Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position: CEIL moderate scale provides it an operating flexibility in an intensely competitive industry. Further, it also benefits from the promoters' experience of over the decades, their strong understanding of market dynamics, and healthy relations with customers and suppliers and will continue to support the business. It achieved a revenue of Rs 1339 crores for fiscal 2022 as against Rs 966 crores in fiscal 2021 and is estimated to book more than 1600 crores in the current fiscal owing to healthy demand from the customers and addition of new customers in segments like fasteners as they generate higher margins for the company.

Moderate working capital cycle: Gross current assets were at 90-140 days over the three fiscals ended March 31, 2022. Its moderate working capital management is reflected in its gross current assets (GCA) of 100 days as on March 31, 2022 as against over 170 days GCAs of some of its peers.

Moderate financial profile: CEIL's capital structure have been at moderately healthy level due to limited reliance on external funds yielding moderate total outside liabilities to tangible networth (TOL/TNW) of 0.89 times for last three year ending on 31st March 2022. CEIL's debt protection measures have also been at comfortable level despite leverage due to moderately profitability. The interest coverage and net cash accrual to total debt (NCATD) ratio are at 1.33 times and 0.09 times for fiscal 2022. CEIL debt protection measures are expected to remain comfortable over medium term. Despite the capex plans in the medium term, the financial structure is estimated to remain comfortable in the medium term.

Weakness:

Susceptibility to cyclicality in automotive industry: The business risk profile is susceptible to inherent cyclicality in automotive industry, linked to performance of the economy. Further with the downturn in the automobile industry with low demand the company sales deteriorated in FY20 by ~24% however, the same have improved in line with the revival of the industry. Also, it is susceptible to change in government policies regarding auto mobiles like pollution norms, electric vehicles etc.

Modest however, improving operating efficiencies: Operating margins were 3.1% in FY 2022 against 4.1% in FY 2021 and weak operating efficiencies leading to low ROCE till FY22 wherein the margins are estimated to improve from the current fiscal to more than 5% owing to revision in the sales pricing with few of its customers and multiple measures undertaken by the management to reduce the raw material costs. Further, diversification into products generating higher margins like fasteners, machine tools etc., further support the profitability and improve the ROCE in the medium term. Sustenance of the same in the range of 5%-6% will remain a key monitorable.