Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities and commercial paper programme of Astra Microwave Products Ltd (AMPL; part of the AMPL group).

 

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.

 

Despite the impact of the second wave of Covid-19 in the first quarter of fiscal 2022, revenue and operating margin of the AMPL group improved to Rs 511 crore and 12.4%, respectively, over the nine months through December 2021 from Rs 390 crore and 7.4%, respectively, in the corresponding period of the previous fiscal. The improvement in margin was led by increased execution of domestic orders which fetch better margins compared with export orders. The operating margin is expected to improve further over the medium term with greater focus on domestic orders. However, while the healthy order pipeline provides revenue visibility over the medium term, volatility in the operating margin (13.4% in fiscal 2021 vis-à-vis 31.5% in fiscal 2018) due to changing revenue mix remains a key credit aspect. Improvement in the profitability due to execution of high-margin domestic orders and its sustenance remain key monitorables.

 

CRISIL Ratings has noted that the promoters have stepped down from AMPL’s board in fiscal 2019. Their current shareholding in the company stands at 10%.  Any material change in business and financial policies will be a key rating sensitivity factor.

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 radio-frequency (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, anti-drone systems etc.

 

The extensive and continued government focus on ‘Make in India’, especially in the defence sector, augurs well for the AMPL group. The group will also benefit from announcements in the Union Budget for fiscal 2023 such as 68% of capital procurement budget in defence to be earmarked for domestic companies, and private companies to be encouraged to take up the design and development of military platforms/equipment in collaboration with Defence Research and Development Organisation (DRDO) and other organisations.

 

* Healthy order pipeline offering sound revenue visibility: As on December 31, 2021, the company had orders worth Rs 1,702 crore, to be executed over 12-36 months. Orders from the domestic market account for around 50%; however lumpiness in order inflow, primarily from space and defence public sector entities, lead to volatility in sales. Technological joint ventures with firms based in Israel could provide a potential upside to cash accrual over the long term. However, order inflow and development of the required technology are key monitorables.

 

* Comfortable financial risk profile: Capital structure and debt protection metrics should remain healthy, given the negligible debt-funded capital expenditure (capex) planned over the medium term. Gearing and total outside liabilities to tangible networth (TOLTNW) ratios stood at 0.22 time and 0.68 time, respectively, as on March 31, 2021, and are expected below 0.25 time and 0.75 time, respectively, over the medium term. Net cash accrual to total debt and interest coverage ratios were 35% and 3.38 times, respectively, for fiscal 2021, and are expected at 45-65% and 4.5-6 times, respectively, over the medium term.

 

Weaknesses:

* Large working capital requirement: Gross current assets (GCAs) improved to 398 days as on March 31, 2021, from 488 days a year before, led by increased execution of export orders which have a short production cycle with less working capital intensity compared with domestic orders, resulting in faster revenue realisation. GCAs are expected at around 430 days over the near to medium term with increased execution of domestic orders. The group primarily caters to domestic defence research and space establishments that usually have a long production cycle and longer working capital cycle compared with overseas orders. Though export revenue may be realised faster, it will be offset by stretch in receivables from domestic orders. Furthermore, the group has to maintain sizeable inventory to cater to all segments, as products are customised, and thus, requirements vary across segments.

 

* 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 primarily driven by the success of R&D projects at DRDO and the subsequent mass production of products.

Liquidity: Adequate

Liquidity will remain adequate, driven by expected annual cash accrual of Rs 50-70 crore against debt obligation totalling Rs 30 crore over fiscals 2023 and 2024. As on February 28, 2022, cash and cash equivalent stood around Rs 38 crore. Utilisation of the fund-based limit averaged 39% during the 12 months ended February 28, 2022. Sustenance of liquidity remains a key monitorable.

Outlook Stable

CRISIL Ratings believes the AMPL group will continue to benefit from its established market position and healthy order book.

Rating Sensitivity factors

Upward factors:

• Significant increase in cash accrual, driven by sustained revenue growth of over 20% per fiscal
• Better working capital management with GCAs sustaining below 250 days

 

Downward factors:

• Lower-than-expected revenue or operating margin, leading to cash accrual below Rs 40 crore per fiscal
• Stretch in debtor realisation with debtor days sustaining above 250 days

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, 2021, company generated revenue of Rs. 511 crores and operating margin of 12. 4% as compared to Rs. 390 crores and 7.4% respectively in the corresponding period in the last fiscal.

Any other information: Not applicable