Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Extensive experience of the promoters: The promoters have experience of three decades in the capital goods industry, which has enabled them to develop a keen grasp of local market dynamics and price trends. The promoters calibrate stocking decisions and extend need-based financial support. MIL is an established player in the manufacturing of induction furnace systems in India and has strong execution capabilities. Backed by robust demand scenario, healthy order book execution and benefits availed from enhanced capacities, MIL has clocked in a turnover of Rs 306.83 crore in fiscal 2024 exhibiting a 15% growth as against the previous fiscal. As such, the company has recorded a turnover of around Rs 150 crore in the first six months of fiscal 2025. Moreover, established relationship of the promoters with its customers has enabled them to build a healthy outstanding order book of around Rs 327.78 crore as on February 2025 which supports healthy revenue visibility over the medium term. The extensive experience of the promoters will help MIL grow over the medium term.

Comfortable financial risk profile: Financial risk profile is comfortable marked by healthy estimated networth of Rs 129.65 crore as on March 31st, 2024. Capital structure is also robust marked by moderate reliance on working capital debt yielding gearing and Total Outside Liabilities to Tangible Networth (TOL/TNW) ratio of around 0.26 and 1.14 times respectively as on March 31st, 2024. Capital structure, going forward, shall remain supported by nil debt funded capital expenditure (capex) plans, negligible term debt and moderate reliance on external working capital debt. Debt protection metrics also remain comfortable marked by expected interest coverage and NCA/AD at 5-7 times and 0.80-1.20 times respectively going forward. With no new debt funded capex plans and steady accretion to reserves, financial risk profile is expected to improve further going forward.

Weaknesses:

Moderately large working capital requirement: Gross current assets (GCAs) were 216 days as on March 31, 2024, on account of sizeable receivables and inventory of 47 days and 11- days, respectively. The company maintains substantial inventory to reduce turnaround time as well as including work in progress. Though working capital requirement is likely to remain large over the medium term, healthy unencumbered liquidity will ensure adequate liquidity. However, sustenance of working capital operations shall remain a key monitorable.

Susceptibility to volatility in raw-material prices and foreign exchange rate fluctuations apart from MIL’s presence in the cyclical capital goods industry: MIL is exposed to the risk of cyclicality inherent in the end-use industries such as metals and mining and the capital goods industry. New orders or repeat orders are largely dependent on the economic condition as the new or expansion projects by industries mainly depend on the level of expected economic growth. However, MIL has largely been able to insulate itself from the inherent cyclicality associated with the industry due to its presence in a niche segment and by catering to clients across diverse geographies (within as well as outside India) as well as due to good share of spare parts and service income at around 15-20% of its total sales. The basic raw material for manufacturing furnaces is electricity-conducive materials such as copper and copper rods. Copper prices are linked to the trends in international markets, which makes MIL’s profitability susceptible to the volatility in material prices, especially in the backdrop of its largely fixed-priced orders. MIL earns around 20% of its income through exports and hence is exposed to a sharp appreciation of the INR against the USD; though some natural hedge is available as the company also sources around 20-30% of its raw material requirement through imports. Nevertheless, as articulated by the management, the company does not hedge the foreign currency exposure as MIL has natural hedge for part of its foreign currency pay-out. The highly volatile price of copper and copper rods (key input) exposes operating margin to sharp fluctuations. As such, operating margins fell to 5.05% in FY22 from 11.72% in FY23 on the back of extreme volatility in the prices of raw materials which could not be passed on to the ultimate customers. Nevertheless, on the back of improved operational efficiencies and better fixed cost absorption and greater contribution of spares and transformer sales to revenue, operating margins have improved to around 11-12% in fiscal 2024 and six months of fiscal 2025. Sustenance of operating margins despite extreme fluctuations in the price of raw materials, foreign exchange rate fluctuations and cyclicality in the capital goods industry shall remain a key monitorable.