Detailed Rationale

CRISIL Ratings has reaffirmed the ratings at 'CRISIL AA (CE)/Stable/CRISIL A1+ (CE)' to the bank facilities of Isgec Titan Metal Fabricators Pvt Ltd (ITMFPL).

 

CRISIL Ratings’ rating on the bank facilities of Isgec Titan Metal Fabricators Pvt Ltd (ITMFPL)continues to reflect the operational and financial support of IHEL, which has an established position in the heavy engineering capital goods industry; and a robust financial risk profile, with unencumbered cash and liquid investments of more than Rs 140 crore as on September 30, 2021 and is estimated to be on similar levels in fiscal 2022.

 

The ratings also factor in the expected improvement in the business risk profile of ITMFPL, backed by the fabrication and designing technology obtained from the joint venture partner, Titan Metal Fabricators, Inc (Titan). These strengths are partially offset by the initial stage of operations, high dependency on guarantor's performance, and exposure to intense competition in the domestic and international markets.

Analytical Approach

The ratings on the bank facilities guaranteed by IHEL are based on CRISIL’s criteria on rating instruments backed by guarantees.

Key Rating Drivers & Detailed Description

Strengths:

• Unconditional and irrevocable corporate guarantee

IHEL has provided an unconditional and irrevocable guarantee to ITMFPL's bank facilities. The guarantee covers the entire principal and interest obligations. The company is also likely to receive operational support from IHEL.

 

• Established market position of parent

IHEL is an engineering procurement contractor (EPC)/manufacturer for various machinery in the capital goods sector, both in India and abroad. Divisions such as boilers, presses, sugar plant machinery, process equipment, and air pollution control equipment are aided by long-term technical tie-ups with a number of recognised global heavy engineering companies as well as IHEL’s in-house design and manufacturing capability. The parent has geographically diversified operations and has been providing engineering solutions to customers around the world for the past 80 years.

 

• Parent’s healthy financial risk profile

IHEL had a strong networth of over Rs 2000 crore as on March 31, 2021, driven by a large scale of operations and hence, steady accretion to reserves and is estimated to be more than 2100 crores in fiscal 22. Gearing was comfortable at 0.47 time, but estimated to weaken marginally in fiscal 22 because of debt of Rs 160 crore contracted to complete the project under Cavite Biofuels Producers Inc, Philippines, repayment of which will begin only from January 2023. Management expects the assets to be sold by the time repayments begin and hence should not impact the financial risk profile (especially liquidity) of IHEL over the medium term. Any further liabilities accruing from the project or any debt build up due to the same, shall remain a monitorable.

 

Debt protection metrics were strong, as reflected in interest coverage and net cash accrual to adjusted debt ratios of 7.71 times and 0.35 time, respectively, for fiscal 2021 and is estimated to be at least more than 4 times in fiscal 22. Large, unencumbered cash and bank balance and liquid investments of more than Rs 100 crore as on March 31, 2021, also support liquidity.

 

Weakness:

• Modest scale of operations

Revenue improved in fiscal 2021 to Rs 35.59 crore from Rs 25.38 crore in fiscal 2020 because of higher order execution and better absorption of fixed cost further leading to higher margins at around 21% in FY21 against 17.45% in FY20. Going forward there is some estimated moderation in the operating margins however the revenue is expected to be more than 40 crores in fiscal 22. With outstanding order book in hand of Rs 64 crore (as on December 31st, 2021), revenue is expected to further increase over the medium term.

 

• High dependence on guarantor's performance

The rating primarily reflects the credit strength of the guarantor. Hence, any adverse movement in the performance of the guarantor may affect the ratings on ITMFPL's facilities.

 

• Exposure to intense competition in the domestic and international markets:

Intense competition and the overall weak market scenario restrict inflow of orders. However, IHEL and Isgec Titan has a healthy track record of booking orders despite a difficult external environment.

Liquidity: Strong

Liquidity is underpinned by the strong financial support of IHEL, backed by an unconditional and irrevocable guarantee. IHEL had unencumbered cash and bank balances of more than Rs 140 crore as on September 30th, 2021, which are adequate to support any exigency over the medium term.

 

Bank limit utilisation of ITMFPL was moderate at 10% for the 12 months through November 2021. Though cash accrual is expected to remain modest, absence of any term debt will enable the company to use the accrual to meet working capital requirement.

Outlook Stable

CRISIL Ratings believes ITMFPL will continue to benefit from the experience of its promoters and the support of the parent.

Rating Sensitivity factors

Upward factors

• Improvement in the parent's credit risk profile
• Better-than-expected cash accrual of more than 20% due to improved scale of operations and operating profitability

Downward factors

• Deterioration in the parent’s credit risk profile
• Lower-than-expected business performance due to revenue declining by 15% on a sustained basis

Adequacy of credit enhancement structure

The ratings continue to be based upon the strength of an unconditional, continuing and irrevocable guarantee extended for the loans by the parent to ensure full and timely payment of all amounts due to the lender on the due dates, and an unconditional undertaking securing the principal repayment and interest payment related to the entire debt. The structure is designed to ensure full and timely payment to the lender.

 

According to the payment mechanism, the guarantor, IHEL, will pay, not later than seven business days from the due date, any amount due and payable by ITMFPL in relation to these instruments in case of any default on, or shortfall in, payment. The guarantee and the undertaking together cover the principal, interest, and other monies payable under the loan.

Unsupported ratings  CRISIL A

CRISIL Ratings has introduced 'CE' suffix for instruments having explicit ‘credit enhancement’ feature in compliance with the Securities and Exchange Board of India circular dated June 13, 2019.

Key drivers for unsupported ratings

For arriving at the unsupported rating, CRISIL has considered the standalone business and financial risk profiles of ITMFPL and has applied its parent notch-up framework to factor in the extent of support available to ITMFPL from IHEL. The rating factors in the strategic importance of ITMFPL to its parent, given the synergies to its operations and criticality of niche products manufactured by ITMFPL to IHEL’s product portfolio.

About the Company

Incorporated in 2015, ITMFPL is a joint venture (JV) of IHEL (51%) and Titan (49%) and was formed to manufacture corrosion-resistant process equipment and provide the next generation of reactive alloy equipment to global customers in the chemical, petrochemical, oil and gas, fertiliser, mining, power generation, pharmaceutical, and steel manufacturing industries.

 

IHEL (formerly, Saraswati Industrial Syndicate Ltd), a public company under the ISGEC group, is listed on the Bombay Stock Exchange. It was established in 1946 by Puri family. Initially, it manufactured spares for sugar mills but later diversified into a range of engineering products. In 1964, it established a JV with the UK-based John Thompson to form Isgec John Thompson to manufacture boilers. In 1981, it acquired majority shares in UP Steels. Both these entities were subsequently merged with IHEL.

 

IHEL currently manufactures heavy engineering equipment and provides related EPC/turnkey services. Product portfolio comprises pressure vessels, heat exchangers, mechanical and hydraulic presses, iron and alloy steel castings, boilers, power plant, sugar plants and machinery and air pollution control equipment.

 

Titan is a US-based company that has fabrication and designing technology to manufacture corrosion-resistant process equipment made from reactive metals and high nickel alloys.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Operating income	Rs crore	36.38	25.60
Reported profit after tax	Rs crore	4.49	1.85
PAT margins	%	12.34	7.22
Adjusted Debt/Adjusted Net worth	Times	0.05	3.66
Interest coverage	Times	7.69	3.43

*CRISIL adjusted figures

List of covenants

There are no material covenants

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs cr)	Complexity Level	Rating assigned with outlook
NA	Letter of credit & Bank Guarantee	NA	NA	NA	25	NA	CRISIL A1+ (CE)
NA	Letter of credit & Bank Guarantee*	NA	NA	NA	20	NA	CRISIL A1+ (CE)
NA	Cash Credit & Working Capital demand loan	NA	NA	NA	10	NA	CRISIL AA (CE)/Stable

*Interchangeability from Non- fund based to fund based