Key Rating Drivers & Detailed Description

Strengths:

• Strong support of CMR and commonality in business: CMRN is a key entity for the CMR group, which has a capacity of over 420,000 tonne per annum spread across 11 plants. The group holds about 60% market share in liquid aluminium and 30-35% market share in recycled aluminium industry (1.3 million tonne capacity). CMRN, with a production capacity of 70,000 MT per annum, contributes to almost 25% of revenue and operating profit of the group.

CMRG specialises in molten aluminium technology which provides benefits such as over-the-road supply and cost savings on inventory. The company follows the hub-and-spoke model for in areas where its plants are located close to units of major auto original equipment manufacturers (OEMs), and has maintained healthy relationships with customers.

The management has over three decades of experience in the aluminium recycling industry. The CMR group has invested in several technologies and formed joint ventures with many global players to use advanced aluminium recycling processes. The group has pioneered the liquid aluminium technology and over the past five years has launched several other technologies to generate better scrap yield and segregate minute aluminium. Steady pace of investments in newer capabilities should benefit all group entities, including CMRN. CMRG will continue to extend financial support in a timely manner in case of exigency.

• Healthy position in the recycled aluminium industry and high operating efficiency: The company 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 OEMs. This has enabled it to develop healthy relationships with customers and save inventory cost.

Operating margin has been high largely because of material cost efficiencies achieved by investing in technologies such as hot refining and cold refining. 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.

Moreover, 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 managing inventory effectively. It tracks material buying, logistics, production and sorting of materials. This has resulted in cost efficiencies and operating margin of 6.9% in fiscal 2022. Return on capital employed also remained healthy at about 30%.

• Comfortable financial risk profile: Cash accrual of Rs 70-75 crore per annum should suffice to cover the average capex of Rs 20-25 crore per fiscal over the medium term. Cash accrual should suffice to cover the capex, though the group may have to raise external debt to fund any large capex/acquisition. Networth and gearing are estimated at over Rs 252 crore and 0.6 time, respectively, as on March 31, 2022. Debt protection metrics are strong, with interest coverage and net cash accrual to adjusted debt ratios of 8.9 times and 0.5 times, respectively, for fiscal 2022.

Weakness:

• 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 (OEMs) partially limits pricing power. Also, operating profitability is exposed to volatility in raw material prices.

Key Financial Indicators

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