Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities of Astra Microwave Products Ltd (AMPL). CRISIL Ratings has also reaffirmed its corporate credit rating at ‘CRISIL A/Stable’.

 

Revenues increased by around 8% on-year to Rs. 816 crore in fiscal 2023 on the back of healthy order intake and steady execution. Operating margins improved by around 570 basis points (bps) to 18.4% for the same period owing to favorable geographical mix on the back of higher domestic order execution as against export orders. Domestic operations comprise higher margin orders owing to the proprietary nature of products developed and manufactured by AMPL, as compared to export orders which are primarily of contract manufacturing. 

 

Turnover during the first quarter of fiscal 2024 declined by 17% on-year to Rs 134 crore, however, with sequential pick up in order execution, revenues during the second and third quarters came in at Rs 190 crore and Rs 231 crore, respectively, resulting in on-year growth of around 9% and 5%, respectively. Operating margins during the first quarter of fiscal 2024, contracted substantially to around 2% (~14% in the corresponding period of the previous fiscal) on account of unfavourable geographical mix and under absorption of fixed overheads; however, operating margin improved to 22% and 29% during the second and third quarters of the current fiscal (~23% during both second and third quarters of fiscal 2023), on the back of higher margin domestic sales though partially offset by increased employee expenses. During the nine months ended December 31, 2023, revenue and operating profitability were Rs 555 crore and Rs 111 crore, respectively, as against Rs 557 crore and Rs 113 crore, respectively, during the corresponding period of the previous fiscal.

 

Over the medium term, revenue growth is expected to be steady with operating margin of around 19-21%, supported by healthy order pipeline and improving geographical mix.

 

The financial risk profile continues to remain strong, backed by healthy capital structure, strong networth, and healthy debt protection metrics. Balance sheet is further strengthened on the back of equity issuance of Rs. 225 crore through qualified institutional placement (QIP). The said transaction was completed on May 05, 2023, and 75% of the proceeds were utilized towards reduction of working capital borrowing outstanding on the said date. Capital structure marked by total outside liabilities to adjusted networth (TOL / ANW) stood at 0.63 time as on March 31, 2023, and is expected to improve to below 0.40 time over the medium term on the back of increase in equity base post QIP issuance and limited dependence on external funding requirements vis-à-vis capital expenditure (capex) and working capital requirements. Key debt protection metrics are expected to remain healthy, with interest coverage at above 5 times over the medium term.

 

The ratings continue to reflect the established market position of AMPL, its strong customer relationships, healthy order pipeline, and comfortable financial risk profile. These strengths are partially offset by the large working capital requirement and exposure to risks inherent in the tender-based business and long gestation period of projects.

 

CRISIL Ratings has also taken note of promoter holding dilution from 8.46% as of June 2022 to 6.54% as of December 2023, owing to reclassification of a few promoters to ‘public’ category, sale of shares by small faction of promoters during the fourth quarter of fiscal 2023, and equity proceeds through QIP issuance during the first quarter of fiscal 2024.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of AMPL, Bhavyabhanu Electronics Pvt Ltd (BEPL) and Aelius Semiconductors Pte Ltd (ASPL). The three companies, collectively referred to as the AMPL group, are under a common ownership and management and have strong business synergies. CRISIL Ratings has moderately consolidated the joint venture company, Astra Rafael Comsys Pvt Ltd, citing operational and financial linkages.

 

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, supported by strong in-house capability in the microwave radiofrequency (RF) applications domain, healthy customer relationships and growth prospects for the sector: The group derives its core business strength from its in-house capability to provide customised microwave RF solutions. It has five state-of-the-art facilities in and around Hyderabad, with research and development (R&D) capability for microwave RF applications, test equipment, and environment chambers for space applications. It has set up an R&D facility in Bengaluru to manufacture radars.

 

Over the years, the group has diversified its business portfolio by providing microwave applications in the space and civil telecommunication segments. It has longstanding relationships with customers and is recognised as a qualified vendor by defence research establishments. Its laboratories for testing space applications are acknowledged by the Indian Space Research Organisation (ISRO).

 

The AMPL group has been taking steps to move up the value chain from the sub-systems vendor to a system vendor and has identified certain growth areas such as SATCOM systems, wind profiler radars, ground surveillance radars, doppler weather radars, and anti-drone systems.

 

The extensive and continued government focus on indigenization in the defence sector with initiatives such as ‘Make in India’ and imports embargo augurs well for AMPL.

 

• Healthy order pipeline offering sound revenue visibility: As on December 31, 2023, the company had orders worth Rs 1,813 crore, to be executed over 1-3 years. Orders from the domestic market account for around 69% of the total unexecuted order book, with majority coming from the defence sector. The company’s management has been focussing on increasing domestic orders and execution, as they have higher margins compared to export orders. Domestic revenue contribution during fiscal 2019 stood at 82%, which declined to 53% during fiscal 2022, before improving to 60% during fiscal 2023. Over the medium term, the management aims to further improve domestic revenue contribution to around 70%. In addition, AMPL is also focussing on expanding order intake and revenue contribution from space projects, for which, the company have set-up a wholly owned subsidiary with a dedicated team focussing on expanding space product portfolio. Furthermore, order intake over the medium term will be supported by initiatives taken by the Government of India in the recent years such as Atmanirbhar Bharath and Make in India campaigns, and announcement of positive indigenous list for Defence Products.

 

• Comfortable financial risk profile: The company primarily relies on short-term borrowings to fund the large working capital requirements. Owing to the net working capital cycle of over 300 days along with the increase in scale of operations and decline in customer advances, working capital borrowings have increased from Rs.56 crore as on March 31, 2022, to Rs. 167 crore as on March 31, 2023. That said, the company has historically maintained total outside liabilities to adjusted networth (TOL / ANW) ratio below 1.0 time owing to adequate coverage of internal accruals towards working capital, on account of modest debt re-payment obligations due to minimal dependence on long-term debt, and moderate capex investments. TOL / ANW stood at 0.63 time as on March 31, 2023, and is expected to improve to below 0.40 time over the medium term despite the increase in the net working capital cycle to above 350 days due to increasing domestic order contribution. The improvement is on the back of increase in equity base post QIP issuance and limited dependence on external funding requirements vis-à-vis capital expenditure (capex) and working capital requirements. Key debt protection metrics are expected to remain healthy, with interest coverage at above 5 times over the medium term.

 

Weaknesses:

• Large working capital requirement: Gross current assets (GCAs) net of cash days was at 331 days as on March 31, 2023. AMPL primarily caters to the defence and aerospace industry, which is marked by long production / gestation periods and longer collection periods. GCA days net of cash is expected to increase to over 350 days owing to the growing skewness towards domestic orders as against export orders, which not only have a longer production cycle but also a longer receivable cycle, and in addition the company is also expected to maintain sizeable inventory. Thus, working capital intensity would be a key monitorable.

 

• Susceptibility to risks inherent in a tender-based business, and long gestation period for projects: The business depends on success in bidding for tenders invited by defence public sector undertakings and research establishments. Establishments such as the DRDO invite tenders from qualified vendors for their R&D requirement and commence bulk production on successful completion of product development. Long-term revenue visibility is driven by the success of R&D projects at DRDO and the subsequent mass production of products.

Liquidity: Adequate

Expected cash accruals of Rs. 90-100 crore per annum over the medium term along with unencumbered cash surplus of Rs. 56 crore as on March 31, 2023, is more than sufficient to cover debt re-payment obligation of Rs. 6-15 crore over fiscals 2024 and 2025 and yearly capex of Rs. 40-60 crore. Working capital requirements shall be met largely through net cash accruals, and shortfall if any, shall be met through working capital borrowings.

Outlook: Stable

AMPL’s business risk profile should remain stable over the medium term, backed by healthy order book, improving geographical mix, and sound operating efficiencies. The financial risk profile should also remain comfortable driven by healthy capital structure and comfortable debt protection metrics.

Rating Sensitivity Factors

Upward factors:

• Better-than-expected ramp-up in revenue and operating profitability, leading to return on capital employed (RoCE) of 18% on sustained basis over the medium term.
• Significant reduction in GCAs, aiding sustained improvement in the financial risk profile.

 

Downward factors:

• Weakening of business performance or sharp decline in operating margins on a sustained basis.
• Weakening of financial risk profile due to higher-than-anticipated debt levels or stretch in working capital, for instance, total outside liabilities to adjusted networth (TOL / ANW) above 1.1-1.2 times on a sustained basis.

About the Company

AMPL was incorporated as a private limited company in 1991 and reconstituted as a public limited company in 1993. It is promoted by Mr P A Chitrakar, Ms C Pramelamma and Mr B Malla Reddy. The company designs, develops and manufactures customised sub-systems and components for microwave communication systems used in the defence, space, and telecommunication sectors.

 

In fiscal 2014, AMPL floated the 100% owned BEPL as a captive supplier of raw material for overseas orders. In fiscal 2015, AMPL floated the 100% owned ASPL in Singapore, as a supplier of MMIC products for semi-conductors. In fiscal 2019, AMPL set up a joint venture, Astra Rafael Comsys Pvt Ltd, with Rafael Advanced Defence Systems for production of communication systems and sub-systems for defence.

 

In the nine months ended December 31, 2023, company generated revenue of Rs. 555 crore and operating margin of 20% as compared to Rs. 557 crore and 21% respectively in the corresponding period in the last fiscal.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	205	NA	CRISIL A/Stable
NA	Working Capital Demand Loan%	NA	NA	NA	30	NA	CRISIL A/Stable
NA	Bank Guarantee	NA	NA	NA	498	NA	CRISIL A1
NA	Bank Guarantee&	NA	NA	NA	97	NA	CRISIL A1
NA	Bank Guarantee^	NA	NA	NA	85	NA	CRISIL A1
NA	Term Loan	NA	NA	Jun-2024	30	NA	CRISIL A/Stable
NA	Foreign Exchange Forward	NA	NA	NA	10.8	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	0.2	NA	CRISIL A/Stable

&Interchangeable with Letter of Credit up to Rs.30 crores

^Fully interchangeable with letter of credit; fully interchangeable with WCDL-2 facility

%Interchangeable with Cash Credit up to Rs.10 crores; interchangeable with Export packing credit / PCFC / PSFC up to Rs.30 crores