Rating Rationale
July 08, 2020 | Mumbai
Mangal Industries Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.419.01 Crore
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Mangal Industries Limited (MIL) at 'CRISIL A/Stable/CRISIL A1'.

The ratings reflects CRISIL's belief that MIL's business performance will benefit from steady off-take from Amara Raja Batteries Ltd (ARBL, rated 'CRISIL AA+/Stable/CRISIL A1+') as well as improving capacity utilization through additions of new customers over the medium term. The financial risk profile is also expected to strengthen with steady improvement in cash accruals, moderation in capital expenditure and continued prudence in working capital management.

Revenue declined by 8% in fiscal 2020 primarily due to decline in volumes from automotive market as well as deferment of sales due to lockdown announcement in March 2020. Profitability, improved to 13.8% in fiscal 2020 (compared to 13.3% in fiscal 2019) due to better product mix, partially offset by pre-operative costs of new expanded capacities.

Demand in fiscal 2021 is also expected to remain subdued due to continued volume decline in the domestic and export markets driven by the Covid pandemic and challenging business environment. The impact will be mitigated by steady volumes from its key customer, ARBL which mainly benefits from healthy volumes in the aftermarket and industrial segment. However any sustained long period of plant closures or deferment of orders can result in deterioration in credit quality of automotive component players, including MIL. On the other hand, a faster restoration of demand and the ability of MIL to revert back to operational stability will be key monitorables.

MIL is expected to invest in moderate capex of Rs 30 crore per annum over the medium term to align its production capacity to demand requirement of ARBL and for expanding machine lines against confirmed orders from new customers. Sustained increase in utilisation of expanded capacities and consequent benefits of operating leverage will improve the business risk profile over the medium term.

These rating strengths are partially offset by high customer concentration and exposure to business cyclicality in end user industries.

Analytical Approach

For arriving at its rating, CRISIL has considered the standalone business and financial risk profiles of MIL.

Key Rating Drivers & Detailed Description
Strengths: 
* Healthy business risk profile, supported by strong business linkages with ARBL: MIL derives about 76% of its revenue from ARBL, the flagship company of the Amara Raja group. ARBL is the second-largest player in the storage batteries segment in India, with diverse revenue streams. ARBL generated net sales of Rs.6,840 crore in fiscal 2020 and MIL is a key supplier of battery and metal fabrication components to ARBL. Over the medium term, ARBL has outlined further plans to expand capacity for its two wheeler, four wheeler and industrial batteries, which bodes well for MIL's incremental volumes. CRISIL believes that MIL will continue to benefit from the strong business linkages with ARBL over the medium term.
 
* Adequate financial risk profile: MIL's financial risk profile is marked by adequate capital structure, healthy debt protection metrics, and is supported by steady cash flows from operations. Despite the part debt funded capex between fiscal 2016 and 2019, steady improvement in accruals and reduction in working capital requirements has lowered the gearing to about 0.55 times in fiscal 2020 compared to 1.26 times in fiscal 2016. Interest coverage and net cash accrual to debt ratios also remain healthy at about 7.1 times and 0.4 times respectively in fiscal 2020. Given the expected improvement in cash accruals, scheduled repayment of debt and moderate fund requirement for capex and working capital, the credit metrics are likely to improve further over the medium term.
 
Weaknesses:
* High customer concentration in revenue profile: Over the past four years, MIL has focussed on diversifying its customer base, which increased contribution of customers outside the Amara Raja group to around 24 per cent of MIL's revenue in fiscal 2019 as against less than 10 per cent during 2008-09. However this has reduced to about 20% in fiscal 2020 as the automotive slowdown has reduced the share of external customers. The operational benefits of ramp up in business with new customers are expected to benefit MIL over medium term. While CRISIL believes that the Amara Raja group will continue to increase its off-take from MIL considering ARBL's expansion plans, it nevertheless continues to expose MIL to customer concentration risk.  
 
* Exposure to cyclicality in the end user industries: MIL's business cycle is exposed to business cyclicality with respect to demand from original equipment manufacturers as well as after-market sales. The monetization of expanded capacity is contingent on sustained off-take from these end user industries.
Liquidity Adequate

Liquidity will remain adequate driven by steady improvement in cash accruals and prudent working capital management. MIL's working capital bank lines of Rs 74.5 crore, are utilised at an average of 70% (of drawing power) over the 12 months period ended May 2020. MIL is expected to invest in capex of Rs 30 crore per annum over the medium term to align its production capacity to demand requirement of ARBL and for expanding machine lines for new customers. This will be part funded by term debt. Healthy accruals of about 60-75 crore is expected to remain adequate to fund the repayment obligations of Rs 42 crore and Rs 34 crore in fiscal 2021 and fiscal 2022 respectively. MIL has opted for not availed the moratorium for any principal repayments on term loans, while it has availed moratorium on the interest component between April and June, mainly to conserve cash for exigencies.

Outlook: Stable

CRISIL believes the business risk profile of MIL will benefit from steady increase in utilisation of new capacities despite a temporary moderation in volumes envisaged during fiscal 2021. Increasing contribution from new external customers and continued healthy off-take by ARBL will further support the business risk profile. The financial risk profile is also expected to improve over the medium term with increase in cash accruals, moderation in capex plans and consequent reduction of debt in capital structure.

Rating Sensitivity factors
Upward factors
* Significant improvement in business performance along with sustained operating profitability above 14% resulting in higher cash accruals
* Substantial improvement in financial risk profile through material reduction in debt leading to gearing below 0.4 times.
  
Downward factors
* Additional large debt-funded capex resulting in weakening of key credit metrics (e.g. gearing above 1.5 times)
* Delay in favourable monetization of expanded capacities leading to sub optimal utilization and decline in profitability below 10%.
About the Company

MIL, incorporated in 1996 as part of the Amara Raja group of companies, manufactures metal fabrication, battery and auto components. These products are used in home inverters, trickle chargers, switch mode rectifier cabinets, and batteries. The company also manufactures fasteners, particularly for the automobile industry. It has also ventured into the storage solutions segment where it provides customised solutions to manage storage needs of clients. During fiscal 2019, it has expanded to Tool Works segment which is involved in manufacture of industrial tools and moulds. The company has two manufacturing facilities near Tirupati and Chittoor in Andhra Pradesh. ARBL and other Amara Raja group companies remain its largest customers.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 885 781
Profit after tax (PAT) Rs crore 37 39
PAT margin % 4.2 5.0
Adjusted debt/adjusted networth Times 0.67 0.90
Interest coverage Times 6.52 4.98

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL 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. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Complexity Level Rating assigned with outlook
NA Bank Guarantee NA NA NA 3.5 NA CRISIL A1
NA Cash Credit NA NA NA 74.5 NA CRISIL A/Stable
NA Letter of Credit NA NA NA 16.5 NA CRISIL A1
NA Corporate Loan NA NA NA 20.0 NA CRISIL A/Stable
NA Long Term Loan NA NA Mar-2022 190 NA CRISIL A/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 89.0 NA CRISIL A/Stable
NA Proposed Working Capital Facility NA NA NA 25.51 NA CRISIL A/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  399.01  CRISIL A/Stable      26-11-19  CRISIL A/Stable  15-11-18  CRISIL A/Stable/ CRISIL A1  21-11-17  CRISIL A-/Positive/ CRISIL A2+  CRISIL A-/Stable/ CRISIL A2+ 
                05-10-18  CRISIL A/Stable/ CRISIL A1       
Non Fund-based Bank Facilities  LT/ST  20.00  CRISIL A1      26-11-19  CRISIL A1  15-11-18  CRISIL A1  21-11-17  CRISIL A2+  CRISIL A2+ 
                05-10-18  CRISIL A1       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 3.5 CRISIL A1 Bank Guarantee 3.5 CRISIL A1
Cash Credit 74.5 CRISIL A/Stable Cash Credit 54.5 CRISIL A/Stable
Corporate Loan 20 CRISIL A/Stable Corporate Loan 20 CRISIL A/Stable
Letter of Credit 16.5 CRISIL A1 Letter of Credit 16.5 CRISIL A1
Long Term Loan 190 CRISIL A/Stable Long Term Loan 190 CRISIL A/Stable
Proposed Long Term Bank Loan Facility 89 CRISIL A/Stable Proposed Long Term Bank Loan Facility 100 CRISIL A/Stable
Proposed Working Capital Facility 25.51 CRISIL A/Stable Proposed Working Capital Facility 34.51 CRISIL A/Stable
Total 419.01 -- Total 419.01 --
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 Criteria for rating short term debt

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