Rating Rationale
October 07, 2019 | Mumbai
Bhagwati Autocast Limited
Rating outlook revised to 'Stable'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.16.66 Crore (Enhanced from Rs.8.82 Crore)
Long Term Rating CRISIL BBB-/Stable (Outlook revised from 'Positive' 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 'Stable' from 'Positive', 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 expectation that BAL's business risk profile will weaken over the medium term on account of slowdown in demand in the tractor industry. In the three months through June 2019, operating income declined 23% over the corresponding period of the previous fiscal. Operating profit before depreciation, interest, and tax (OPBDIT) margin was 6.9% compared with 5.8%, mainly due to decline in input costs, which is expected to be passed on to the customers in the second half of fiscal 2020. The outlook revision also factors in CRISIL's belief that BAL's financial risk profile will remain adequate over the medium term, supported by steady cash accrual, modest capital expenditure (capex).

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 debt protection metrics. Gearing was 0.35 time as on March 31, 2019, 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 total debt ratios were 7.61 times and 0.65 time, respectively, in fiscal 2019.
 
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 rose to 6.9% in fiscal 2019 from 4.9% the previous fiscal on account of an increase in product prices in line with higher input costs; however, this happened with a lag.BAL's business risk profile is also constrained by modest scale of operations in the intensely competitive metal castings industry.
 
Liquidity: Adequate
Liquidity is expected to remain adequate driven by sufficient cushion between net cash accrual and repayments.Average bank limit utilisation of 50% for 12 months ending August 2019.
Outlook: Stable

CRISIL believes BAL's business risk profile will weaken over the medium term on account of slowdown in volumes in the tractor industry. Financial risk profile is expected to remain adequate, supported by steady cash accrual and modest capex.

Rating sensitivity factors
Upward factors
* Sustained revenue growth of 25%, while sustaining profitability
* Improvement in financial risk profile

Downward factors
* Revenue de-growth of more than 25% per annum
* Large debt-funded capex or stretch in working capital cycle weakening financial risk profile.

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 three months through June 2019, profit after tax (PAT) was Rs 0.6 crore and net sales was Rs 23 crore, against Rs 0.8 crore and Rs 30 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 120 90
Profit After Tax (PAT) Rs crore 3.7 1.1
PAT Margin % 3.1 1.2
Adjusted debt/adjusted networth Times 0.35 0.36
Interest coverage Times 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.Cr) Rating assigned with outlook
NA Cash Credit NA NA NA 12 CRISIL BBB-/Stable
NA Term Loan NA NA Oct-2021 2.16 CRISIL BBB-/Stable
NA Bank Guarantee NA NA NA 2.50 CRISIL A3
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  14.16  CRISIL BBB-/Stable      31-10-18  CRISIL BBB-/Positive  10-07-17  CRISIL BBB-/Stable  20-05-16  CRISIL BBB-/Negative  CRISIL BBB-/Negative 
                31-05-17  CRISIL BBB-/Stable       
Non Fund-based Bank Facilities  LT/ST  2.50  CRISIL A3      31-10-18  CRISIL A3  10-07-17  CRISIL A3  20-05-16  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-/Stable Cash Credit 5.57 CRISIL BBB-/Positive
Term Loan 2.16 CRISIL BBB-/Stable Term Loan .75 CRISIL BBB-/Positive
Total 16.66 -- Total 8.82 --
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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