Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL BBB-/Stable/CRISIL A3’ ratings to the bank facilities of Lgb Forge Limited (LGBFL).

 

The ratings reflect the anticipated improvements in business risk profile, which will be driven by diversified revenue streams of LGBFL, refurbishment of existing machinery and incremental capital expenditure (capex), leading to better revenue and financial risk profile supported by the managerial and operational support from LG Balakrishnan Bros Ltd (LGB), flagship entity of LGB group.

 

Revenue in fiscal 2024 dropped by 3% to Rs 89.6 crore as compared to Rs 92.3 crore in fiscal 2023, impacted by frequent machinery breakdown because of aging issues due to lesser maintenance during the Covid-19 pandemic and drop in export volumes. LGBFL’s machineries (4 press in hot forging in Mysuru [Karnataka] and 14 cold forging press in Coimbatore [Tamil Nadu]) became very old and there was no maintenance capex incurred for a long time, leading to frequent machinery breakdowns. However, despite the above challenge, LGBFL is expected to post revenue of Rs 78-80 crore over medium term, driven by healthy order book and planned refurbishment of aging machineries.

 

During fiscal 2024, LGBFL’s operating losses reduced to 1.0% as compared to loss of 4.9% in the previous fiscal, led by softening of raw material prices. However, going forward, operating margin may improve to 4.0-4.5% driven by the decrease in freight cost after its planned setup nearer to customer location, change in employee cost structure along with process improvements and refurbishments of press machines which could result in better fixed cost absorption for the company.

 

Revenue in the first quarter of fiscal 2025 for LGBFL remained stable at Rs 22.5 crore as compared to Rs 22.7 crore in the first quarter of fiscal 2024, mainly on account reduction in exports and lesser utilisation levels of the press machines. Operating losses remained at 1.8% in the first quarter of fiscal 2025 as compared to loss of 2.1% in the first quarter of fiscal 2024 on account of reduced scale of operations and increased fixed cost expenses.

 

LGBFL’s financial risk profile is moderate with losses affecting the networth in the past two fiscals. Networth stood at Rs 20 crore as on March 31, 2024, as compared to Rs 29 crore a year ago. Ratios such as debt to earnings before interest tax depreciation and amortisation (Ebitda) and net cash accrual to debt remained negative in the past two fiscals due to operating losses. In the first quarter of fiscal 2025, LGBFL sold its Puducherry division for Rs 15 crore which has helped in reducing debt levels and fund its capex worth Rs 4 crore in fiscal 2025. As of June 30, 2024, total debt levels reduced to Rs 19.5 crore as compared to Rs 29 crore as on March 31, 2024. Debt levels at the end of fiscal is expected at Rs 20-22 crore. However, these metrices are expected to improve in fiscal 2025, driven by expected improvement in profitability and planned reduction in debt levels.

 

Liquidity risk profile is supported by operational and financial flexibility being part of the LGB group and continued support from the promoters. For instance, the company’s capex is being partly supported by LGB in terms of purchase and lease to LGBFL to an extent of Rs 6 crore which will be repaid over the years. Besides, the cash accrual is expected at Rs.3-4 crore remaining adequate for repayment of Rs 2.2 crore, while the capex shall be funded from the sale proceeds of Puducherry division.

 

The ratings also reflect the longstanding relationship with key clients, diverse revenue segment of LGBFL serving different automotive (auto) segments and financial and operation support from LGB. These strengths are partially offset by modest scale of operations, intense competition in the forging segment and modest financial risk profile.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profile of LGBFL. The company also benefits from being part of the established and financially strong LGB group.

 

Also, the proposed lease arrangement with group company, LGB, has been considered as debt in the books of LGBFL.

Key Rating Drivers & Detailed Description

Strengths:

Longstanding relationship with clientele and diverse revenue segments

The company derives its revenue by supplying to leading Tier-1 and Tier-2 auto component players in both domestic (84% of revenue in fiscal 2024) and export markets (16% of revenue in fiscal 2024). Albeit top 5 customer contribute ~75% of sales, it enjoys healthy and longstanding relationship with these players. Besides, revenue is diversified across passenger vehicles (PV), commercial vehicles (CV) and tractors, which insulates the company from demand issues in any particular segment.

 

Financial and operational support from LGB group of companies

LGBFL being part of the LGB group receives timely support from its group companies and its promoters. For instance, LGB has proposed to partly support the purchase of secondhand press machines by way of leasing to LGBFL from LGB. The promoters also infused unsecured loans in the company (Rs 1 crore as on March 31, 2024, as compared to Rs 2.2 crore a year ago), given the weak operating performance, and are expected to extend timely and adequate financial support, on need basis, to meet the company’s operational and financial commitments going forward as well. As of June 30, 2024, the promoters own 73.8% shareholding while the remaining is held by the public.

 

Weaknesses:

Low scale of operations with high competition in the forging segment

LGBFL is a relatively small player in the highly competitive forging industry, with pressure from larger players restricting its pricing flexibility. It also has relatively low market share with customers because of its scale. Nonetheless, its established relationships with reputed Tier-I auto component suppliers support its revenue to an extent.

 

Modest financial risk profile

LGBFL’s financial risk profile is moderate due to sizeable debt availed to cover its operational losses in the past two fiscals. The company’s debt levels remained at Rs 11.8 crore at the end of fiscal 2022. However, it increased to Rs 26 crore at the end of fiscal 2023 and Rs 29 crore at the end of fiscal 2024. This is also on account of stretch in cash conversion cycle increasing from 49 days at the end of fiscal 2022 to 108 days at the end of fiscal 2023 and 90 days at the end of fiscal 2024. Besides, networth deteriorated to Rs 20 crore at the end of fiscal 2024 after posting losses after tax in the past two fiscals leading to fall in credit metrices. However, debt levels are expected to reduce at the end of fiscal 2025 supported by the sale proceeds from the Puducherry division. As on June 30, 2024, long-term debt stood at Rs 12.6 crore and the short-term debt at Rs 7 crore. Hence, debt coverage metrics like interest cover and debt to Ebitda ratio is expected to improve driven by fall in debt and improvement in profitability.

Liquidity: Adequate

LGBFL’s expected cash accrual of Rs 3-4 crore this fiscal and Rs 5-7 crore next fiscal is expected to adequately cover debt obligations including expected lease payments of Rs 2.2 crore this fiscal and ~Rs 4 crore next fiscal. Capex of Rs 4 crore is being met through proceeds from sale of the Puducherry division. Besides, the company has access to bank lines of Rs 22 crore, which were moderately utilised ~60% for the nine months through August 2024. Utilisation has also reduced in recent months, with sale proceeds of Puducherry unit used to pare short term debt. This provides additional flexibility to raise funds. The company is also expected to receive timely support from promoters in the event of exigencies (unsecured loan of Rs 1 crore received in fiscal 2024). The promoters, as well as group flagship, LGB, have also demonstrated support by subscribing to LGBFL’s rights issue in the past.

Outlook: Stable

LGBFL will benefit from its extensive experience of management, its relationship with key existing customers and refurbishment or replacement of its existing lines over the medium term to support the business risk profile. Besides, continuous support from its promoters and its group company, LGB, providing operational and managerial support shall aid the financial risk profile of LGBFL.

Rating Sensitivity Factors

Upward Factors

• Sustained improvement in revenue and operating profitability above 9-10%, leading to higher-than-expected cash accrual
• Efficient working capital management and improvement in financial risk profile

 

Downward Factors

• Sustained decline in revenue and operating profitability declining below 4% on sustained basis
• Stretched working capital cycle or sizeable debt-funded capex impacting the financial risk profile, especially liquidity.

About the Company

Incorporated in 2008, the LGB group’s flagship entity LGB demerged its forging operations into a separate company -- LGBFL -- to form a joint venture with a French-based auto component player. Since the same did not consummate, LGBFL since then had remained as a separate entity.

 

LGBFL is involved in manufacturing forged (hot, warm and cold) components supplying to Tier-1 and Tier-2 auto component players majorly serving PVs, CV and tractor segments. The company has manufacturing facilities at Coimbatore (cold forging – 1080 metric tonne per annum [MTPA]) and Mysore (Hot forging – 6000 MTPA) respectively. The company had machining division at Puducherry, which was sold to LGB in April 2024. As of June 2024, the promoters held stake of 73.79% while the remaining is held by the public.

About the Group

LGB Group of Industries (LGB group) was founded in 1937 as a transport company which has grown into a diversified manufacturing company. In order to focus its activities on the core business, LGB concentrated in transmission products such as chains, sprockets, auto tensioners, fine blanked components and forged and machining components and aligned its manufacturing facilities to meet the demand of its global customers. The flagship entity of the group is LGB, which is one of the largest manufacturers of two wheeler (2W) auto chains in India (marketed under the brand, Rolon).It derived close to 80% of its revenue in fiscal 2024 from chains and allied products and the rest from the metal forming segment. In terms of its business segments, 2W constitutes over 80% of its consolidated revenue, while over 20% comes from the replacement segment. Other key entities of the group include Super Transports Pvt Ltd, LGB Auto Products Pvt Ltd and Super speeds Pvt Ltd.

Key Financial Indicators

As on/for the period ended March 31*	Unit	2024	2023
Operating income	Rs crore	90	92
PAT	Rs crore	-10	-9
PAT margin	%	-11.0	-10.1
Adjusted debt/adjusted networth	Times	1.46	0.89
Interest coverage	Times	0.17	-1.18

*CRISIL Ratings-adjusted numbers

Any other information: Not Applicable