Rating Rationale
February 13, 2019 | Mumbai
Alicon Castalloy Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.300 Crore (Enhanced from Rs.207.2 Crore)
Long Term Rating CRISIL A/Negative (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.100 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its' ratings on the bank facilities and debt instruments of Alicon Castalloy Limited (ACL) at 'CRISIL A/Negative/CRISIL A1'.
 
On January 31, 2019, the outlook on long term ratings was revised to 'Negative' driven by stretched liquidity profile of ACL compared to earlier expectations, due to elongated receivable cycle and higher than anticipated capex over the medium term. Debtor days increased to over 100 days in first half of fiscal 2019 from 90 days in first half of fiscal 2018 due to increasing proportion of exports which has higher debtor collection period of over 120 days. Delay in accessing long term debt for the incurred capital expenditure in fiscal 2019, and stretch in working capital cycle resulted in continued high dependence on working capital limits resulting in high bank limit utilization at 96% for 6 months ended December 31, 2018. Increased bank limit utilization reduces the cushion available to meet any unforeseen exigency.

ACL is likely to undertake debt funded capex of about Rs.400 crore during fiscal 2019 to fiscal 2022, funded through about 50-60% through long term debt and remaining cash accruals. Though cash accruals are expected to increase Rs 75-110 crore during the same period, higher capex and working capital requirement will result in higher gearing of more than one time compared to earlier expectation of less than 0.7 times gearing in the medium term.
 
The management is taking initiatives to improve the overall liquidity position by contracting fresh long term debt of Rs 25-30 crore against capex in fiscal 2019. Management is also taking steps to reduce the receivable cycle in exports segment. Improvement in the working capital cycle resulting in better cushion in bank limit utilization will be a key rating monitorable.
 
The ratings continue to reflect an established market position in the aluminium die-casting automobile (auto) components sector, driven by a diverse clientele base and long-standing customer relationship. The ratings also factor in an above-average financial risk profile because of adequate gearing and debt protection metrics. These rating strengths are partially offset by susceptibility to high bank limit utilisation reflecting stretched liquidity, volatility in demand in the two-wheeler and passenger car segments, and moderately high working capital requirement due to increasing exports.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of ACL and its wholly owned subsidiaries, Austria-based Illichmann Castalloy GmbH and Slovakia-based Illichmann Castalloy s.r.o. That's because all three 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
The company has a diversified product profile in the aluminium casting business, including cylinder heads, intake manifolds, engine support brackets, and compressor housings. It has an established market position in the aluminium casting auto component sector driven by established client relationship and a presence in India, Austria, and Slovakia. The clientele includes major auto original equipment manufacturers (OEMs) such as HMCL (Hero Motor Corp Limited, Bajaj Auto Ltd (BAL; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), TML (Tata Motors Limited; rated 'CRISIL AA/Positive/CRISIL A1+'), MSIL (Maruti Suzuki India Limited; rated 'CRISIL AAA/Stable/CRISIL A1+'), and Mahindra and Mahindra Ltd (M&M; rated 'CRISIL AAA/Stable/CRISIL A1+'). Increase in business from new customers in the auto and non-auto segments over past three years resulted in improved customer diversity with the top five customers contributing about 50% in fiscal 2018 against 61% in fiscal 2011 and contribution of new business expected to increase to contribute over 12% in fiscal2019.
 
With increasing share of business from new customers, contribution from new products, readiness of products for electric vehicles segment and improving exports, ACL's revenue over the medium term is likely to grow at around 20% CAGR. The operating margin, are expected to continue to remain stable between 11.5% to 12% with stability of utilisation levels at recently commissioned capacities, cost control initiatives and increasing share of higher margin exports.
 
* Above average financial risk profile
As the company will continue to invest in capacity addition, and hence, its' gearing is likely to remain above one time over medium term. Hence, although operating profitability is robust, debt protection measures will be modest. Interest coverage was 4.0 times during fiscal 2018.
 
CRISIL believes successful completion of capex will help in gradual improvement in the company's debt protection measures over the medium term. Any major time or cost overrun or more-than-expected delay in ramp-up of operations after capacity expansion will remain key rating sensitivity factors.
 
Cash accruals are expected to improve steadily to increase from Rs.75 crore in fiscal 2019 to over Rs 100 crore in fiscal 2021 due to better growth and sustained profitability. With a steady increase in cash accruals, the financial risk profile is expected to remain comfortable over the medium term.
 
Weakness:
* Stretched liquidity due to working capital intensive operations led by increasing exports and growth in new business. 
While cash generation from operations is steady at about Rs 75 crore annually, delay in enhancing working capital limit in an attempt to enforce greater discipline over collection cycle and delay in accessing long term debt for capex in fiscal 2019, has led to high bank limit utilisation of over 95% during 6 months ended December 31, 2018, resulting in stretched liquidity. With receipt of long term debt and focus on reducing debtor collection period, ACL management is likely to keep a minimum cushion in its bank limits. Improvement in liquidity backed by lower dependence on short term borrowings will be key rating sensitivity factor. ACL's operations are working capital intensive as reflected in its gross current assets of about 157 days as on March 31, 2018, driven by high receivables and moderate inventory levels. The working capital requirements are expected to increase with scaling up of operations.
 
* Susceptibility to demand volatility in the two-wheeler and passenger car segments
High focus on research and development, wide product portfolio and faster adoption of new technologies are expected to result in increase in share of business with its customers in the medium term. Largest customer for ACL contributes about 18% of total revenue indicating healthy customer diversity for ACL. While ACL's revenue profile benefits from good customer diversity, it remains exposed to risks related to cyclical demand patterns inherent to the automobile industry, and ability of the OEMs to sustain their market share in the domestic and overseas markets.
Liquidity

Stretched liquidity due to limited buffer in the bank limit, with average utilization of 96% over 12 months ended December 2018 due to increase in receivable days and delay in sanction of long term debt for capex. Going forward, cash accruals are expected to ramp up to Rs. 75-110 crore, as against the maturing repayments of around Rs. 26-46 crore each year over fiscal 2019 to fiscal2021. ACL is also likely to enhance its bank limits in April 2019 to fund increasing working capital requirement. Further, receipt of long term loan of Rs 25-30 crore in February 2019 for incurred capex in fiscal 2019 will support to reduce bank limit utilization to comfortable level of below 90% and will remain sensitivity factor.  ACL is likely to incur capex of around Rs 90 crore in fiscal 2020 towards capacity expansion which is expected to be funded from long term debt and internal accruals.

Outlook: Negative

CRISIL believe that ACL's business risk profile will benefit further over the medium term supported by its established market presence, and improving revenue diversity, resulting in sustained increase in its cash generation. The company's financial risk profile is expected to moderate with increased receivables days due to focus on exports and debt funded large capex plan.
 
Downside scenario:
* Continued high bank limit utilization putting pressure on liquidity position or
* Sharp decline in operating performance or
* More than anticipated debt-funded capex/acquisitions, or increase in working capital requirement constraining any improvement in the TOL/TNW ratio and leading to deterioration in debt protection metrics.
 
Upside scenario:
* Enhanced bank lines, improvement in working capital cycle resulting bank limit utilisation below 90% on a sustained basis, thereby leading to improved liquidity
* Substantial scale up in operations driven by improving diversity and sustained profitability,  and
* Improvement in debt protection metrics, for instance gearing improving below one time

About the Company

ACL was established as Enkei Castalloy Ltd (Enkei Castalloy), a joint venture between Pegasus Castalloy Ltd (an Indian company, engaged in manufacturing cast-aluminium automotive components since 1990) and Enkei Corporation (Japan), one of the largest manufacturers of alloy wheels in the world. On account of 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. The 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.
 
For the first six months in fiscal 2019, ACL has reported a profit after tax (PAT) of Rs.26.1 crore on operating income of Rs.602.4 crore as compared to PAT of Rs.15.7 crore on operating income of Rs.459.1 crore for the corresponding period of previous year.

Key Financial Indicators
Particulars for period ended March 31, Unit 2018 2017
Revenue Rs cr 1019 775
Profit After Tax(PAT) Rs cr 39 26
PAT margin % 3.8 3.4
Adjusted debt/adjusted networth Times 1.08 1.45
Interest coverage Times 4.0 3.4

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size
(Rs Crore)
Rating Assigned
with Outlook
NA Cash Credit NA NA NA 200 CRISIL A/Negative
NA Letter of credit & Bank Guarantee NA NA NA 19.2 CRISIL A1
NA Proposed Long Term
Bank Loan Facility
NA NA NA 5.9 CRISIL A/Negative
NA Term Loan NA NA Dec-19 11.8 CRISIL A/Negative
NA Term Loan NA NA Mar-20 7.3 CRISIL A/Negative
NA Term loan NA NA Oct-23 29.4 CRISIL A/Negative
NA Term loan NA NA Apr-21 26.4 CRISIL A/Negative
NA Commercial Paper NA NA 7-365 days 100 CRISIL A1
 
Annexure - List of entities consolidated
Names of Entities Consolidated Type of Consolidation
Illichmann Castalloy GmbH Full consolidation
Illichmann Castalloy s.r.o. Full consolidation
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1  31-01-19  CRISIL A1  19-01-18  CRISIL A1    --    --  -- 
Fund-based Bank Facilities  LT/ST  280.80  CRISIL A/Negative  31-01-19  CRISIL A/Negative  19-01-18  CRISIL A/Stable  14-11-17  CRISIL A/Stable  21-12-16  CRISIL A-/Positive/ CRISIL A2+  CRISIL A-/Stable 
                29-05-17  CRISIL A-/Positive/ CRISIL A2+       
Non Fund-based Bank Facilities  LT/ST  19.20  CRISIL A1  31-01-19  CRISIL A1  19-01-18  CRISIL A1  14-11-17  CRISIL A1  21-12-16  CRISIL A2+  CRISIL A2+ 
                29-05-17  CRISIL A2+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 200 CRISIL A/Negative Cash Credit 135 CRISIL A/Negative
Letter of credit & Bank Guarantee 19.2 CRISIL A1 Letter of credit & Bank Guarantee 15.7 CRISIL A1
Proposed Long Term Bank Loan Facility 5.9 CRISIL A/Negative Proposed Cash Credit Limit 8.5 CRISIL A/Negative
Term Loan 74.9 CRISIL A/Negative Proposed Long Term Bank Loan Facility 28.9 CRISIL A/Negative
-- 0 -- Term Loan 19.1 CRISIL A/Negative
Total 300 -- Total 207.2 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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