Rating Rationale

Key rating drivers and detailed description

Strengths:

Established market position: DCL’s promoters have an extensive industry experience of over three decades in conductors and cable industry. Over the years, promoters have developed a sound understanding of market dynamics and healthy relations with customers, suppliers. Company’s market position is supported by diversified customer base and product mix. The increasing revenue share from newly developed products also supports the business risk profile. DCL has also lowered its reliance on direct government entities’ work to ~25% of its turnover now as against 50-55% around 5 years back. Further, the company has a fairly diversified presence in domestic market. Company’s operating income is Rs 670 crore in fiscal 2023, ~17% y-o-y growth which is backed by better product mix, higher volumes and higher average aluminium prices. The year to date operating income of ~ Rs 330 crores till Sep23 and healthy order book of ~ Rs 520 crores which gives revenue visibility over medium term, shall continue to support the business risk profile of company and the company is expected to achieve operating income in range of Rs 760-780 crores in FY24.

Comfortable financial risk profile : The comfortable financial risk profile is marked by comfortable capital structure as reflected in gearing of 0.5 times as on March 31, 2023, which demonstrates sufficient headroom to take additional debt for business requirements. Further with no major debt funded capital expenditure proposed to be undertaken over medium term, and repayment of existing term loans in full by FY26, the capital structure is expected to remain comfortable. Debt protection metric of company has been comfortable as witnessed by interest cover and NCAAD of more than 4 times and 0.3 times in FY23, further with sustenance of operating margins expected to be in range of 10-11% and no major debt proposed to be undertaken, the debt protection metric is expected to remain comfortable over medium term.

Weaknesses:

Moderate scale of operations: Although the company has achieved an operating income CAGR of ~16% for last 3 fiscals through FY23, the scale of operations continue to remain moderate. In current fiscal, the company has achieved an operating income of ~Rs 330 crores till Sep23 and order book position of ~Rs 520 crores which gives revenue visibility for next 6-9 months, the company is expected to clock operating income in range of Rs 760-780 crores in FY24. Going ahead with continuous focus of management on adding new customers and diversify its product mix yielding higher realisations, operating income is expected to improve. Sustained improvement in operating income aided by volumetric growth amid sustenance of operating margins in range of 10-11% would therefore remain a key rating sensitivity factor.

Exposure to intense competition and limited track record of sustenance of improved margins: The industry is marked by presence of many organized and unorganized players with intense competition which restrains the ability of players to command pricing and grow rapidly thereby also constraining the profitability. Also, profitability remains vulnerable to any sharp and sudden commodity price fluctuations, however with sound policies to hedge the volatility in prices of raw material, the company has witnessed improvement in operating margins to ~10% as YTD performance till Sep23. Sustenance of operating margins in range of 10-11% amid sustenance improvement in scale of operations, would therefore remain a key rating sensitivity factor.