Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A-/Stable/CRISIL A2+’ ratings to the bank facilities of Zetwerk Manufacturing Businesses Private Limited (Zetwerk, part of Zetwerk Group).

 

The rating reflects the group's strong financial risk profile marked by robust networth, comfortable gearing and ample liquidity. The financial risk profile is expected to sustain going forward backed by Zetwerk management’s committed stance of maintaining gross gearing well below 0.5 times at all points in time, whilst also maintaining substantial liquidity buffer. The rating also takes into account the moderate business risk profile marked by diverse set of operations, diversified geography and clientele, and prudent risk management policies. These strengths are partially offset by its limited track record of operations, complex business model exposed to operational risks and counter party risks, muted but gradually increasing operating profitability especially in the organic business, continued acquisitions, subdued debt protection metrics and working capital intensive operations.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has consolidated the business and financial risk profiles of Zetwerk, and its subsidiaries and joint ventures, which are strategically important to, and have a significant degree of operational integration with Zetwerk. These companies are Zetwerk Manufacturing USA  Inc (ZMUSA), Zetfab India Private Limited (ZIPL), Zetwerk Manufacturing SG Pte Limited (ZMSG), Sharp Tanks and Structural Private Limited (STS), Zetwerk Manufacturing HK Private Limited (ZMHK), Zetwerk Aerosystems Private Limited (ZAPL), Zet Town India Private Limited (ZTIPL), Sips-Limino-Zetwerk (SLZ) and Zetwerk Fabplus Private Limited (ZFPL). This is because all these entities, together referred to as the Zetwerk group, operate in the same industry and have operational and financial linkages. CRISIL Ratings considers these entities as being strategic to Zetwerk in view of their strong integration with Zetwerk’s operations.

 

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:

Strong financial risk profile: Zetwerk group has a strong networth of Rs 3,764 crores as of March 2022 and is expected to further improve with steady accretion to reserves. The company maintains a comfortable capital structure with limited reliance on external borrowings and absence of any debt-funded capital expenditure (capex). Gearing and total outside liabilities to adjusted networth ratio stood at about 0.21 times and 0.80 times as on March 31, 2022, respectively. . Management stance is to maintain gross gearing well below 0.5 times over the medium term. 

 

Well diversified operations and large customer base: Zetwerk group has diversified operations, with presence in steel fabrication and precision parts manufacturing, EPC segment, consumer goods, apparels and trading of various commodities. Diversity in revenue profile provides a cushion against downturn in any segment and adds to the revenue stability.

 

In addition, the group benefits from a large 600+ customer base which includes reputed players such as Tata Group, L&T, Aditya Birla Group, Arvind Group, etc. The top 10 customer contributes to less than 30% revenues. The group has been expanding its customer base year-on-year, with repeat customer base of 85%. It also generates 15-20% revenues from exports.

 

Scale of operations has been increasing rapidly with an estimated topline of over Rs.12,000 crores in FY2023. This would be more than doubling on revenues of Rs. 4,965 crores reported in fiscal 2022 that itself was at a CAGR of 320 percent since inception. Current order book stands at Rs. 10,078 crores as on September 2022 which is to be executed over the next 12 months. The group has achieved estimated revenues of Rs. 5,101 crores in H1 ended September 2022.

 

The revenue growth is expected to sustain over the medium term as Zetwerk is backed by not just organic growth in business but also the acquisitions the group has been undertaking. The contribution of acquired companies is currently lower than 5% to the topline for the year ended March 2022. The ability of the group to successfully deliver projects and product consignments will be critical towards achieving this growth.

 

Established vendor network: Zetwerk group has established partnership with 10000+ suppliers/vendors spread across India, which supports the group to cater to large orders by provide large available capacities and varied capabilities along with competitive pricing to its customers. The group manages its widespread operations through its proprietary software, which supports the group in managing supply chain, reduce costs and monitor quality while ensuring timely production. The same helps in maintaining healthy in-hand order book and would continue supporting business risk profile over the medium term.

 

Prudent risk management practices: Back-to-back purchases and order-backed inventory mitigate price fluctuation risk of key inputs, like steel, aluminum, cotton, etc. Also, part of inventory under fabrication and EPC is supplied by customers, reducing the risk of price fluctuations. Its customer base mainly comprises of players having strong to moderate credit profile. Further, internal credit limits are assigned to each customer basis their credit profile. For EPC, it undertakes central government or multilateral funded projects. The group also actively monitors the ageing of advances/material given to job-workers and assign limits to them as well. These limit risk of bad debts on receivables and advances.

 

Weaknesses:

Limited track record of operations: Zetwerk group has been in operations for just over three years and has grown exponentially in the limited period. While the group has invested significantly to build up the network and infrastructure to ramp up operations, its ability to do so successfully on a sustained basis will be monitored. The group is also susceptible to unforeseen financial liabilities, in case of any operational issues or delay in project executions.

 

The growth has been through increase of existing segment and acquisitions. It has acquired 4 companies in the past 12 months and aims to grow inorganically with an aim to expand their existing product capabilities as well as add incremental customer base. However, the integration risk and associated returns from such acquisitions remain a key monitorable.

 

Working capital intensive operations: Zetwerk group’s operations are highly working capital intensive as reflected by net-off cash gross current assets (GCA) of 220 days as on March 31, 2022. On a run rate basis, GCA days is estimated to remain around 140 to 145 days. Against this, the company’s creditors stood at about 165 days along with Rs 103 crores of customer advances. While the credit period to customers ranges from 45 to 90 days across segments, debtors are high due to milestone-based billing and high sales in last quarter. There are also debtors more than 6 months of Rs. 34 crores as on March 31, 2022, however it includes retention money and the group has made provisions of Rs. 25 crores as on March 2022. Inventory is moderate at 40-45 days and is expected to remain at similar levels. In addition, the company offers large advances to few suppliers/vendors with established track record and relationship - majority of whom are SME and MSMEs, to help them fund their working capital requirements. This exposes the group to high credit risk from vendors.

 

Low operating margin and subdued debt protection measures: Although, operating margins have improved in fiscal 2022 to 1.7% and is estimated to further improve in fiscal 2023, it continues to remain constrained due to low value addition. This also leads to subdued interest coverage at around 1.19 times in fiscal 2022. While debt levels are low, interest cost is high on account of costs of vendor financing limits and bank charges for non-fund-based limits. Improvement in operating margin and hence interest coverage will remain a key monitorable.

Liquidity: Strong

Cash accruals are expected to be over Rs 100 to 150 crore which are sufficient against term debt obligation of Rs 50 to 60 crore in fiscal 2023 and 2024. Bank limit utilization has been moderate at about 74% on average for the past six months ended September 2022. The group had cash and bank balance of around Rs. 186 crore with additional liquid investments of above Rs. 3000 crore as on March 31, 2022, including fixed deposits, mutual funds, commercial paper and corporate bonds and corporate fixed deposits. CRISIL Ratings expects a substantial amount of such liquidity to be maintained by the group over the medium term. Low gearing and moderate net worth support its financial flexibility and provides the financial cushion available in case of any adverse conditions or downturn in the business.

Outlook: Stable

CRISIL Ratings believe the group will continue to benefit from increasing scale with diversified operations and established relationships with vendors and clients.

Rating Sensitivity factors

Upward factor

• Sustenance in scale and sustained operating profitability of above Rs 350 crores, leading to higher interest coverage
• Improvement in working capital cycle while sustaining a strong capital structure

 

Downward factor

• Decline in scale of operations leading to fall in revenue or profitability margin hence leading to net cash accrual lower than Rs 100 crore.
• Large debt-funded capital expenditure or a substantial increase in its working capital requirements weakening its liquidity & financial profile.

About the Group

Incorporated in 2019, Bengaluru- based Zetwerk is promoted by Mr. Amrit Acharya, Mr. Srinath Ramakkrushnan, Mr. Vishal Chaudhary, Mr. Rahul Sharma, and Mr. Ankit Fatehpuria. The promoters and employees own about 23% of stake while remaining is with private equity players like Greenoaks, Lightspeed, Accel, Sequoia Capital, Kae Capital, D1 Capital and others.

 

Zetwerk group is engaged in contract manufacturing of precision parts, fabrication, consumer goods, apparels, and EPC for electrification, solar, and water. It also trades in various commodities such as steel, construction material, chemicals and polymers. The group generates around 6% to 7% from own manufacturing facilities, while remaining is through with vendors/sub-contractors.

Any other information: Not applicable

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	Non-Fund Based Limit*	NA	NA	NA	1744.0	NA	CRISIL A2+
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	581.0	NA	CRISIL A-/Stable
NA	Proposed Term Loan	NA	NA	NA	50.0	NA	CRISIL A-/Stable
NA	Term Loan	NA	NA	Sept-25	125.0	NA	CRISIL A-/Stable

*Nonfund based limits are partially fungible with fund based limits