Rating Rationale
August 31, 2020 | Mumbai
Tata Advanced Materials Limited
Ratings continues on 'Watch Positive'
 
Rating Action
Total Bank Loan Facilities Rated Rs.410 Crore
Long Term Rating CRISIL A+ (Continues on 'Rating Watch with Positive Implications')
Short Term Rating CRISIL A1 (Continues on 'Rating Watch with Positive Implications')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's ratings on the bank facilities of Tata Advanced Materials Limited (TAML) continue to be on 'Rating Watch with Positive Implications'.
 
The rating is on watch positive because of the company's expected merger with its parent, Tata Advanced Systems Ltd (TASL; rated 'CRISIL AA-/CRISIL A1+/Watch Developing'), a wholly owned subsidiary of Tata Sons Pvt Ltd (Tata Sons; 'CRISIL AAA/FAAA/Stable/CRISIL A1+'); TASL has a better credit risk profile than TAML. The parent has acquired 100% shareholding in TAML from its erstwhile parent, Tata Industries Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+'), with the transaction concluding in May 2019. Subsequently, TAML shall be merged with TASL post-receipt of regulatory approvals; with closure expected in fiscal 2021. TASL also acquired TAL Manufacturing Solutions Ltd from Tata Motors Ltd (TML; 'CRISIL AA-/Negative/CRISIL A1+') in March 2019, which was subsequently merged with itself in May 2020.
 
TASL is also in the process of acquisition and subsequent merger of the defence businesses of The Tata Power Company Ltd ('CRISIL AA-/Positive/CRISIL A1+') and TML. All transactions are subject to customary regulatory approvals, with expected closure within fiscal 2021.
 
The consolidation of the defence and aerospace businesses of the Tata group under TASL, and equity support expected from Tata Sons should benefit TASL over the medium term. CRISIL expects continued support from the parent, and is in discussions with the management to understand the impact of the transactions on the overall credit risk profile of TASL and its subsidiaries, including TAML. CRISIL will take an appropriate rating action after receipt of adequate clarity and closure of the transactions.
 
The ratings continue to reflect the strong financial and managerial support TAML gets from TASL, adequate revenue visibility backed by signed contracts, and a favourable demand outlook. These strengths are partially offset by a weak, though improving, financial risk profile and working capital-intensive operations.
 
The Novel Coronavirus pandemic (Covid-19) disrupted the operations of TASL and its subsidiaries/JVs, including TAML, over the last few months, particularly in the months of March and April 2020. Thereafter, manufacturing facilities commenced operations in May 2020 with the applicable standard operating procedures (SOPs) in place. Given the contractual nature of its business, there should be limited impact on off-take. Nevertheless, the situation related to the pandemic is still evolving.

Analytical Approach

CRISIL has applied its parent notch-up framework to factor in support from TASL. This takes into account TAML's strategic importance to the parent, and the financial and management linkages between the two companies.

Key Rating Drivers & Detailed Description
Strengths:
* Strong financial and managerial support from TASL: Given the Tata group's focus on the aerospace and defence businesses, TAML is strategically important to the group and will continue to receive support from TASL.
 
* Improving business risk profile and high revenue visibility: TAML manufactures composites used in aircraft and personnel/vehicle armours for defence sector. It is the sole supplier for most of its products and has healthy relationships with tier-I suppliers of Boeing and Airbus.
 
Revenue has grown significantly, at a compound annual rate of about 24% over the five fiscals through 2020. Healthy orders and growing importance of composites (given advantages of high stiffness-to-weight ratio, corrosion resistance, and durability) will be key growth drivers.
 
Weaknesses:
* Weak, though improving, financial risk profile: Though networth has been small due to sizeable losses incurred initially, turnaround has been robust in recent years. Operating margin improved to over 20% in fiscal 2019 from 10% in fiscal 2016, and is expected to remain strong, albeit with some correction in fiscal 2020 (margin stood at around 17%) and fiscal 2021 owing to the Covid-19 related disruption. With sustained revenue and profitability, interest coverage ratio is expected to remain about 4 times. Better profitability, coupled with efficient working capital management, has ensured lower reliance on debt, and gearing is expected to remain below 1 times.
 
* Working capital-intensive operations: Inventory is large because of the specialised nature of imported raw materials and longer lead time. This, along with growing scale of operations, will result in larger working capital requirement over the medium term. The ability to prudently fund these expenses through internal cash flows and cash credit limit will remain a key monitorable. 
Liquidity Strong

Expected cash accrual of around Rs 80 crore in fiscal 2021 will be sufficient to meet debt repayment. Average utilisation of cash credit/fund-based facilities was less than 50%. Financial aid from parent will also support liquidity. 

Rating Sensitivity factors
Upward factors:
* Successful merger with TASL
* Upgrade in TASL's rating by one notch  
 
Downward factors:
* Delay in merger with TASL
* Downgrade in TASL's rating by one notch or decline in its support to TAML
About the Company

TAML, a wholly owned subsidiary of TASL, manufactures composites components for the aerospace, defence, and industrial sectors. Facility is in Jigani Industrial Estate near Bengaluru.

Key Financial Indicators
As on / for the period ended March 31 2020 2019
Revenue Rs crore 376 411
Profit after tax (PAT) Rs crore 37 59
PAT margins % 10% 14%
Adjusted debt/adjusted networth Times 1.0 1.5
Interest coverage Times 3.9 3.8

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size
(Rs Crore)		 Complexity
Level		 Rating Assigned
 with Outlook
NA Term Loan NA NA Mar-22 75.00 NA CRISIL A+/Watch Positive
NA Term Loan* NA NA NA 25.00 NA CRISIL A+/Watch Positive
NA Cash Credit NA NA NA 7.50 NA CRISIL A+/Watch Positive
NA Cash Credit^ NA NA NA 45.00 NA CRISIL A+/Watch Positive
NA Cash Credit@ NA NA NA 75.00 NA CRISIL A+/Watch Positive
NA Fund-Based Facilities NA NA NA 35.00 NA CRISIL A+/Watch Positive
NA Non-Fund Based Limit NA NA NA 109 NA CRISIL A1/Watch Positive
NA Non-Fund Based Limit & NA NA NA 35 NA CRISIL A+/Watch Positive
NA Proposed Long Term
Bank Loan Facility		 NA NA NA 3.50 NA CRISIL A+/Watch Positive
^Fungible with non-fund based facilities
@Fungible with non-fund based facilities up to Rs 25 crore
&Fungible with fund-based limits up to Rs 30 crore
*yet to be drawn down
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT    --    --  30-04-19  Withdrawn  27-11-18  CRISIL AA+(SO)/Stable  24-10-17  CRISIL AA+(SO)/Stable  CRISIL AA+(SO)/Stable 
            12-02-19  CRISIL AAA(SO)/Stable  27-08-18  CRISIL AA+(SO)/Stable       
                04-06-18  CRISIL AA+(SO)/Stable       
Fund-based Bank Facilities  LT/ST  266.00  CRISIL A+/(Watch) Positive  02-06-20  CRISIL A+/Watch Positive  12-12-19  CRISIL A+/Watch Positive  27-11-18  CRISIL A+/Watch Developing  24-10-17  CRISIL A+/Stable  CRISIL A+/Stable 
        04-03-20  CRISIL A+/Watch Positive  30-10-19  CRISIL A+/Watch Positive  27-08-18  CRISIL A+/Watch Developing       
            17-09-19  CRISIL A+/Watch Positive  04-06-18  CRISIL A+/Watch Developing       
            21-06-19  CRISIL A+/Watch Positive           
            30-04-19  CRISIL A+/Watch Developing           
            12-02-19  CRISIL A+/Watch Developing           
Non Fund-based Bank Facilities  LT/ST  144.00  CRISIL A+/(Watch) Positive/ CRISIL A1/(Watch) Positive  02-06-20  CRISIL A+/Watch Positive/ CRISIL A1/Watch Positive  12-12-19  CRISIL A+/Watch Positive/ CRISIL A1/Watch Positive    --    --  -- 
        04-03-20  CRISIL A+/Watch Positive/ CRISIL A1/Watch Positive  30-10-19  CRISIL A+/Watch Positive/ CRISIL A1/Watch Positive           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 7.50 CRISIL A+/Watch Positive Cash Credit 7.50 CRISIL A+/Watch Positive
Cash Credit^ 45 CRISIL A+/Watch Positive Cash Credit^ 45 CRISIL A+/Watch Positive
Cash Credit@ 75 CRISIL A+/Watch Positive Cash Credit@ 75 CRISIL A+/Watch Positive
Fund-Based Facilities 35 CRISIL A+/Watch Positive Fund-Based Facilities 35 CRISIL A+/Watch Positive
Non-Fund Based Limit& 35 CRISIL A+/Watch Positive Non-Fund Based Limit& 35 CRISIL A+/Watch Positive
Non-Fund Based Limit 109 CRISIL A1/Watch Positive Non-Fund Based Limit 109 CRISIL A1/Watch Positive
Proposed Long Term Bank Loan Facility 3.5 CRISIL A+/Watch Positive Proposed Long Term Bank Loan Facility 3.5 CRISIL A+/Watch Positive
Term Loan 100 CRISIL A+/Watch Positive Term Loan 100 CRISIL A+/Watch Positive
Total 410 -- Total 410 --
^Fungible with non-fund based facilities
@Fungible with non-fund based facilities up to Rs 25 crore
&Fungible with fund-based limits up to Rs 30 crore
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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