Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities and corporate credit rating of Astra Microwave Products Limited (AMPL; part of the AMPL group).

 

On May 05, 2023, the company raised equity funds amounting to Rs. 225 crore through Qualified Institutions Placement (QIP). The funds were raised at Rs. 270 per share translating to allotment of 8.33 million equity shares of face value Rs. 2 each. AMPL shall utilize the funds for working capital re-payment and general corporate purposes.

 

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.

 

For fiscal 2022, operating income of the AMPL group improved to Rs 754 crore registering a growth of 16% driven by higher execution of defence orders, while operating margins dipped slightly to 12.9% from 13.4% for fiscal 2021 on account of higher raw material costs. During 9M’FY23, operating income rose to Rs 557 crores vis-à-vis Rs 511 crores in 9M’FY22. Further, the operating margins also witnessed a substantial improvement from 12.9% in fiscal 2022 to 20.3% during 9M’FY23 on the back of higher execution of high margin based domestic orders 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 (12.9% in fiscal 2022 vis-à-vis 31.5% in fiscal 2018) due to changing revenue mix and its impact on working capital intensity remains a monitorable.

 

The financial risk profile is supported by strong capital structure, healthy debt protection metrics and comfortable liquidity. Adjusted networth and gearing stood at Rs 585 crore and 0.12 times, respectively, as on March 31, 2022. Debt protection metrics are expected to remain healthy in the medium, with interest coverage and NCAAD to remain above 4.00 times and 40% respectively.

 

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 7.17% as of March 31, 2023. 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 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, anti-drone systems etc.

 

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

 

Healthy order pipeline offering sound revenue visibility: As on September 30, 2022, the company had orders worth Rs 1,852 crore, to be executed over 12-15 months. Orders from the domestic market account for around 68% with majority coming from the defence sector (54%). 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 monitorable.

 

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. Adjusted gearing and total outside liabilities to tangible networth (TOLTNW) ratios stood at 0.12 time and 0.64 time, respectively, as on March 31, 2022, and are expected below 0.30 time and 0.70 time, respectively, over the medium term. Net cash accrual to total debt and interest coverage ratios were 70% and 4.57 times, respectively, for fiscal 2022, and are expected at 45-55% and 4.5-7 times, respectively, over the medium term. Impending board approved QIP to further improve the financial risk profile of the company.

 

Weaknesses:

Large working capital requirement: Gross current assets (GCAs) improved to 346 days as on March 31, 2022, from 398 days a year before, led by reduction in debtor days. GCAs are expected at around 400 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 as domestic order execution is expected to increase in the future and thus working capital intensity would be a key monitorable. Furthermore, the group must 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 70-100 crore against debt obligation totalling Rs 20 crore over fiscals 2023 and 2024. As on September 30, 2022, cash and cash equivalent stood around Rs 72 crore. Utilisation of the fund-based limit averaged 33% and for non-fund-based limit, it stood at 78% during the 12 months ended December 31, 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:

• 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
• Better working capital management with GCAs sustaining below 350 days

 

Downward factors:

• Lower-than-expected revenue or operating margin, leading to cash accrual below Rs 40 crore per fiscal
• Stretch in working capital cycle with GCAs sustaining above 550 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 six months ended September 30, 2022, company generated revenue of Rs. 337 crores and operating margin of 18.5% as compared to Rs. 309 crores and 12.2% respectively in the corresponding period in the last fiscal.

Any other information: Not applicable