Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the defense segment further strengthened by synergies of being part of the Adani group: The Alpha group has an established market position in the defense segment with a track record of close to 2 decades in the designing, development and production of a diverse range of products catering to the defense segment. The major customers includes Ministry of Defence (MoD), various Defence laboratories under Defence Research and Development Organisation (DRDO), Defence PSUs such as Bharat Electronics Limited (BEL) and Hindustan Aeronautics Limited (HAL) and units operated by Indian Space Research Organisation (ISRO), etc. This has given them an understanding of the dynamics of the market, and enabled them to establish relationships with suppliers and customers. Further, the company has also benefitted from overseas customers which led them to gain access in foreign markets. Some major customer includes Elbit Security Systems Limited and Israel Aerospace Industries in Israel, MBDA Missile Systems in France and ELTA Systems Limited, Israel.

• Supported by the synergies of the Adani group from December 2018, the group’s unexecuted order book has grown by close to 2.5 times during the period to around Rs.4420 crore as on December 15, 2020. The large order book provides healthy revenue visibility over the medium term. The Alpha group is expected to continue to benefit from its established market position and synergies of the Adani group over the medium term.

• Healthy product diversity and benefit of strategic tie ups: ADTPL is an established player in the market and in operations for over 20 years, the scale of operations remains healthy. As, ADTPL offers wide range of products such as battle tanks, fighter aircraft, helicopters, unmanned aerial vehicles, avionics equipment including missile launch detection systems (MILDS), optronics, LRF-based products, laser target designators (LTD), thermal imagers and fire control systems (TIFCS), navigation, tactical communication, software defined radios (SDR), image conversion, data and image fusion, radar, radio frequency (RF) seekers, C3I systems, electronic warfare, simulators, microwave components and RF units for domestic and international markets.

• Above average financial risk profile:  The financial risk profile is above average as reflected in its healthy capital structure and moderate debt protection metrics. The total outside liabilities to tangible networth (TOLTNW) ratio has improved to around 1 time as on March 31, 2020 from over 2 times as on March 31, 2018 aided by infusion of equity by Adani Defense. However interest coverage is moderate at around 2.6 times for fiscal 2020 on account of high reliance on debt to fund working capital requirements, due to working capital intensive nature of operations. Nevertheless, the interest coverage is expected to improve over the medium term due to steady improvement in profitability supported by execution of strategic high value projects.

Weakness:

• Working capital intensive operations:  The group’s operations are working capital intensive as reflected in high gross current assets of around 385-600 days over the last three years ended fiscal 2020.  Inventory levels were significantly high at the end of March 2020 at around 300 days due to high unbilled inventory resulting due to the lockdown imposed to contain the spread of Covid-19. Further receivables are usually high in the range of 150-250 days, at the end of the fiscal on account of higher billing during the last quarter of every fiscal. The working capital intensity is likely to remain high over the medium term, however recent enhancements in fund based working capital limits should support the funding of working capital requirements over the medium term.

• Customer concentration risks in revenue profile: ADTPL faces significant customer concentration risks. The top 5 orders contributes to around 80 percent of the total order book The high customer concentration makes the company's revenue growth and profitability dependent on its key customers' future growth plans. Further, any changes in procurement policy by these customers could impact the order flow for ADTPL.

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