| Air Works India (Engineering) Private Limited | ||||||
| Ratings removed from ‘Watch Developing’; Ratings reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has removed its ratings on the bank facilities of Air Works India (Engineering) Private Limited (Air Works) from ‘Rating Watch with Developing Implications’ and has reaffirmed the ratings at ‘CRISIL BBB/CRISIL A3+’ while assigning a ‘Stable’ outlook to its long-term rating.
The ratings had earlier been placed on watch with developing implication following the announcement by Adani Enterprise Ltd (AEL) that Adani Defence Systems & Technologies Ltd (ADSTL, a 100% subsidiary of AEL) has signed a definitive agreement to acquire Air Works. The watch has now been resolved, based on an articulation from the management of Air Works as well as written confirmation that the long stop date as per the term sheet executed between ADSTL, Air Works and certain shareholders of Air Works has expired. Further, CRISIL Ratings is given to understand that there are no ongoing discussions between the concerned parties to extend the validity of the term sheet.
The rating factors in the recovery in operating performance of the company as reflected in estimated operating revenue of around Rs. 350 crores, ~21% growth[1] over fiscal 2022, wherein the first quarter was impacted due to second wave of the pandemic and gradual recovery was seen thereafter. Additionally, the operating margins (after considering one-time cost of Adani transaction and customer incident as operational cost) improved to ~13.3% in fiscal 2023 from ~7.5% in the previous fiscal.
While the scale of operations for fiscal 2023 has remained lower than the earlier estimates, the improvement in performance trajectory remains adequate. Delay in commencement of the Cochin facility (commenced in September 2022 due to covid led delay in receipt of approval from the authorities) and consequent lower utilisation has also impacted the performance of the company to some extent. However, with expected increased utilisation at Cochin facility, the revenue as well as profitability is expected to materially improve in fiscal 2024.
With improved utilisation of the Cochin facility, the revenue of the company is expected to be above Rs 420 crore (from continuing business) in fiscal 2024 and the operating leverage will support the operating margin improvement to above 18% resulting in operating profit of ~Rs 75 crore. The scaling up of operations and expansion in operating profitability will remain monitorable going forward.
The rating also factors in the modest financial risk profile as reflected in deterioration in net worth over the last few years, and consequent high gearing (for debt excluding lease liabilities) at around 2.8 times and modest interest coverage for fiscal 2023. Going forward, with improvement in profitability and consequent significant improvement in accruals, the net worth position is expected to gradually improve. The liquidity position remains adequate with free cash and cash equivalents of ~Rs 18 crores as on March 31, 2023 and around 25% unutilised fund-based bank limits. Material improvement in the financial risk profile as reflected significant improvement in gearing and interest coverage ratios will remain essential going forward. [1] The operating revenue for fiscal 2022 was ~Rs 293 crore, fiscal 2021 was ~Rs 249 crore and fiscal 2020 was ~Rs 320 crore |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Air Works and its subsidiaries, which are strategically important to, and have significant operational integration with, the company. All the companies, together referred to herein as Air Works, operate in similar businesses.
Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths
Air Works is one of the largest MRO players in India providing services to established players, comprising of IndiGo, Boeing, Tata SIA, Air Asia and Air Arabia. It has also received long-term orders for private/business jet MRO from players such as Reliance, JSW group and Grasim Industries Ltd etc. The company has also established a long-standing relationship with the defence authorities for maintenance of the defence aircrafts.
Recent government initiatives augur well for the domestic MRO industry. Under the Atmanirbhar Bharat initiative, numerous reforms have been introduced by the Government of India to promote the MRO industry in India. These initiatives include reduction in goods and services tax (GST) on MRO services from domestic customers to 5% from 18% earlier and no GST on MRO services to international customers, along with easier access for foreign aircraft entering India (with the earlier 15-day period extended to 180 days), among others.
There are also ongoing discussions around removing the royalty applied by airport operators at government-run airports and reducing the rental costs. These measures should promote outsourcing of maintenance to India, thereby supporting improvement in the MRO industry in India over the medium term.
The company is focused on MRO operations in India. Regulatory reforms should support revenue growth and ensure healthy operating profit over the medium term.
Weaknesses
The revenue from the continuing business of the company has improved above the pre-pandemic level in fiscal 2023. The company has also commenced the new Cochin facility in September 2022, certified by European Aviation Safety Agency (EASA) and is expected to aid in improving the scale by attracting business from international carriers. The revenue visibility is expected to remain healthy over the medium term, supported by a diversified clientele and MRO orders across the business aviation, defence, aircraft lessors and airline segments.
Debt protection metrics remain constrained by modest networth and moderate but improving operating profitability. For fiscal 2023, interest coverage has remained modest at 1.9 times despite improvement from the previous year. The gearing of the company (for debt excluding lease liabilities) remained high at 2.8 times and the total outside liabilities (for debt excluding lease liabilities) to tangible net worth ratio remained high at 6.2 times as on fiscal 2023. While expected recovery in the operating performance in fiscal 2024 should support the financial risk profile, the track record and sustenance of the improvement remains to be seen. |
Liquidity: Adequate Cash balance and liquid investments stood at Rs 18 crore as on March 31, 2023 and fund based limits have remained utilised at around 75%. Net cash accrual, expected at around Rs 45 crore in fiscal 2024 and increasing upto Rs 70 crores in the medium term, will adequately cover yearly principal debt obligation of ~ Rs 16 crore in fiscal 2024 (peak repayment amount on current level of long-term debt). Internal cash accrual, cash and equivalents and unutilised bank lines should be sufficient to meet the incremental working capital requirement, debt obligation and planned capex over the medium term. |
Outlook: Stable The business risk profile of Air Works should remain adequate over the medium term, driven by long-term contracts with airlines and healthy relationships with carriers both in domestic and international market, while the financial risk profile should improve gradually, supported by steady increase in cash accrual. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1951, Air Works provides engineering, asset management, flight safety and technology solutions to commercial airlines and business aviation sectors. The company has five key business segments: MRO engineering services, aircraft painting and finishing, technical service to lessors, business jet management services and flight safety. The company owns 50% stake in Acumen, which provides end-to-end technical audit and data management services for leased aircraft. |
Key Financial Indicators (CRISIL Ratings-adjusted numbers)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 07-June-23 in line with the lender-wise facility details as on 04-Aug-22 received from the rated entity
Criteria Details
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