Rating Rationale

Strengths
* Established market position supported by strong in-house capability in microwave radio-frequency (RF) applications domain and strong customer relationships: The group's market position is underpinned by its strong in-house R&D capability with an extensive and proven track record of two decades, established and longstanding relationships with defence research establishments, a large pool of trained and qualified employees, and adequate infrastructure for training them.

The group derives its core business strength from its in-house capability to provide customised microwave RF solutions. It has four state-of-the-art facilities in and around Hyderabad with R&D capability for microwave RF applications, test equipment, and environment chambers for space applications. It has set up a R&D facility in Bengaluru to manufacture radars. AMPL designs certain critical semi-conductor devices through its in-house R&D team, securing the group's supply chain. Over the years, the group has diversified its business portfolio by providing microwave applications in the space and civil telecommunication segments.

The group has longstanding relationships with customers and is recognised as a qualified vendor by defence research establishments, and is recognised by the Indian Space Research Organisation (ISRO) for its space applications testing laboratories. AMPL's prime customers include Defence Research Development Organisation (DRDO), ISRO, Bharat Electronics Ltd, and Indian Meteorological Department.

* Healthy orders providing moderate revenue visibility: As on December 31, 2017, the group had orders of Rs 533 crore, to be executed in 12-15 months, providing moderate revenue visibility over the medium term. Lumpy order inflow, primarily from defence public sector entities, leads to volatility in sales. The pace of order inflow will be a key monitorable. Technological joint ventures (JVs) with an Israel-based and a Canada-based firm could provide potential upside to revenue in the long term. However, developments in terms of investment in the JVs, order inflow for products, and the development of required technology remain key factors to watch.

* Healthy financial risk profile: The AMPL group has a prudent capital structure and healthy debt protection metrics. As on March 31, 2018, gearing is estimated below 0.5 time. Net cash accrual to total debt and interest coverage ratios are estimated at 78% and 7.4 times, respectively, for fiscal 2018 vis-à-vis 57% and 7 times, respectively, in fiscal 2017.

Weaknesses
* Large working capital requirement: The AMPL group has gross current assets of 340-350 days on account of stretched receivables and sizeable inventory. The group primarily caters to domestic defence research establishments that usually have long production cycle with large working capital requirement, compared to overseas orders. Also, the revenue realisation pertaining to domestic orders is slower. The group has to maintain sizeable inventory to cater to all segments as products are customised as per customer requirement, which varies across segments.

* Susceptibility to risks inherent in tender-based business, limited long-term revenue visibility, and long gestation period for projects: The AMPL group's business depends on success in bidding for tenders invited by defence public sector undertakings and research establishments. Defence research establishments, such as 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 limited, as revenue is driven by the success of R&D projects at DRDO and the subsequent mass production of products.

* Revenue concentration in defence sector
Revenue is concentrated in the defence market. Most of the defence projects are initiated, designed, and developed by DRDO, and are driven by government policies and priorities. Thus, as the short-term dynamics of the market are not under the group's control, it faces the risk of uncertain revenue from the defence segment. The share of revenue from this segment reduced to 27% in fiscal 2014 from 72% fiscal 2013, but increased to 83% in fiscal 2017. The space segment accounts for 7-10% of revenue.