensitivity factors

Upward factors:

  • Significant increase in scale of operations with operating income above Rs. 380-400 crore while maintaining healthy operating margins leading to higher cash accruals
  • Sustenance of financial risk profile and no large, debt-funded capital expenditure (capex)

 

Downward factors:

  • Stretch in working capital cycle or any large, debt-funded capex weakening the capital structure
  • Decline in operating margins or a steep decline in scale of operations, resulting in cash accruals below Rs 25 crore

About the Group

DEL, incorporated in 1982,  started its business with trading in welding rods/ electrodes and ventured into manufacturing of the same since 1993. DEL along with its subsidiaries, are engaged in manufacturing of welding consumables, wear plates/parts and heavy engineering equipment. It has five manufacturing facilities at Nagpur, Maharashtra.

 

The group is currently promoted and managed by Mr Prashant Garg (managing director), Dr Nitin Garg (additional director), and Ms Chitra Garg (director).

Key Financial Indicators

As on/for the period ended March 31

Unit

2024

2023

Operating income

Rs crore

279.73

256.19

Reported profit after tax (PAT)

Rs crore

31.14

22.54

PAT margin

%

10.77

8.64

Adjusted debt/adjusted networth

Times

0.18

0.36

Interest coverage

Times

23.74

13.34

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs. Crore)		 Complexity
Level		 Rating assigned
with outlook
NA  Bank Guarantee  NA  NA  NA  13 NA  CRISIL A2+ 
NA  Cash Credit  NA  NA  NA  47 NA  CRISIL A-/Stable 
NA  Letter of Credit  NA  NA  NA  5 NA  CRISIL A2+ 

Annexure – List of entities consolidated

Names of entities consolidated

Extent of consolidation

Rationale for consolidation

Diffusion Engineers Ltd

Full

Parent company

Diffusion Super-Conditioning Services Pvt Ltd

Full

Subsidiary company

Nowelco Industries Private Ltd

Full

Subsidiary company

Diffusion Hernon Adhesive and Sealant Pvt Ltd

Full

Subsidiary company

Diffusion Engineers Singapore Pte Ltd

Full

Subsidiary company

Diffusion Wear Solutions Philippines Inc

Full

Step-down subsidiary
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 47.0 CRISIL A-/Stable   --   -- 22-02-22 Withdrawn   -- CRISIL BBB+/Stable
Non-Fund Based Facilities ST 18.0 CRISIL A2+   --   -- 22-02-22 Withdrawn   -- CRISIL A2
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Bank Guarantee 3 ICICI Bank Limited CRISIL A2+
Bank Guarantee 10 HDFC Bank Limited CRISIL A2+
Cash Credit 10 YES Bank Limited CRISIL A-/Stable
Cash Credit 7 ICICI Bank Limited CRISIL A-/Stable
Cash Credit 20 HDFC Bank Limited CRISIL A-/Stable
Cash Credit 10 DBS Bank Limited CRISIL A-/Stable
Letter of Credit 5 HDFC Bank Limited CRISIL A2+
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Engineering Sector
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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