Rating Rationale
July 10, 2017 | Mumbai
Bhagwati Autocast Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.8.82 Crore (Reduced From Rs.11.5 Crore)
Long Term Rating CRISIL BBB-/Stable (Reaffirmed)
Short Term Rating CRISIL A3 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Bhagwati Autocast Limited (BAL) at 'CRISIL BBB-/Stable/CRISIL A3', and has withdrawn its rating on the proposed long-term bank loan facility of Rs 2.68 crore at the company's request.

On May 31, 2017, CRISIL had revised its rating outlook on the long-term bank facilities of BAL to 'Stable' from 'Negative' and reaffirmed the rating at 'CRISIL BBB-'. The rating on the short-term facility was reaffirmed at 'CRISIL A3'. The outlook revision reflects CRISIL's belief that BAL will sustain the improvement in its operating performance over the medium term, supported by favorable demand from the tractor industry. Operating income rose 10% in fiscal 2017 over the previous fiscal, and operating profitability before depreciation, interest, and tax (OPBDIT) margin improved to 7.6% from 6.5% in the previous fiscal, supported by increased sales volume and low material cost. Revenue should increase steadily over the medium term, driven by revival in the tractor segment and steady demand from key clients. Operating profitability should sustain at 6-7%, supported by higher revenue and capacity utilization. The outlook revision also factors in the expected improvement in BAL's financial risk profile over the medium term, supported by no debt-funded capital expenditure (capex), steady cash accrual, and moderate working capital requirement.

The ratings continue to reflect the company's established track record in the castings segment, and its adequate financial risk profile. These strengths are partially offset by high customer concentration and vulnerability to cyclicality in the tractor industry, susceptibility of profitability to volatility in raw material cost, and small scale of operations.

Key Rating Drivers & Detailed Description
Strengths
* Established track record:
BAL has been in the castings business for 25 years and has an established customer base. It has longstanding relationships with large original equipment manufacturers such as Escorts Ltd (Escorts), Mahindra and Mahindra Ltd (M&M; 'CRISIL AAA/Stable/CRISIL A1+').

* Adequate financial risk profile: The financial risk profile is supported by steady cash accrual, moderate working capital requirement, and the absence of any debt-funded capex plan. Debt protection metrics continue to remain adequate with interest coverage ratio and net cash accrual to total debt ratio of 7.46 times and 0.43 times respectively for fiscal 2017.

Weakness

* High customer concentration and vulnerability to cyclicality in the tractor industry: BAL derives most of its revenue from its three key clients in tractor industry. Hence, it faces high customer concentration risk as loss of any one customer or any impact on the performance of these players will result in significant loss of revenue and sub-optimal capacity utilisation for the company. Its revenue is also impacted by the performance of the tractor industry as it manufactures castings primarily for tractors.

* Small scale of operations and susceptibility of profitability to volatility in raw material cost: BAL's business risk profile is constrained by small scale of operations in the intensely competitive metal castings industry, reflected in range-bound revenue in the past 3 fiscals. Its operating margin has been volatile because of fluctuations in prices of key raw materials such as scrap and pig iron.
Outlook: Stable

CRISIL believes BAL will maintain its business risk profile over the medium term, driven by favourable demand from the tractor segment and steady sales to key clients. Its financial risk profile is also expected to improve, supported by stable cash accrual and modest capex. The outlook may be revised to 'Positive' in case of significant and sustained increase in revenue and profitability, while managing working capital cycle and sustaining the current financial risk profile. The outlook may be revised to 'Negative' if a significant decline in revenue and profitability, or large, debt-funded capex, weakens key credit metrics.

About the Company

Set up by members of the Ahmedabad-based Bhagwati family, BAL began commercial operations in 1984. The company manufactures casting components mainly for the tractor, industry. These components include several large cast products, such as gear box housings, axle housings, and exhaust castings. The company's factory in Ahmedabad, Gujarat, has manufacturing capacity of 18,000 tonne per annum.

For fiscal 2017, profit after tax (PAT) was Rs 1.5 crore on net sales of Rs 70 crore, against a PAT of Rs 0.8 crore on net sales of Rs 64 crore in fiscal 2016.

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 cr.) Rating Assigned with Outlook
NA Cash credit NA NA NA 6.0 CRISIL BBB-/Stable
NA Term loan NA NA 26-Mar-2019 1.32 CRISIL BBB-/Stable
NA Proposed long term bank loan facility NA NA NA 2.68 Withdrawal
NA Letter of credit NA NA NA 1.5 CRISIL A3
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  7.32  CRISIL BBB-/Stable  31-05-17  CRISIL BBB-/Stable    No Rating Change  16-01-15  CRISIL BBB-/Negative    No Rating Change  CRISIL BBB-/Stable 
Non Fund-based Bank Facilities  LT/ST  1.5  CRISIL A3    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A3 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 6 CRISIL BBB-/Stable Cash Credit 4 CRISIL BBB-/Stable
Letter of Credit 1.5 CRISIL A3 Letter of Credit 1.5 CRISIL A3
Proposed Long Term Bank Loan Facility 2.68 Withdrawal Proposed Long Term Bank Loan Facility 4.6 CRISIL BBB-/Stable
Term Loan 1.32 CRISIL BBB-/Stable Term Loan 1.4 CRISIL BBB-/Stable
Total 11.5 -- Total 11.5 --
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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