| Mangal Industries Limited | ||||||
| Ratings removed from ‘Watch Developing’; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has removed its ratings on the bank facilities of Mangal Industries Limited (MIL; part of Amara Raja group) from ‘Watch with Developing Implications’ and has reaffirmed the ratings at ‘CRISIL A/CRISIL A1’ while assigning a ‘Stable’ outlook to the long term rating.
The reaffirmation and outlook revision factors the healthy revenue growth from remaining business (including manufacturing of auto components (fasteners, plastics, copper inserts/connectors and others),metal fabrication, storage solutions and lead bushes) which has grown at a healthy CAGR of 28% since FY 2020.The proposed demerger will also enable MIL to focus better on the remaining business and augment clientele and end-user diversity. Further overall financial risk profile is expected to improve with transfer of majority of debt to books of ARBL subsequent to the proposed demerger resulting in comfortable debt metrics i.e gearing is estimated to be less than 0.4 times over the medium term.
As per the ongoing scheme of arrangement, plastic component for the battery business of MIL will be moved into group company, Amara Raja Batteries Ltd (ARBL; rated ‘CRISIL AA+/Stable/CRISIL A1+’) as a going concern which accounted for ~40% of revenue and ~53% of operating profits in fiscal 2023. The above scheme of arrangement was to be effective April 1,2022 onwards, subject to the approval of the National Company Law Tribunal (NCLT).MIL had obtained the approval for the above said scheme from the shareholders and unsecured creditors in meeting dated April 12th 2023 as directed by NCLT vide order dated February 9th 2023.
Although overall scale of operations of the company and margins are expected to reduce on account of demerger of plastic component for battery business, remaining business has been growing at a healthy CAGR of 28% since FY 2020 and operating margins from remaining business have also steadily improved from 7.6% in FY 2020 to 8.8% in FY 2023. Accordingly considering the steady growth in remaining business and overall improvement in financial risk profile of MIL, CRISIL Ratings believes that the proposed demerger will not have any material impact on overall credit risk profile of MIL. Furthermore, share of revenue from external clients have increased from 66% in FY 2023(excluding revenue from plastic component business) from below 30% in fiscal 2020 thereby reducing the client concentration risk.
Revenue from remaining business has marginally declined by 2% on-year in the fiscal 2023(adjusting for plastic component division which will be transferred to ARBL), on account of decline in chemical trading business which the company plans to discontinue from FY 24 onwards considering the lower margin. Revenue from the remaining business segments is expected to surpass ~Rs.1000 crore levels, while margin would be ~9% from fiscal 2024 onwards. Over the medium term, revenue is expected to be driven by growth in new products, including auto components and storage solutions. Financial risk profile is also likely to improve notwithstanding capacity expansion plans, because of progressive debt repayment, healthy cash accrual and prudent working capital management. |
Analytical Approach CRISIL Ratings has considered the standalone business and financial risk profiles of MIL. |
Key Rating Drivers & Detailed Description Strengths: Healthy business risk profile: About 64% of the income is derived from ARBL, the flagship company of the Amara Raja group and the second-largest player in the storage batteries segment in India with diverse revenue streams.Furthermore, all the business divisions (excluding plastic component division) of MIL have recorded a strong CAGR of ~28% between fiscals 2020 and 2023. The company will benefit from the initiatives undertaken to diversify the customer base and end-use segments over the medium term which has yielded results in form of increasing share of revenue from external clients from less than 30% in FY 20 to over 60% over the medium term.
Adequate financial risk profile: The financial risk profile of MIL is marked by adequate capital structure, healthy debt protection metrics, and is supported by steady cash flow from operations. Transfer of debt to extent of Rs.100 crore to ARBL as part of ongoing scheme along with progressive debt repayment, healthy cash accrual is expected to result in a comfortable gearing of below 0.3 time as on March 31, 2023 and will continue to remain at healthier levels over the medium term.
Weaknesses: Exposure to cyclicality in end-user industries: Business cycle is susceptible to changes in demand from original equipment manufacturers as well as after-market sales. Monetisation of expanded capacity is contingent on sustained offtake from these end-user industries.
Modest profitability: Operating margin has remained above 12% in the past five fiscals. However, with the demerger of the plastic components business that carried profitability of more than 17%, overall profitability will decline to ~9% levels over the medium term. However with company planning to gradually reduce the chemical trading business with low margins from FY 24 and discontinue over the medium term to aid in improvement of margins. |
Liquidity: Adequate Liquidity will remain adequate on the back of higher cash accrual and prudent working capital management. Working capital limit of Rs 94.5 crore was utilised at an average of 30% (of drawing power) over the 6 months through March 2023. Healthy accrual of Rs ~60-70 crore, after the demerger, will be sufficient to fund incremental working capital and capital expenditure (capex) requirements. |
Outlook: Stable CRISIL Ratings believes the business risk profile of MIL will benefit from healthy off-take by its major customer, ARBL and increasing contribution from external customers thereby aiding in overall diversification of revenue streams. The financial risk profile is also expected to improve over the medium term with transfer of major debt to books of ARBL post the demerger, increase in cash accruals, order backed moderate capex plans. |
Rating Sensitivity factors Upward factors
Downward factors
|
About the Company Incorporated in 1996 as a part of the Amara Raja group of companies, MIL manufactures metal fabrication, battery and auto components that are used in home inverters, trickle chargers, switch mode rectifier cabinets and batteries. The company also manufactures auto components and provides customised solutions to manage the storage needs of clients. In fiscal 2019, MIL started manufacturing industrial tools and moulds and began trading in substitute chemicals in fiscal 2021. It has a manufacturing facility each near Tirupati and Chittoor in Andhra Pradesh. ARBL and other Amara Raja group companies remain the largest customers of MIL. |
Key Financial Indicators
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
|
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||
|
Criteria Details
|