Detailed Rationale

CRISIL Ratings has reaffirmed its rating on the bank facilities of Alicon Castalloy Ltd (ACL) at 'CRISIL A/Positive/ CRISIL A1'.

 

CRISIL Ratings had revised its outlook on the long-term bank facilities of ACL to 'Positive' from 'Stable' while reaffirming the rating at 'CRISIL A'. The rating on the short-term bank facilities has been reaffirmed at 'CRISIL A1' on January 18, 2023.

 

The ratings draw comfort from the improvement in the business risk profile of the Company aided by a strong order book, increasing wallet share for existing customers and change in revenue and product mix. Further, financial risk profile continues to be strong supported by healthy capital structure and comfortable debt protection metrices of the company.

 

Company registered a strong 30% year on year growth in revenue at Rs.1402 crore during fiscal 2023 driven by healthy offtake from OEMs especially in the PV segment while the 2W segment also recovered post de-growth in fiscal 2022. During 9MFY24, Company booked a revenue of Rs.1140 crore driven by addition of new logos to the client base, rising proportion of four-wheeler segment in the orderbook which require products with higher weightage, and launch of new products for EV / tech-agnostic products.

 

Over the medium to long term, Company’s revenues are expected to grow by 9-14% driven by change in revenue mix with increasing wallet share of existing clients, addition of new products and customers. Further, Company has order book position of Rs.9000 crore to be executed over a period of six years ending fiscal 2029. The business profile will be supported by healthy segmental diversity, diversified product portfolio, established relationship with its clientele and change in segmental mix towards PV and CV segments from current skewness towards 2-Wheeler.

 

Operating margins expanded by 50 bps to 11% in fiscal 2023 on the back of change in product mix. The same further increased to 12.1% during 9MFY24 owing to softening of commodity prices (mainly aluminium) coupled with increase in share of value-added products which fetch better margin. Over the medium term, increasing share of higher margin products partly offset by the increased overhead costs for new product developments will result in sustenance of operating margin at 12%.

 

ACL plans to carry out capital expenditure (capex) of about Rs.400 crore during fiscals 2024 to 2026, which is expected to be funded by a prudent mix of internal accrual and debt. Overall debt levels are not expected to surpass the mark of Rs.400 crore annually over the medium term. Consequently, debt/earnings before interest, depreciation, tax and amortization (EBIDTA) is expected to remain below 1.7 times in medium term (fiscal 2023: 1.05 times) and interest coverage ratio to sustain at ~5.0 times in fiscal 2024 against 5.02 times in fiscal 2023.

 

The ratings continue to reflect the established market position of ACL in the aluminium die-casting auto components sector, driven by a diverse clientele and longstanding customer relationship. The ratings also factor in healthy financial risk profile because of low gearing, above average debt protection metrics and healthy liquidity. These strengths are partially offset by moderately large working capital requirement due to increasing exports and growth in new business and volatility in demand in the two-wheeler and passenger car segments.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of ACL and its wholly-owned subsidiaries, Alicon Holding GmBH, Austria-based Illichmann Castalloy GmbH and Slovakia-based Illichmann Castalloy S.R.O. That is because all the entities, collectively referred as ACL, have significant operational linkages and are under a common management.

 

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 in aluminium casting auto-component sector

ACL has a diversified product profile in the aluminium casting business, including cylinder heads, intake manifolds, engine support brackets, motor housings, battery housing and compressor housings. It has an established market position in the aluminium casting auto component sector, driven by established client relationship and operations in India, Austria, and Slovakia. Clientele includes major auto original equipment manufacturers (OEMs) such as Hero Motocorp Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Bajaj Auto Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Maruti Suzuki India Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Daimler India Commercial Vehicles Private Limited ('CRISIL AA+/Positive'), Mahindra and Mahindra Ltd ('CRISIL AAA/Stable/CRISIL A1+'), Honda Motors & Scooters industries, Toyota Industries Engine India and Ashok Leyland Limited. Increase in business from new customers in the auto (mainly passenger vehicle segment) and non-auto segments over the past three years further improved customer diversity. With the increasing share of business from new customers, contribution from new products, readiness of products for electric vehicles (EV) segment and improving exports, revenue growth is likely to be better than for the industry. CRISIL Ratings expects the recovery to continue with revenue likely to increase 9-14% year-on-year over the medium term.

 

• Diversified revenue profile

Company has geographic diversity in terms of exports and domestic sales with 22% export contribution in fiscal 2023, as well as customer diversity. Further, increasing sales from EV products and non-auto sales aid revenue. Expected improvement in revenue diversity due to ramp-up of new orders from existing as well as new customers with a strong, new product pipeline. This should help ACL to report better-than-industry growth in the medium term.

 

• Healthy financial risk profile:

Debt protection metrics remain healthy, with interest coverage and net cash accrual to total debt ratios of 5.0 times and 42%, respectively, estimated in fiscal 2024. Debt/EBITDA is expected at 1.7  times in fiscal 2024 and will sustain at similar range in medium term. With improving profitability, financial risk profile will strengthen over the medium term. Company is also likely to fund planned capital expenditure (capex) with a prudent mix of debt and internal accruals.

 

Weaknesses

• Large working capital requirement, led by increasing exports and growth in new business

Operations have been working capital intensive, reflected in gross current assets, receivables and inventory all sizeable at 163, 121, and 45 days, respectively, as on March 31, 2023. Debtor days though have lowered in comparison to previous fiscal, are still high mainly due to increasing share of exports wherein receivables period is comparatively higher than for domestic customers. The prudent management of working capital with lower dependence on short-term borrowings will remain a key monitorable for the Company.

 

Further, any delay in operationalization of capex executed in recent years may impact the ROCE which stood at 12.7% for fiscal 2023. Ramp-up in scale of operations and profitability along with efficient working capital management will be crucial to improve RoCE on a sustained basis to over 13% and will remain a monitorable.

 

• Susceptibility to cyclicality in demand in the automobile industry

Company currently derives more than 40% of the revenue from 2W segment. Currently 2W industry is growing at slower pace and is yet to reach the pre-pandemic levels. While the revenue profile of ACL benefits from healthy customer diversity with none of the customers contributing to more than 15% of the revenue, the company remains susceptible to risks related to cyclical demand patterns inherent to the auto industry and ability of the OEMs to sustain their market share in the domestic and overseas markets. Company is focusing on reducing its 2W concentration and improving its share in the PV and CV segments. High focus on research and development, wide product portfolio and faster adoption of new technologies like EV / tech-agnostic parts are expected to increase the share of business with customers over the medium term

Liquidity: Strong

ACL is expected to enjoy healthy liquidity position supported by expected cash accruals of Rs.125-177 crore over the medium term as against annual debt repayment Rs.33-54 crore. Further, liquidity is aided by cash surplus of Rs,7 crore as on September 30, 2023.

Outlook Positive

The business risk profile of ACL will continue to benefit from revenue diversification across auto segments and across customers. Revenue is expected to grow at a healthy rate of 9-14% over the medium term along with healthy margin, supported by its diversified product mix, established customer base coupled with strong new order book. The financial risk profile is expected to remain healthy, supported by steady growth in cash accrual and healthy networth base despite elevated capex.

Rating Sensitivity factors

Upward factors

• Sustained improvement in business performance resulting in operating profitability of 12-13% with steady cash generation
• Prudent capex funding and efficient management of working capital, leading to continued improvement in financial risk profile and debt protection metrics

 

Downward factors

• Sharp decline in operating performance resulting in decline in operating margins below 8% on a sustained basis.
• Large, debt-funded capex/acquisition, or increase in the working capital requirement  leading to deterioration in debt protection metrics.

About the Company

ACL was established as Enkei Castalloy Ltd (Enkei Castalloy), a joint venture between Pegasus Castalloy Ltd (an Indian company that manufactures cast-aluminium automotive components since 1990) and Enkei Corporation (in Japan; one of the largest manufacturers of alloy wheels in the world). Owing to sustained losses in the alloy wheels division, the promoters hived it off as a separate company, Enkei Wheels Ltd, and retained the casting business with effect from April 1, 2009. Enkei Castalloy was renamed as ACL on December 27, 2010.

 

ACL manufactures aluminium castings including cylinder heads, support brackets, intake manifolds, crankshafts, and engine brackets, for use in the auto industry. Clients include key Indian auto OEMs as well as auto and engineering OEMs in the European market through its subsidiaries. ACL has manufacturing units in Pune (Maharashtra) and Binola (Haryana).

Any other information: Not applicable