Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Asahi India Glass Ltd (AIS).

 

The ratings continue to reflect the healthy business risk profile of AIS as indicated by its established market position in the automotive (auto) and architectural glass segments and established clientele. The ratings also factor in the company’s strong operating efficiency, comfortable financial risk profile, and the extensive industry experience of the promoters and technical and business support from AGC Inc (AGC; rated ‘A-/Stable/A-2’ by S&P Global Ratings). These strengths are partially offset by susceptibility to cyclicality in the end-user industries and to volatility in fuel prices, and large capital expenditure (capex) plan.

 

Revenue growth is estimated over 25% on-year in fiscal 2023, with sales of over Rs 3,900 crore driven by recovery in demand from original equipment manufacturers (OEMs) and increase in price realisations in the architectural glass segment. In fiscal 2024, revenue is expected at Rs 4,200-4,400 crore owing to sustained improvement in demand from OEMs and increasing use of glass in construction.

 

Profitability is expected to sustain over 20% in fiscal 2024 with increase in scale and higher realisations for float glass. As a result, net cash accrual is expected at Rs 525-575 crore over the medium term. The operating margin in the architectural glass segment has improved over the past three fiscals with increase in price realisations.

 

The financial risk profile is expected to remain healthy in fiscal 2024 supported by adequate liquidity in the form of unutilised bank lines of over Rs 405 crore as on 31st Dec 2022 and comfortable capital structure. Debt protection metrics should remain comfortable with increase in profitability despite the large capex of Rs 1,800-1,900 crore over fiscals 2023-2025 for greenfield capacity expansion of 700-800 tonne per day (TPD) and maintenance capex in the existing plants. The capex is to be funded through debt and internal accrual. After the commissioning of the new capacity, import of glass done by the company is expected to decline.

 

Larger-than-expected capex or steep moderation in credit metrics on account of slowdown in the end-user industry will remain a rating sensitivity factor. AIS has strong financial flexibility due to continued support from the promoters, AGC Inc and Maruti Suzuki India Ltd (MSIL; ‘CRISIL AAA/Stable’) which have strong credit profiles.             

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of AIS and its subsidiaries (AIS Glass Solutions Ltd, Integrated Glass Materials Ltd, GX Glass Sales and Services Ltd) as these are integral to the operations of AIS. CRISIL Ratings has also factored in the strong business linkages with promoters AGC Inc (erstwhile Asahi Glass Co Ltd, Japan), a global leader in architectural and auto glass, and MSIL (erstwhile Maruti Udyog Ltd), a market leader in the passenger car industry in India.

 

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:

• Healthy business risk profile: Track record of over 35 years in the auto glass components industry has helped AIS build a dominant market position with 74% share in the passenger vehicle segment and key relationships with leading OEMs such as MSIL, Suzuki Motors, Hyundai Motor India, Tata Motors Ltd (‘CRISIL AA-/Stable/CRISIL A1+’), Mahindra and Mahindra Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Toyota Kirloskar Motor, Skoda Auto and Kia Motors India. The 18% market share and established presence in architectural glass led to a healthy 7.2% compound annual growth rate (CAGR) revenue growth in the segment over the past five years.

 

The company has moderate revenue diversity between auto glass (56% revenue contribution) and architectural glass (44%). Presence in the auto aftermarket sales (20%) enhances diversity and pricing flexibility. The strong market position and technological edge due to association with AGC Inc have also led to healthy operating margin of 17-20% over the past five years.

 

After healthy revenue growth of 30.9% in fiscal 2022, revenue is estimated to have grown 25% on-year in fiscal 2023, and is expected to rise 8-10% to Rs 4,200- Rs 4,400 crore over the next two fiscals. The increase in auto glass capacity post commissioning of phase 1 of the Gujarat plant to cater to increased demand from OEMs, easing of shortage of semi-conductor chips, increasing glass usage in buildings and healthy realisations for float glass will support growth over the medium term.

 

Operating profitability was healthy at 18.5-20.0% over the past three years despite the impact of Covid-19 induced challenges on demand from OEMs and the construction segment. The margin is expected to remain over 20% with profit of Rs 800-850 crore over the medium term.

 

• Comfortable financial risk profile: Debt protection metrics should remain comfortable over the medium term with increase in profitability despite sizeable capex in fiscals 2024 and 2025 for a new float glass unit and phase 2 of the auto glass unit in Gujarat. Total debt is expected to remain within Rs 1,800- Rs 1900 crore in fiscals 2024 and 2025. Interest coverage ratio is expected to sustain above 6 times in fiscal 2024. Gearing should remain below 1 time as on March 31, 2024, but is unlikely to show any major improvement due to debt-funded capex over fiscals 2023-2025. The ratio of debt to earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to remain below 2 times over the next three fiscals, improving from 3.4 times as on March 31, 2021.

 

Total Networth is expected to increase to Rs 2,600 crore as on March 31, 2024, from Rs 1,483 crore at the end fiscal 2021 backed by strong cash accrual. The total outside liabilities to tangible networth ratio should improve to below 1.07 times as on March 31, 2024, from an estimated 1.11 times as on March 31, 2023.

 

• Experienced management supported by strong promotors: AIS enjoys strong backing of the Labroo family (20.9% shareholding), AGC Inc (22.2% shareholding) and MSIL (11.1% shareholding). MD and CEO, Mr Sanjay Labroo, who has over three decades of industry experience, manages the company. AGC Inc, which is the leading glass manufacturer in the world with 12% global market share in the float glass segment and 30% in the auto glass segment, provides technical support to AIS. The promoters supported AIS when it faced a liquidity stretch during fiscals 2008-2013.

 

Weaknesses

• Large capex requirement: AIS operates in a capital-intensive industry where a downturn in the end-user industries may affect profitability. Gearing was above 1 time till fiscal 2021 on account of large capex in the auto glass plant and the impact of Covid-19 induced challenges on profitability. The asset turnover of the company was 3.5-6.0% over the past five years. AIS is undertaking capex of over Rs 1,500 crore over fiscals 2022-2025 for capacity expansion (including capex of Rs 250 crore on phases 2 and 3 of the auto glass plant in Gujarat), to be funded through debt and internal accrual. Any impact of the capex on profitability will affect debt protection metrics, and hence remains a monitorable.

 

• Susceptibility to inherent cyclicality in the auto industry: AIS derives 56% of its revenue from the OEM segment, which is inherently cyclical. Auto OEMs were adversely hit by the pandemic as well as slowdown in the Indian economy, and recovered only from the second half of fiscal 2021. Shortage of semi-conductor chips also impacted the industry in fiscal 2023. The performance of AIS also remains vulnerable to economic downturns.

Liquidity: Strong

Cash accrual, expected at Rs 500-550 crore in fiscals 2024 and 2025 each, should comfortably cover debt obligation of Rs 366 crore and Rs 340 crore, respectively, and the surplus will support liquidity. AIS has historically been able to refinance debt when cash accrual has fallen short of debt obligation. The total fund-based limit of Rs 535 crore had modest utilisation of 10.86% on average over the 10 months through December 2022. The current ratio is expected to remain low ~1.2 times over the medium term because of large current portion of long-term debt and negative working capital cycle.

 

ESG Profile of Asahi India Glass Limited

CRISIL Ratings believes the ESG profile of AIS supports the company’s already strong credit risk profile. The sector has a moderate environmental and social impact, driven by its raw material sourcing strategies and energy-intensive processes. AIS has continuously focused on mitigating its environmental and social impact.

 

Key ESG highlights:

• The company’s ESG disclosures are in line with the guidelines framed by the Ministry of Corporate Affairs and published Business Responsibility Report. It is in the process of strengthening disclosures over the medium term.
• The company has been investing in environmental initiatives such as reduction in water consumption by 20% though low-cost automation, energy savings by combining frosting for three machines and adding one bottom cooling fan (90 KW) and small high pressure blower (11 KW) at the Roorkee plant.
• AIS is committed to ensuring safety and security of its employees. There were zero complaints related to sexual harassment, discrimination at workplace, child labour, forced labour, wages and other human rights related issues in fiscal 2022.
• The board of directors comprises 50% independent directors. The company is committed to effective board functioning and enhancing shareholder wealth, and has healthy investor grievance redressal and extensive disclosures.

 

ESG is gaining importance among investors and lenders. AIS’s commitment to ESG will play a key role in enhancing stakeholder confidence, given the shareholding by foreign portfolio investors and access to domestic capital markets.

 

AGC has announced in February 2023 that it would partner with Saint-Gobain and start a demonstration test of its technology development at a plant in the Czech Republic, with an aim to significantly reduce carbon dioxide emissions from flat glass production. AGC will continue to reduce its huge development costs and capital expenditures in order to alleviate the burden on environment through joint development, like the one with Saint-Gobain, and other initiatives. On the other hand, the company's increasing exposure to the life science business, which is related to health and safety, a social consideration, is somewhat positive from a social risk standpoint.AIS' ESG commitment will continue to be also driven by AGC’s commitment.

Outlook Stable

CRISIL Ratings believes AIS will continue to benefit from its established market position and comfortable financial risk profile.

Rating Sensitivity factors

Upward factors

• Revenue growth of 15-20%, leading to cash accrual of over Rs 600 crore, and maintenance of healthy return on capital employed while pursuing capex
• Continued healthy financial risk profile, particularly debt protection metrics, and prudent working capital management with gross debt to Ebitda ratio below 1.5 times on a sustained basis

 

Downward factors

• Cash accrual below Rs 300 crore
• Larger-than-expected capex impacting debt protection metrics with debt-to-equity ratio above 2.75 times

About the Company

AIS is India's largest integrated glass solutions company and a dominant player in the auto and architectural glass segments. It commands over 74% market share in the Indian passenger car glass market. It has significant presence in the auto and architectural glass value chains through the following business verticals: auto glass, architectural glass (float, soft coat, hard coat, architectural processing), consumer glass (auto and architectural glass).

 

AIS has manufacturing units in Bawal (Haryana), Taloja (Maharashtra), Roorkee (Uttarakhand), Chennai (Tamil Nadu) and Patan (Gujarat) and three auto glass assembly units.

 

For the nine months ended December 31, 2022, AIS posted net profit of Rs 298 crore and operating revenue of Rs 2,885 crore.

Any other information: Not applicable