Avantel Ltd.

Brickwork Ratings assigns the ratings for the Bank Loan Facilities of Rs. 52.00 Crs. of Avantel Ltd.

Credit Strengths:

• Established market position and track record of the company with strong R&D facility :
  Avantel has been operating in the niche defence supplies segment  for the past three decades and  provides customised wireless and satellite communication (SATCOM) solutions and products. The company manufactures wireless front-end, satellite communication, embedded systems, signal processing devices and provides network management, software development and related customer support services. The company's SATCOM products are proprietary in nature and being the single vendor, it contributed   around 70% revenue in FY21. The company's performance  are strongly backed by the in-house R&D facilities, which are certified by the Department of Scientific and Industrial Research (DSIR), Government of India. 

• Experienced and qualified management :
  The founder and present Chairman & Managing Director, Dr. A Vidyasagar is technically qualified and has an extensive industry experience of over three decades. Other promoters of the family-managed business are also qualified and experienced. The management is ably supported by a qualified team of professionals. 

• Longstanding relationship with the strategically important clientele and positive industry outlook :

  Avantel's products mainly cater to the aerospace and defence sectors and its customers mainly come from the strategic sector such as space, defence, transport and ades and is recognised as a qualified vendor by defence and defence research establishments viz. Indian Army, Indian Airforce, Indian Navy, Indian Coastguard,  ISRO, DRDO and BARC.  The company is also have long standing relationship with Goa Shipyard Limited, The Boeing Company, Larsen & Toubro Limited (L&T), etc. The government's improved focus and increased budgetary allocation to the end user sectors remain positives for the company. 

• Healthy financial risk profile with steady improvement :

  The company's financial profile continues to be comfortable as reflected by the steadily improving topline, stable profitability margins, strong capital structure, comfortable debt coverage ratios and adequate liquidity position. Topline has grown with a CAGR of over 18%, over the past five years. The company’s total operating income improved to Rs.77.70 Crs in FY21 against Rs.51.92 Crs in FY20.  EBITDA and PAT improved to Rs.22.18 Cr and Rs.15.38 Crs respectively in FY21 against Rs.15.38 Crs and Rs.10.76 Crs in FY20. EBITDA and PAT margins were strong at 29% and 20% in FY21.  Tangible networth improved to Rs.66.24 Crs (PY : Rs.51.67 Crs) and with a zero debt position, as on 31 Mar 2021. Gearing was nil and TOL/TNW remained unchanged at 0.3 times as on 31 Mar 2021, as compared to previous year. Debt protection metrics were comfortable  with ISCR of 14.65 times and DSCR of 13.13 times, during FY21. As per the unaudited results for Q1FY22, the company achieved revenue of Rs.13.72 Crs (PY : Rs.11.13 Crs)  with EBITDA and PAT of Rs.4.99 Crs and Rs.3.07 Crs respectively.

• Adequate order book position :

  Avantel has been receiving repeat orders from the existing clientele on the back of  its established track record and healthy relationship.  Currently, the company has an unexecuted order book of  around Rs.150 Crs as on 30 Jun 2021 and additional confirmed orders worth ~Rs.125 Crs from Indian Railways which are expected during the current fiscal. This adequate order book position ensures short to medium term revenue visibility for the company.

• Working capital intensive operations :

  Company's operations are working capital intensive due to relatively elongated conversion cycle. However,  the inventory holding period improved to 28 days and receivable holding period improved to 100 days as on 31 Mar 2021 against 45 days and 172 days respectively, a year ago. As such, conversion cycle improved to 115 days in FY21 against 197 days in FY20. Nonetheless, the company primarily relies on non-fund based facilities for securing orders, and is judicious in utilisation of its fund-based working capital facilities. The company assesses long term liquidity requirements on a periodical basis and manages them through internal accruals and committed credit lines. 

• Moderate scale of operations :
  Though the company faces limited competition as it operates in a niche segment, the low scale of operations limits its bidding capacity to some extent. Nonetheless, there is significant improvement in the topline over the years, as marked by the CAGR of over 18% for the period 2017-21.

• Segment and customer concentration risk :

  The company primarily supplies to defence and defence research organisations coming under Ministry of Defence which has over 80% of revenue share exposing the company to segment and customer  concentration risks. However, the orders in pipeline from the railways are expected to diversify the revenue stream going forward. Furthermore, the company's primary revenue stream was SATCOMs with a contribution of ~ 70% in FY21. The associated risks are mitigated to a certain degree with the company's foray into newer areas like HF and radar subsystems.

• Exposure to risks inherent in a tender-based business and :

  Avantel's business is tender based and hence the company remains susceptible to the inherent risk associated with such business. However, the established track record of the company and being the preferred supplier to the reputed clientele for the last many years, help to get repeat orders as seen from the steady improvement in revenue and profitability over the years and the growing order book position. The position is likely to be maintained in the short to medium term.

For arriving at its ratings, Brickwork Ratings has applied its rating methodology as detailed in the Rating criteria below (hyperlinks provided at the end of this rationale). The company does not have any subsidiaries.

Positive :

• Revenue growth of 30-40% y-o-y with strong margins, on a sustained basis.
• Steady growth in the order book position along with new order accretion and efficient order execution and timely realisation of debtors
• Improved diversification of the product profile 

Negative :

• Any reduction in the topline and significant decline in margins
• Significant deterioration in the capital structure on account of significant debt-funded capex and/or a stretch in the working capital cycle

Liquidity position is adequate marked by the steady internal cash accruals backed by strong margins and unutilised bank lines. Net cash accrual remains moderate against no term debt obligation over the medium term. Cash and cash equivalents were ~Rs.43 Crs and current ratio was 3.89 times as on 31 Mar 2021. Historically, the company maintains sufficient balance in cash and cash equivalents and working capital facilities to meet the short term liquidity requirements.

The terms of sanction include standard covenants normally stipulated for such facilities.

Not applicable

Nil

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

• General Criteria
• Manufacturing Companies
• Approach to Financial Ratios
• Short Term Debt