Detailed Rationale

CRISIL Ratings has removed its ratings on the bank facilities of Tata Advanced Systems Limited (TASL) from ‘Rating Watch with Developing Implications’ and upgraded the long-term rating to ‘CRISIL AA’ from ‘CRISIL AA-‘ and assigned a ‘Stable’ outlook. The short-term rating has been reaffirmed at ‘CRISIL A1+’.

 

The ratings watch has been resolved post completion of the reorganisation and receipt of regulatory approvals. The upgrade reflects the company’s strengthened business risk profile, driven by consolidation of all the defence and aerospace businesses of the Tata Group into TASL. Post consolidation, the scale of the company has grown 3.5 times to around Rs 4,300 crore estimated revenue in fiscal 2022. The reorganisation has also bolstered its market position, improved diversity and the company’s ability to bid for larger end-to-end projects.

 

TASL acquired TAL Manufacturing Solutions Ltd (TAL) from Tata Motors Ltd (TML; ‘CRISIL AA-/Stable/CRISIL A1+’) in March 2019 and Tata Advanced Materials Ltd (TAML) from Tata Industries Ltd (TIL; rated 'CRISIL AAA/Stable/CRISIL A1+') in May 2019. Both these subsidiaries have been merged with TASL effective from April 1, 2019 and May 31, 2019, respectively. Additionally, it has also acquired two divisions - Tata Power’s Strategic Engineering Division (SED) and Tata Motors Defence Undertaking (TMLD) on slump sale basis effective from November 1, 2020 and April 1, 2021, respectively, post receipt of regulatory approvals.

 

The aggregate enterprise value of all these transactions is over Rs 2,800 crore, which includes debt of over Rs 800 crore. The purchase consideration towards acquisition of TAL and TAML was fully funded through equity from the parent, Tata Sons Pvt Ltd (Tata Sons; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+') while SED and TMLD acquisitions were funded through bridge debt till the time equity comes in from the parent. The company is expecting equity infusion of Rs 630 crore from parent this fiscal towards retirement of bridge debt and as a result of that, leverage should improve from current elevated levels.

 

As of December 2020, the company had orders worth Rs 16,500 crore, exhibiting revenue visibility over the next four years. During fiscal 2021, the Covid-19 pandemic affected the global civil aviation segment wherein deliveries were deferred amid rising uncertainty, while military aerospace orders remained resilient. On the other hand, domestic defence business rebounded sharply, helped by receipt of sizeable orders from the Ministry of Defence (MoD).

 

Fiscal 2022 revenue is expected to log robust growth of over 70%, led by the TMLD acquisition, full year impact of the SED division and recovery in the aerospace segment due to committed deliveries schedule. Operating margin was impacted in fiscal 2021, but is expected to rise by 80-100 basis points (bps) to around 13% this fiscal, helped by improved operating leverage.

 

The ratings continue to reflect TASL’s established market position in the aerospace and defence segments, aided by the company’s strategic tie-ups with global players and strong support from its parent, Tata Sons. These strengths are partially offset by moderate working capital requirement and average financial risk profile.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has fully consolidated the business and financial risk profile of TASL’s subsidiaries and joint ventures (JVs) on account of similar business profile, and significant operational and financial linkages. The subsidiaries include Nova Integrated Systems Ltd, Aurora Integrated Systems P Ltd, TATA Aerostructure Pvt Ltd and its JV companies include Tata Sikorsky Aerospace Ltd, Tata Lockheed Martin Aerostructures Ltd, Hela Systems Pvt Ltd and Tata Boeing Aerospace Ltd.

 

CRISIL Ratings has also applied its parent notch-up framework to factor in the intensity of support that TASL receives from the parent, Tata Sons.

 

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:

• Established market position and strategic tie-ups with global players

TASL has emerged as a dominant player in India catering to the global aerospace business, supported by its strategic tie-ups with original equipment manufacturers (OEMs) and strong capabilities across the aerospace value chain. It assembles and supplies composites, such as wings, fuselage, empennage, floor beams and cabins to both tier-I and II OEMs, as well as engine components to tier-I players. Over the last several years, it has added major aerospace players as clients, including Boeing, Sikorsky, Lockheed Martin, GE, FACC and Spirit, besides establishing strong linkages. It has also formed JVs with Sikorsky, Lockheed Martin and Boeing. TASL’s agreements with its JV partners and similar arrangements with vendors insulate it from volatility in raw material prices, which also provides stability to its operating margin.

 

On the domestic defence front, it serves directly to the MoD and its divisions - Defence Research and Development Organisation (DRDO) and the Indian Air Force (IAF) by participating through competitive bidding route. In the domestic market, it competes with homegrown rivals such as Bharat Electronics Ltd, Bharat Dynamics Ltd, Bharat Forge, Mahindra & Mahindra, and Larsen & Toubro, amongst others.

 

Pertinently, TASL is well positioned to benefit from the defence offset requirements applicable to global OEMs and Make in India initiatives of the Government of India that act as structural tailwinds for the sector.

 

• Strong support from the holding company, Tata Sons

TASL is a strategically important entity for Tata Sons considering that it is the primary face of the Tata group in the aerospace and defence sectors. This is reflected in the group’s decision to consolidate related businesses under it and infusion of substantial amount of equity towards the consolidation exercise. Going forward, TASL should continue to receive support from its parent, given its strategic importance to it.

 

Weakness:

• Moderate working capital requirement

The company enjoys better terms of trade in the global aerospace business in the form of healthy customer advances, milestone-based payment and nil retention money that leads to faster conversion of the working capital cycle. However, on the domestic front, the operations are working capital intensive due to low intermediate payments. Furthermore, it has significant exposure to Ministry of Defence under Government of India which relies on budgetary means to clear its dues.

 

The gross current assets (GCAs) are expected to be elevated at over 500 days in fiscal 2021, on account of large unbilled revenue booked in the fourth quarter and partly due to covid-19 impact. However, GCAs are expected to reduce to below 300 days in fiscal 2022, led by liquidation of unbilled revenue and strong revenue growth.

 

• Average financial risk profile

TASL’s total debt to adjusted networth ratio was 2.4 times and interest coverage ratio was 2.9 times in fiscal 2021. These had weakened in fiscal 2021 because of the equity buyout of SED and TMLD divisions that was funded by bridge debt. However, on a combination of equity infusion from the parent of Rs 630 crore this fiscal and improved profitability, the gearing and interest coverage ratio are expected to improve to 1.2 times and 4.4 times, respectively, by fiscal 2023.

Liquidity: Strong

Liquidity should remain healthy, driven by prudent working capital management and steady cash accrual. Liquidity is supported by conservative utilisation of bank lines and cash and equivalent of over Rs 150 crore (including JVs) as on March 31, 2021. The company, including its JVs, are expected to generate net cash accrual of Rs 320-350 crore this fiscal, which should be adequate to cover debt maturities of over Rs 150 crore and part of the capital expenditure of over Rs 300 crore. As of December 2020, the fund-based working capital limit was moderately utilized at 65-70%. Moreover, TASL derives need-based support from its parent, Tata Sons.

Outlook: Stable

CRISIL Ratings factors in expected improvement in its business risk profile with the completion of merger and acquisition of all defence & aerospace divisions. The company is also expected to remain strategically important to, and continue to receive strong managerial and financial support from parent, Tata Sons, over the medium term.

Rating Sensitivity factors

Upward Factors

• Better-than-expected ramp-up in revenue and operating profitability, leading to return on capital employed (RoCE) of 12% on sustained basis over the medium term
• Material reduction in debt, improving the debt protection metrics

 

Downward Factors

• Any downward revision in the rating of the parent or change in stance of support
• Deterioration of the financial risk profile with interest coverage ratio sustaining below 3 times

About TASL

TASL, incorporated in 2007 as a wholly owned subsidiary of Tata Sons, is the strategic aerospace and defence arm of the Tata group. TASL has capabilities in diverse areas, including aerospace and aero-structures, missile systems and sub-systems, radar systems and sub-systems, command and control systems, unmanned aerial systems, optronic systems, and homeland security solutions.

Key Financial Indicators (TASL - Standalone) 

Particulars	Unit	2020	2019
Revenue	Rs.Crore	969	511
Profit After Tax (PAT)	Rs.Crore	59	34
PAT Margin	%	6%	7%
Total debt/adjusted networth	Times	0.3	0.4
Interest coverage	Times	4.4	2.6

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue Size (Rs.Crore)	Complexity levels	Rating outstanding with outlook
NA	Foreign currency term loan	NA	NA	Mar-25	32.9	NA	CRISIL AA/Stable
NA	Foreign currency term loan	NA	NA	Mar-26	50.50	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	Mar-25	125.0	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	Mar-26	1523.30	NA	CRISIL AA/Stable
NA	Non-fund-based limit	NA	NA	NA	3,929.3	NA	CRISIL A1+
NA	Fund-based facilities	NA	NA	NA	1,184.0	NA	CRISIL AA/Stable

 

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Nova Integrated Systems Ltd	Full	Similar business profile, and significant operational and financial linkages with parent, TASL.
Aurora Integrated Systems Pvt Ltd
Tata Sikorsky Aerospace Ltd
Tata Lockheed Martin Aerostructures Ltd
Hela Systems Pvt Ltd
Tata Boeing Aerospace Ltd
TATA Aerostructure Pvt Ltd