Detailed Rationale

CRISIL Ratings has reassigned its ‘CRISIL A1’ rating to the short term bank facilities of CMR Green Technologies Limited (CMRG; part of the CMR group) while reaffirming the long-term rating at ‘CRISIL A+/Positive’

 

The ratings reflect the healthy business risk profile of the group, supported by established position in the aluminium recycling industry with strong technical capabilities; high operating efficiency; support from joint venture (JV) partners; and a comfortable financial risk profile. These strengths are partially offset by exposure to cyclicality in the automobile (auto) industry and to volatility in metal prices. It also reflects CMRG’s expected improvement in the business profile supported by increasing scale of operations, improving operating efficiency as well as further improvement in financial risk profile.

 

For fiscal 2022, CMRG is expected to report better than expected revenues of over Rs.4000 crore led by recovery in demand, ramp up of new capacities, increase in exports and higher aluminium prices. CMR group has, over the last five fiscals, strengthened its competitive edge in supplying molten aluminium and ingots to auto companies through tech ties-up with Toyota Nikkei and Chiho Environmental group. Furthermore, longstanding relationships with customers and favourable location of plants will result in healthy growth of 8-12% per annum over the medium term. In addition to aluminium, few other growth drivers include recycling of stainless steel and copper, and scraping of electric motors and end-of-use vehicles.

 

The operating profitability is expected to be better at 11% during current fiscal also supported by increase in aluminium prices, investments in technological improvements and improving output ratio. CRISIL Ratings expects operating profitability to remain at 9-11% in the medium term driven by improvement in capacity utilsiation and sustenance of improved output ratio.

 

Financial profile remains strong as indicated by adjusted networth of over Rs 847 crore as on March 31, 2021 as improved operating profitability resulted in high accretion to reserves along with comfortable equity capital invested in the business. The gearing is expected to remain below 0.3 times in medium term in absence of any major debt funded capex.  Strong cash accrual, moderate capital expenditure (capex) and healthy liquid surplus will support the credit profile over the medium term Any large inorganic expansion or acquisition remain a key monitorable.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of CMR Green Technologies and its subsidiaries, CMR Nikkei India Pvt. Ltd (CMRN), CMR Toyotsu Aluminium India Pvt Ltd (CMRT), CMR- Chiho Recycling Technologies Private Ltd, together referred to as the CMR group owing to significant operational, managerial 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:

Market leadership in the recycled aluminium industry with strong technical capabilities

The CMR group is one of the two major players in the aluminium and zinc casting alloys segment in India. With capacity of over 420,000 tonne per annum spread across 12 plants, the group has about 60% market share in liquid aluminium and 30-35% market share in recycled aluminium industry. Though the share of aluminium in total revenue is close to 80%, product diversity is improving with steel, copper and other materials accounting for about 20% now against 10-15% earlier.

 

The group follows the hub-and-spoke model for over the road molten aluminium technology in areas where its plants are near the units of major auto original equipment manufacturers (OEMs) resulting in cost savings. This has enabled it to develop healthy relationships with customers. Through this shared infrastructure, customers also depend on the group for regular supply of molten aluminium.

 

Investment in various technologies has improved scrap yield. Moreover, JVs with Japanese companies, Nikkei MC Aluminium and Toyota Tsusho Corporation, have enabled the group to build up capability in liquid/molten alloy transportation. Apart from aluminium, new avenues of growth, such as recycling of electric motors and end-of-use vehicles, will further strengthen business risk profile.

 

Healthy operating efficiency

Operating margin has been high largely because of material cost efficiencies the group has achieved by investing in technologies such as hot refining, cold refining and Zurik (stainless steel). Yield from scrap has improved to about 80% from 75% earlier. The group has pass-through clauses that mitigate the impact of price volatility on margin.

 

A robust centralised IT (information technology) system supports overall manufacturing process. Since every consignment is different, the IT system becomes crucial in determining its exact composite and manage inventory effectively. It tracks material buying, logistics, production, and sorting of materials. The group has also invested in automation capabilities to help further refine the recycling process and improve output ratio. This has resulted in cost efficiencies and improved operating margin to about 12% in fiscal 2021 from 3-4% six years back. Operating margin is expected to sustain at 9-11% in the medium term. However, the impact of ramp-up in scale on profitability will remain a key monitorable. Further, return on capital employed remained over 20% consistently over last five fiscals and is expected to remain healthy in the medium term.

 

Comfortable financial risk profile

Financial risk profile is characterized by low term debt and adequate debt protection metrics and liquidity. Absence of any significant debt-funded capex and healthy cash accruals of Rs 300-350 crore per annum are expected to result in minimal dependence on long term debt and overall debt reduction in the medium term.

 

Over fiscals 2022 and 2023, CMR group is expected to undertake capex of about Rs 30-50 crore, funded through internal accrual. Interest coverage and net cash accrual to debt ratio were healthy at 7.7 times and 0.6 time, respectively, for fiscal 2021, and are expected at over 11.0 times and around 0.9 time, respectively, for fiscal 2022. The TOL/ANW ratio, which was at 1.0 time as on March 31, 2021, should sustain at 0.5-0.7 time over the medium term. CRISIL Ratings believes that CMR group’s leverage levels will continue to be characterised by controlled debt. Any growth plans resulting in a sizeable long term debt will remain a key rating sensitivity factor.

 

Weaknesses

Susceptibility to cyclicality in the auto industry and limited pricing power

The auto industry is inherently cyclical, with performance linked to the economy. High dependence on original equipment manufacturers partially limits pricing power. Also, operating profitability is exposed to volatility in raw material prices.

Liquidity: Adequate

CMRG’s liquidity will remain adequate, driven by healthy cash accrual of Rs 270-300 crore in the medium term. The fund-based limit of Rs 350 crore was utilised at 51% on average during the 6 months through September 2021. Internal accrual, cash and cash equivalent and unutilised bank lines will be sufficient to meet debt obligation and working capital requirement. However, the company may depend on debt to fund increased capex or additional working capital requirement.

Outlook: Positive

CMR group is expected to benefit from its leadership position in the aluminium recycling industry and good growth prospects aluminium recycling business. Steady cash generating ability and moderate capex is also expected to help sustain healthy financial profile over the medium term.

Rating Sensitivity Factors

Upward factors

• Improvement in scale of operations and sustenance of healthy operating margin resulting in cash accrual over Rs 250 crore
• Improvement in financial risk profile driven by healthy cash accrual, efficient working capital management or equity infusion

 

Downward factors

• Decline in operating margin to below 5%
• Large, debt-funded acquisition, or capex or elongation of working capital cycle leading to weakening of financial risk profile

About the Group

CMRG is India’s largest producer of Aluminium and Zinc die-casting alloys with a combined annual capacity of over approx. 4,20,000 MT. The Group is engaged in the business of manufacturing and selling of aluminium based die cast alloys and zinc alloys in India. The Group is also engaged in the business of segregation and sale of metal scrap as a part of manufacturing process (with a specific focus on stainless steel, brass, copper and zinc).

 

CMRG commenced its business in 2006, when it put up a technology plant at Tatarpur, near New Delhi. The plant deployed sophisticated technologies such as twin-shaft shredder, eddy current separator, high-capacity melting furnaces with metal circulation pump, de-coater, etc. CMR Group is presently operating through ten manufacturing plants including 4 plants under two Joint Ventures with renowned Japanese companies, Toyota Tsusho Corporation and Nikkei MC Aluminium. 

 

CMR group has also put up 11th manufacturing plant under 50-50 joint venture with Chiho Environmental Group Limited to engage in the collection, segregation processing, recycling and treatment of all types of secondary metal raw material.

 

For the six months ended September 2021, CMRG reported revenue of Rs 2238 crore and profit after tax (PAT) of Rs 164.5 crore

Key Financial Indicators

As on/for the period ended March 31	Unit	2021	2020*
Operating income	Rs crore	2967	2655
Reported profit after tax^	Rs crore	61	134
PAT margins	%	2.1	5.0
Adjusted Debt/Adjusted Networth	Times	0.58	0.43
Interest coverage	Times	7.70	6.09

*CMR financials

^PAT for fiscal 2021 adjusted for amortisation of Goodwill of Rs 184 crores which is notional in nature and PAT before amortisation is Rs 209 crores and PAT margins is 7.03%

Any other information: Not applicable