Rating Rationale
April 02, 2020 | Mumbai
Bhagwati Autocast Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.16.66 Crore
Long Term Rating CRISIL BBB-/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A3 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Bhagwati Autocast Limited (BAL) to 'Negative' from 'Stable', while reaffirming the rating at 'CRISIL BBB-'. The rating on the short-term bank facility has been reaffirmed at 'CRISIL A3'.
 
The outlook revision reflects CRISIL's belief that BAL's revenue and operating profitability is likely to remain under pressure over the near to medium term given the uncertainty in demand revival in the tractor sector post Novel Coronavirus (Covid-19). While BAL plant shutdown is expected to be temporary, revocation of the measures will be contingent upon directive from the Central government and extent of spread of Covid-19. Prolonged plant closures can result in significant deterioration in credit quality of BAL. That said, the ability of BAL to revert back to operational stability will be a key monitorable, and CRISIL will continue monitoring the same.
 
In the nine months through December 2019, operating income declined 19% over the corresponding period of the previous fiscal on account of slowdown in demand in tractor industry. De growth in revenue is expected in fiscal 2021 mainly due to subdued demand and gradual recovery in tractor sector post Covid-19. Operating profit before depreciation, interest, and tax (OPBDIT) margin was 6.4% as compared to 7.1% in the same period, mainly due to decline in input costs, which was passed on to the customers. Operating margins are expected to decline further in fiscal 2021 mainly due to lockdown and gradual revival in demand from the tractor companies. The company has unutilised average bank lines of 35% and thus adequate liquidity cushion to meet its fixed costs for next three months
 
The ratings continue to reflect the company's established track record in the castings segment and adequate financial risk profile. These strengths are partially offset by high customer concentration and vulnerability to cyclicality in the tractor industry, susceptibility to volatile raw material costs, and modest scale of operations.

Key Rating Drivers & Detailed Description
Strengths:
* Established track record: BAL has been in the castings business for more than 3 decades and has an established customer base. It has longstanding relationships with clients such as Escorts Ltd, Swaraj Engines Ltd, and Mita India Pvt Ltd.
 
* Adequate financial risk profile: Financial risk profile is supported by adequate capital structure and adequate debt protection metrics. Gearing is estimated to be 0.24 time as on March 31, 2020, and is expected to remain below 0.4 time over the medium term, backed by steady cash accrual and the absence of any major debt-funded capex. Interest coverage and net cash accrual to adjusted debt ratios are estimated at 6.01 times and 0.64 time, respectively, in fiscal 2020.
 
Weaknesses:
* High customer concentration and vulnerability to cyclicality in the tractor industry: The bulk of revenue is derived from three key clients. Therefore, loss of any one customer or weakened performance of any of these three players could lead to a significant loss in revenue and sub-optimal capacity utilisation. Revenue is also dependent on the performance of the tractor industry, which is currently subdued as the company manufactures castings primarily for tractors.
 
* Susceptibility of profitability to volatility in raw material costs and modest scale of operations: Operating margin has been volatile because of fluctuations in the prices of key raw materials (scrap and pig iron). OPBDIT margin is expected to decline to around ~6%% in fiscal 2020 from 6.9% in fiscal 2019, mainly due to decline in input costs, which was passed on to the customers with a lag effect.  BAL's business risk profile is also constrained by modest scale of operations in the intensely competitive metal castings industry.
Liquidity Adequate

The company has adequate liquidity cushion in terms of unutilised bank lines of 35% on a limit of Rs 12 cr which will be sufficient to cover interest and principal repayment and fixed costs in case of prolonged slowdown.. Further, sufficient cushion exists between net cash accruals of Rs 2-3 crore and repayments of 0.3 crore in fiscal 2021.

Outlook: Negative

CRISIL believes the BAL's credit risk profile may deteriorate in case of prolonged impact of Covid -19 and slowdown in tractor industry.

Rating Sensitivity factors
Upward factors
* Sustained revenue growth of 10%, while maintaining operating profitability
* Improvement in financial risk profile
 
Downward factors
* Revenue de-growth of more than 25% annually
* Weakening of financial risk profile due to large debt-funded capex or stretch in working capital cycle
About the Company

BAL was set up by members of the Ahmedabad-based Bhagwati family. Commercial operations began in 1984. The company manufactures casting components, mainly for tractors. These components include several large cast products, such as gear box housings, axle housings, and exhaust castings. The manufacturing unit is in Bavla District (Ahmedabad), total capacity of which is 18,000 tonne per annum.
 
For the nine months through December 2019, profit after tax (PAT) was Rs 24 crore and net sales was Rs 77 crore, against Rs 3 crore and Rs 95 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars 2019 2018
Revenue 120 90
PAT 3.7 1.1
PAT margin 3.1 1.2
Adjusted debt/adjusted networth 0.35 0.36
Interest coverage 7.61 4.61

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
date
Issue size
(Rs crore)
Rating assigned
with outlook
NA Cash Credit NA NA NA 12 CRISIL BBB-/Negative
NA Term Loan NA NA Oct-21 2.16 CRISIL BBB-/Negative
NA Bank Guarantee NA NA NA 2.50 CRISIL A3
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  14.16  CRISIL BBB-/Negative      07-10-19  CRISIL BBB-/Stable  31-10-18  CRISIL BBB-/Positive  10-07-17  CRISIL BBB-/Stable  CRISIL BBB-/Negative 
                    31-05-17  CRISIL BBB-/Stable   
Non Fund-based Bank Facilities  LT/ST  2.50  CRISIL A3      07-10-19  CRISIL A3  31-10-18  CRISIL A3  10-07-17  CRISIL A3  CRISIL A3 
                    31-05-17  CRISIL A3   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 2.5 CRISIL A3 Bank Guarantee 2.5 CRISIL A3
Cash Credit 12 CRISIL BBB-/Negative Cash Credit 12 CRISIL BBB-/Stable
Term Loan 2.16 CRISIL BBB-/Negative Term Loan 2.16 CRISIL BBB-/Stable
Total 16.66 -- Total 16.66 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers

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