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 Ltd (AMPL).

 

The ratings factor in the healthy financial risk profile of the company, driven by healthy capital structure, strong networth and comfortable debt protection metrics. Business performance is expected to sustain in fiscal 2025, with revenue expected to grow 15% on-year (in the first quarter of fiscal 2025, revenue grew by 16% on-year to Rs 155 crore) and operating margin to sustain at 19-20% (15.5% in the first quarter of fiscal 2025 vs 2.3% in the first quarter of fiscal 2024) led by healthy order book of Rs 2,100 crore as on June 30, 2024, and increased contribution of the higher margin domestic business. Share of the domestic business is expected to increase to ~80% of revenue in fiscal 2025 from 65-70%. The share of the domestic business is expected to remain high above 75% in fiscal 2025.

 

Revenue grew by 11% on-year to Rs 909 crore in fiscal 2024 on the back of healthy order intake and steady execution. Operating margin improved by around 310 basis points (bps) to 21.5% in fiscal 2024 owing to favourable geographical mix towards higher margin domestic order execution as against export orders. Share of revenue from the domestic market improved to 68% in fiscal 2024 from 60% in fiscal 2023. Domestic operations comprise higher margin orders owing to the proprietary nature of products developed and manufactured by AMPL, compared with export orders which are primarily of contract manufacturing. The financial risk profile was strong supported by healthy networth, with the completion of equity raise of Rs 225 crore through qualified institutional placement (QIP) in May 2024, proceeds of which were utilised for meeting working capital requirement. The capital structure continued to be healthy in fiscal 2024, with high cash accrual. Cash accrual is projected above Rs 120 crore per annum against Rs 22-25 crore debt obligation over the medium term. Leverage ratios as indicated by total outside liabilities to adjusted networth (TOLANW) and debt to adjusted networth (gearing) stood at 0.51 time and 0.25 time, respectively, as on March 31, 2024, and are expected to remain below 0.6 time and 0.4 time, respectively, over the medium term backed by healthy cash accrual. Key debt protection metrics will remain healthy, with interest coverage ratio expected above 6 times over the medium term.

 

 Financial flexibility is supported by unencumbered cash and equivalent of Rs 75 crore as on March 31, 2024. Capital expenditure (capex) of Rs 50-75 crore per annum, planned over the medium term, will likely be funded through debt and internal accrual. 

 

The ratings continue to reflect the established market position of AMPL in microwave radio frequency (RF) applications segment in India, its strategic importance as a qualified vendor for defence research establishments, strong customer relationships, healthy order pipeline and comfortable financial risk profile. These strengths are partially offset by large working capital requirement, susceptibility to risks inherent in tender-based business and long gestation period of projects.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profile of AMPL, Bhavyabhanu Electronics Pvt Ltd (BEPL), Aelius Semiconductors Pte Ltd (ASPL) and Astra Space Technologies Pvt Ltd (ASTPL). The companies, collectively referred to as the AMPL group, have common ownership, management and strong business synergies. CRISIL Ratings has also moderately consolidated the joint venture, 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 RF applications domain, healthy customer relationships and growth prospects for the sector: The AMPL 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 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 portfolio by providing microwave applications in the space and civil telecommunication segments. It has longstanding relationships with its 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 group has been taking steps to move up the value chain from sub-systems vendor to system vendor and has identified growth areas such as SATCOM (satellite communications) systems, wind profiler radars, ground surveillance radars, doppler weather radars and anti-drone systems. The company has established a new facility in Bengaluru to cater to space technologies (such as satellites).

 

Extensive and continued government focus on indigenisation in the defence sector with initiatives such as Make in India and imports embargo augurs well for the group.

 

• Healthy order pipeline offering sound revenue visibility: As on June 30, 2024, the company had orders worth Rs 2,099 crore to be executed over the next 24 months. Orders from the domestic market account for around 78% of the 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 with export orders. Domestic revenue contribution stood at 82% during fiscal 2019, which declined to 53% in fiscal 2022 before improving to 68% in fiscal 2024. Over the medium term, the management aims to increase domestic revenue contribution to around 80%. In addition, AMPL is focussing on expanding order intake and revenue contribution from space projects, for which the company has set up a wholly owned subsidiary with a dedicated team focussing on expanding the 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 financial risk profile remains strong backed by healthy networth of Rs 963 crore and low gearing of 0.21 time as on March 31, 2024. The company primarily relies on short-term borrowing to fund its working capital requirement. Owing to net working capital cycle of over 400 days along with increase in scale of operations and decline in customer advances, the working capital borrowing increased from Rs 167 crore as on March 31, 2023, to Rs 216 crore as on March 31, 2024. The company has maintained TOL ANW ratio below 1.0 time despite large working capital requirement. The TOLANW is expected to remain below 0.6 time over the medium term on account of healthy operating margin and steady accrual. Debt protection metrics will likely remain healthy, with interest coverage above 6 times over the medium term.

 

Weaknesses:

• Large working capital requirement: Gross current assets (GCAs; net of cash) were over 400 days as on March 31, 2024. AMPL primarily caters to the defence and aerospace industry, leading to delayed customer clearances and large inventory owing to medium to high gestation products. The GCAs (net of cash) are expected to remain above 400 days over the medium term owing to increasing domestic orders as against export orders, which not only have a longer production cycle but also a longer receivables cycle. The working capital cycle may remain stretched over the medium term and hence will be closely monitored.

 

• Susceptibility to risks inherent in tender-based business and long gestation period of projects: The business depends on success in bidding for tenders invited by defence public sector undertakings and research establishments. Establishments such as the Defence Research and Development Organisation (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 mass production.

Liquidity: Adequate

Expected cash accrual over Rs 110 crore per annum over the medium term, along with unencumbered cash surplus of Rs 76 crore as on March 31, 2024, will sufficiently cover debt obligation of Rs 22-25 crore over fiscals 2025 and 2026. Yearly capex of Rs 50-75 crore is expected to be funded through debt and equity. Working capital is largely funded through internal accrual, customer advances and external debt. High bank limit utilisation remains monitorable.

Outlook: Stable

AMPL will continue to benefit from its healthy order book, improving geographical mix and sound operating efficiency. The financial risk profile will 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 15-16% on a sustained basis
• Significant reduction in GCAs aiding liquidity
• Sustenance of healthy financial risk profile

 

Downward factors:

• Weakening of business performance or decline in operating margin on a sustained basis
• Weakening of the financial risk profile owing to higher-than-anticipated debt or further stretch in the working capital cycle, with TOLANW ratio of 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 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 monolithic microwave integrated circuit (MMIC) products for semiconductors. 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. AMPL has incorporated ASTPL as a wholly owned subsidiary, which will cater to the requirement of space and satellite technologies.

 

In the three months ended June 30, 2024, the company generated revenue of Rs 155 crore and profit after tax (PAT) of Rs 15 crore compared with Rs 134 crore of revenue and net loss of Rs 1 crore in the corresponding period of the previous fiscal.

Any other information: Not Applicable