Rating Rationale
August 21, 2019 | Mumbai
Diffusion Engineers Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.45 Crore (Enhanced from Rs.35 Crore)
Long Term Rating CRISIL BBB+/Stable (Reaffirmed)
Short Term Rating CRISIL A2 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL ratings on the bank facilities of Diffusion Engineers Limited's (DEL) continues to reflect comfortable operating efficiency, diverse revenue profile on the back of promoter's extensive experience, and healthy financial risk profile. These strengths are partially offset by modest scale of operations in the intensely competitive industrial consumables and refurbishment industry.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy operating efficiency and diverse revenue profile: Benefits from promoter's industry experience of around four decades and diverse product and service offerings should support business. Operating margin has averaged 13.5% in the five fiscals through 2019.
 
* Healthy financial risk profile: Gearing remained comfortable at 0.17 time as on March 31, 2019, supported by a healthy networth of over Rs 88.2 crore in the absence of any major debt-funded capital expenditure (capex), and controlled working capital debt. Also, debt protection metrics were robust, with interest coverage ratio of over 8.50 times for fiscal 2019 on account of a healthy operating profitability.
 
Weaknesses:
* Modest, but improving, scale of operations in fragmented market: Despite increasing (because of better demand in new product segment), turnover remained subdued at Rs 152.33 crore for fiscal 2019 (Rs 108.89 crore in fiscal 2018). This was mainly due to intense competition from unorganised players.
 
* Modest, but improving, scale of operations in fragmented market: The scale of operation although improving, remains modest at Rs 152.33 crore for fiscal 2019 (Rs 108.89 crore in fiscal 2018). The growth is attributed to increasing demand for its new product. However, industrial consumables segment is highly fragmented with a large number of unorganised players in the market, leading to competition.
Liquidity

Liquidity remains adequate. Expected yearly cash accrual of over Rs 12 crore will be sufficient to meet debt obligation, over the medium term. Bank limit was moderately utilised at 46% for the 12 months ended May 2019. Current ratio has remained healthy in the four fiscals through 2019. Unencumbered cash and bank balance and liquid mutual fund investments (Rs 1.8 crore and Rs 5.5 crore, respectively, as on March 31, 2019) also support liquidity.

Outlook: Stable

CRISIL believes DEL will maintain its stable business and healthy financial risk profiles over the medium term. The outlook may be revised to 'Positive' if significant improvement in revenue and steady profitability leads to high cash accrual, while financial risk profile is steady. The outlook may be revised to 'Negative' if low cash accrual, stretch in working capital cycle, or any major debt-funded capex weakens financial risk profile.

About the Company

Incorporated in 1982 and promoted by Mr N K Garg, DEL manufactures industrial consumables such as wear plates, welding rods/electrodes, and flux-cored wires. It also provides refurbishment services to various capital goods industries. Manufacturing facilities are in Nagpur, Maharashtra.

Key Financial Indicators
As on / for the period ended March 31 Units 2019 2018
Operating income Rs crore 152.33 108.89
Reported profit after tax (PAT) Rs crore 10.17 9.39
PAT margins % 6.7 8.6
Adjusted debt/adjusted networth Times 0.17 0.22
Interest coverage Times 8.48 8.44
 

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 Letter of credit & Bank Guarantee NA NA NA 20 CRISIL A2
NA Cash Credit NA NA NA 25 CRISIL BBB+/Stable
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  25.00  CRISIL BBB+/Stable  05-08-19  CRISIL BBB+/Stable      22-11-17  CRISIL BBB+/Stable  23-02-16  CRISIL BBB+/Stable  CRISIL BBB+/Stable 
        22-02-19  CRISIL BB+/Stable (Issuer Not Cooperating)*      04-04-17  CRISIL BBB+/Stable       
Non Fund-based Bank Facilities  LT/ST  20.00  CRISIL A2  05-08-19  CRISIL A2      22-11-17  CRISIL A2  23-02-16  CRISIL A2  CRISIL A2 
        22-02-19  CRISIL A4+ (Issuer Not Cooperating)*      04-04-17  CRISIL BBB+/Stable/ CRISIL A2       
All amounts are in Rs.Cr.
*Issuer did not cooperate; based on best-available information
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 25 CRISIL BBB+/Stable Bank Guarantee 7 CRISIL A2
Letter of credit & Bank Guarantee 20 CRISIL A2 Cash Credit 25 CRISIL BBB+/Stable
-- 0 -- Rupee Term Loan 3 CRISIL BBB+/Stable
Total 45 -- Total 35 --
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 Engineering Sector
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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