Azad Engineering Pvt. Ltd.

Brickwork Ratings revises the ratings for the Bank Loan Facilities of Rs. 130.36 Crs. of Azad Engineering Pvt. Ltd.

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (22 Sep 2020)	Present
Fund Based	50.69	82.10	Long Term	BWR BBB- /Stable Assignment	BWR BBB /Stable Upgrade
	25.00	40.00	Short Term	BWR A3 Assignment	BWR A3 + Upgrade
Non Fund Based	5.13	8.26	Short Term	BWR A3 Assignment	BWR A3 + Upgrade
Grand Total	80.82	130.36	(Rupees One Hundred Thirty Crores and Thirty Six lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure
Note: A rating advisory for delay in rating review was published on 03 November 2021. Bank loan facilities of the Company have enhanced from an earlier rated amount of Rs. 80.82 Cr to Rs. 130.36 Cr. Below mentioned are the details: a. ICICI Bank: The bank facilities from ICICI Bank of Rs. 27.38 Cr as per last rated amount was taken over by Union Bank of India. ICICI bank has sanctioned fresh bank facilities of Rs. 9.00 Cr with packing credit of Rs. 5.00 Cr and derivative limit of Rs. 4.00 Cr. b. Union Bank of India: Along with loans taken over from ICICI Bank, the Company availed a fresh term loan of Rs. 15.00 Cr from Union Bank of India. The bank facilities from Union Bank of India stood at Rs. 41.03 Cr at present (term loan outstanding of Rs. 23.35 Cr and sanctioned packing credit, BG and derivative aggregating to Rs. 17.68 Cr). Additionally, the Company is proposing an amount of Rs. 42.50 Cr in the form of term loan. c. Tata Capital: Tata Capital has sanctioned a fresh term loan of Rs. 10.62 Cr in addition to the existing term loan of outstanding Rs. 4.29 Cr. An amount of Rs. 7.57 Cr has been disbursed as of now. Kotak Bank: Fund based working capital has enhanced from Rs. 8.00 Cr to Rs. 20.00 Cr

RATING ACTION / OUTLOOK

The rating upgrade reflects the significant increase in the order book position of the Company and expected improvement in the revenues in FY22. The revenue growth muted in the last three financial years and are expected to improve in FY22 backed by improved outstanding orders. The orders are the long term contracts with reputed clientele. The ratings take into account the established business of the Company of supplying precision machining components & parts to Power Generation and Aerospace Original Equipment Manufacturers, and its engineering capabilities with regular capacity enhancement in the last three financial years. Further, in view of the sharp increase in outstanding order book position, the Company has undertaken capacity expansion with proposed capital expenditure of Rs. 92.00 Cr in FY22. The capital expenditure of Rs. 92.00 Cr (towards machinery of Rs. 60.00 Cr which is to be installed in the existing unit and land & infrastructure of Rs. 32.00 Cr to establish an additional unit) is to be funded from bank loans, internal accruals and debentures. The installation of machinery would be completed and operationalized in the month of April 2022. The ability of the Company to timely operationalize the machines and derive additional revenues and profitability from the same, remains to be monitored.

Total operating income of the Company remained at ~Rs. 121-122 Cr in the last three financial years. Business operations were impacted due to Covid 19 induced restrictions resulting in decline in revenues in Q1FY21 by ~77% against the revenues in Q1FY19 and Q1FY20, which restricted the revenue growth in FY21. The operating profit margins were 34.90% in FY19 and 33.92% in FY20. It has declined in FY21 due to Covid 19 driven additional expenses towards administrative overheads and employee cost. Also, in view of the increase in orders, the Company purchased its key raw material in advance during Q4FY21 to mitigate the anticipated pricing risk. However, the operating profit margin remained healthy at 24.76% in FY21. The rating continue to factors in the Company's adequate financial risk profile marked by comfortable net worth, gearing and debt coverage indicators. Further, with ongoing debt funded capital expenditure, the gearing and debt coverage indicators remain at comfortable levels. 

The ratings remain constrained by the moderate scale of operations of the Company, stretched working capital cycle and customer concentration risks with more than 70% of its revenue being derived from top two customers. The rating is further constrained by the Company's high revenue concentration as more than 90% of the revenues are from the Energy segment. The ratings also factor in the susceptibility to risks arising from volatile input prices and exposure to exchange fluctuation risks on account of high exports. 

The Company has closed two rounds of funding from DMI Finance Pvt Ltd in FY22 and issued debentures to the tune of Rs. 60.00 Cr (Tranche I of Rs 36.00 Cr in June 2021 and Tranche II of Rs. 24.00 Cr in October 2021) with a coupon rate of 10% for CCD (Compulsory Convertible Debentures) of Rs. 18.00 Cr and 14% for OCD (Optional Convertible Debentures) of Rs. 42.00 Cr. BWR notes the possible equity dilution upon execution of CCD of Rs. 18.00 Cr, which remains a credit concern.

The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. BWR believes Azad Engineering Private Limited’s business risk profile will continue to benefit from its established relationship with reputed OEMs, along with an increase in order book to improve on the revenues and profits for FY22. The same is likely to help the Company maintain a healthy financial risk profile. The outlook may be revised to Positive if there is a sustained increase in scale of operations and order book position results in an improved financial risk profile, gearing and debt protection metrics. The rating outlook may be revised to 'Negative' if the revenues and profits are lower than anticipated, there is deterioration in liquidity or any stretch in the working capital cycle weakening the financial risk profile. 

KEY RATING DRIVERS

Credit Strengths:

• Experienced promoters and management team :

  The promoter, Mr. Rakesh Chopdar has more than two decades of experience in the precision engineering industry. Over the years, the promoters have built strong relationships with customers. Strong track record, timely execution of orders, healthy relationships with customers and requisite quality certifications enable the company to cater to reputed original equipment manufacturers and government departments seamlessly.

• Established track record and developed infrastructure :

  The company has an established facilities at Hyderabad. The company has been adding capacity since FY18. The present capacity allows the company to manufacture ~2.4 lac pieces per annum. At present the infrastructure includes Forge Shop, Heat Treatment Shop, Hi-Tech CNC Machines, State of the art Laboratory, State of the art Inspection Facility, Heavy Machining Shop, Manufacturing software etc. Moreover, the company has obtained various international certifications namely ISO 9001:2015 (QMS), AS9100 D, ISO 14001: 2015 (EMS), BS 45001: 2018 (OHSAS) and ISO 27001: 2013 (ISMS) for its facilities. The company has been a qualified Other Equipment Manufacturer for many of its clients since inception.

• Average financial risk profile :

  Revenues stood at the same level with a total operating income of Rs. 122.09 Cr in FY20 and Rs .122.03 Cr in FY21. The EBITDA, however, decreased from Rs. 41.41 Cr in FY20 to Rs. 30.21 Cr in FY21 on account of increase in operating expenses. Thereby, the PAT has also decreased from Rs. 21.10 Cr in FY20 to Rs. 13.28 Cr in FY21. The Company has reported revenue of ~Rs. 117 Cr in 8MFY22 and an outstanding orders of ~Rs. 168 Cr to be completed in FY22, provides a healthy revenue growth visibility for FY22. Expected improvement in revenue scale will also result in improvement in overall profitability. Further, with a healthy net worth, the gearing stood at 0.82 times as on 31 March 2021. Debt protection metrics were comfortable with ISCR at 6.18 times and DSCR at 1.35 times as on 31 March 2021. Current ratio is moderate at 1.14 times as of 31 March 2021. There has been constant capacity enhancement in the last three financial years to meet the increasing demand and upgradation, and the Company has been incurring capital expenditure each year, funded through a mix of term loans and internal accruals. However, overall capital structure and coverage indicators have been at adequate level. 

• Established relationships with reputed clientele :

  The Company has running long term contracts with reputed customers in domestic & export markets and the business can be broadly divided into 2 business verticals - Energy and Aerospace. The company is a supplier to established and known companies like GE, Mitsubishi, BHEL, Doosan, Siemens, Toshiba etc in the energy segment and Honeywell, GE aviation, Rafael, HAL etc in the Aerospace segment. The majority of clientele are from Europe, Japan, UAE and USA. 

• Improved order book position :

  As per the order book position as of November 2021, the Company has an outstanding order book position of Rs. 2472.70 comprising Rs. 1110.48 Cr from energy segment and Rs. 1362.22 Cr from aerospace segment. These orders are acquired during FY20 and FY21 business operations and are confirmed orders in hand with long term contracts in place for 5 to 10 years to materialize from which Rs. 168.22 Cr is to be completed in FY22. 

Credit Risks:

• Moderate scale of operations :

  The company’s business risk profile is constrained by its modest scale of operations and turnover. Thus, the company is yet to enjoy any significant economies of scale and bargaining power with the customers.

• Stretched working capital cycle :

  The working capital cycle is elongated on account of higher receivables of more than six months as on 31 Mar 2021 as more than 60-70% are export receivables having credit period of 120 - 150 days and payment from few domestic customers was delayed. The inventory holding has increased to 104 days as on 31 March 2021 due to increase in WIP and raw material inventory. In view of the increased order book position and anticipating the steel prices would increase in future, the Company procured the steel in advance during Q4FY21, which is one of the key raw materials.

• Customer concentration risk :

  With the current order book position, the Company achieved segment diversification with ~45% from the Energy segment and ~55% from the Aerospace segment. However, around 73% of the orders are from GE in the Energy segment and 84% are from single clients in the Aerospace segment. As such, the Company is exposed to significant customer concentration risk. The risk is mitigated to a certain degree keeping in view the past satisfactory relationship and the reputation of such clients which offer low counterparty risks.

• Forex risks :

  The Company’s sales constitute nearly ~60 - 70% of exports which has increase to ~87% in FY21 and imports up to 20%. Though the company has been sanctioned with Forward contract/ derivative limits, the company is yet to avail the limits. The Company has natural hedging in place with foreign currency loans (WC/TLs) being availed from the bank which mitigates the risk to a certain degree.

ANALYTICAL APPROACH - Standalone

BWR has adopted a Standalone approach while arriving at its ratings and applied its rating methodology as detailed in the Rating Criteria (hyperlinks provided at the end of this rationale). Azad had 3 wholly owned subsidiaries(WOS) viz, Swastik Coaters Pvt Ltd., Rouland Chemicals Pvt ltd and Agen Metcast Pvt ltd. The Company has sold out the Agen Metcast Pvt Ltd. in FY22 and other two companies are not operational. For FY21, the operations of the Agen Metcast Pvt Ltd is not significant as ~98% of revenue is from Azad Engineering Pvt Ltd.

RATING SENSITIVITIES

Positive:

• Growth in revenue and EBITDA margin on a sustained basis
• Inflow of orders on a sustained basis with diversification in customer base

Negative:

• Deterioration in key credit metrics on account of weaker than expected business performance and sustained pressure on net margins
• Any material impact on the business profile on the company on account of material unforeseen geopolitical events

LIQUIDITY INDICATORS - Adequate

The company’s liquidity position is adequate marked by sufficient cash accruals as against repayment of term loan obligations and moderate current ratio. Average limit utilization remained high at ~85-95% as confirmed with the working capital lenders. Current ratio stood at 1.14 times as on 31 Mar 2021. Cash and cash equivalents were at Rs 20.31 Cr as on 31 Mar 2021. On account of adequate EBITDA, net cash accruals and, comfortable cash and cash equivalents, the liquidity position is considered adequate. 

ABOUT THE ENTITY

Azad Engineering Pvt. Limited (Azad) was incorporated in Sep 1983 with its registered office at Hyderabad. The Company started its core manufacturing activity in 2008 to manufacture precision machine parts & components for power generation equipment manufacturers. It produces Highly Engineered Critical Turbine and Aerospace Parts required by Power Generation and Aerospace OEMs.

The company has a total area of 19,884 sqm encompassing its Corporate Office and CNC Machining facility spread across 11,108 sqmt and the forging facility in the balance area of 8,776 smt. It produces ~240000 parts per annum in various sizes and materials.

The company was set up and promoted by Late Mr.Bajaranglal Chopdar. It is a closely held family owned business with Mr. Rakesh Chopdar (Son of Late Mr. Bajaranglal Chopdar) and Mrs. Jyoti Chopdar (wife of Mr. Rakesh Chopdar) as directors.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	122.03	122.09
EBITDA	Rs.Crs.	30.21	41.41
PAT	Rs.Crs.	13.51	21.10
Tangible Net Worth	Rs.Crs.	101.39	90.70
Total Debt/Tangible Net Worth	Times	0.82	0.63
Current Ratio	Times	1.14	1.16

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2021)			2020		2019		2018
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	82.10	BWR BBB/Stable (Upgrade)	22Sep2020	BWR BBB- Stable (Assignment)	NA	NA	NA	NA
Fund Based	ST	40.00	BWR A3+ (Upgrade)	22Sep2020	BWR A3 (Assignment)	NA	NA	NA	NA
Non Fund Based	ST	8.26	BWR A3+ (Upgrade)	22Sep2020	BWR A3 (Assignment)	NA	NA	NA	NA
Grand Total		130.36	(Rupees One Hundred Thirty Crores and Thirty Six lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

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.

Hyperlink/Reference to applicable Criteria

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

Analytical Contacts
Rajaram Gouda Senior Rating Analyst Board : +91 80 4040 9940 rajaram.g@brickworkratings.com	Sankaranarayanan sankaranarayanan@brickworkratings.com
1-860-425-2742 | media@brickworkratings.com

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	ICICI Bank	Term Loan - Out-standing	_	_	0.00
2	ICICI Bank	Bank Guarantee - Sanctioned	_	_	0.00
3	ICICI Bank	Derivative Limit - Sanctioned	_	4.00	4.00
4	ICICI Bank	FBWC (CC/EPC/FBD/FBP) - Sanctioned	_	5.00	5.00
5	Kotak Mahindra Bank	FBWC (CC/EPC/FBD/FBP) - Sanctioned	_	20.00	20.00
6	Kotak Mahindra Bank	Derivative Limit - Sanctioned	_	1.58	1.58
7	Kotak Mahindra Bank	Sales Invoice Financing - Sanctioned	_	_	0.00
8	Kotak Mahindra Bank	Term Loan - Out-standing	4.39	_	4.39
9	Others	Term Loan - Proposed	_	_	0.00
10	Others	PC/PCFC - Proposed	_	_	0.00
11	TATA Capital Financial Services Limited	Term Loan - Out-standing	4.29	_	4.29
12	TATA Capital Financial Services Limited	Term Loan - Out-standing	7.57	_	7.57
13	Union Bank of India	Bank Guarantee - Sanctioned	_	0.50	0.50
14	Union Bank of India	Term Loan - Out-standing	9.09	_	9.09
15	Union Bank of India	Term Loan - Out-standing	14.26	_	14.26
16	Union Bank of India	Term Loan - Proposed	42.50	_	42.50
17	Union Bank of India	Derivative Limit - Sanctioned	_	2.18	2.18
18	Union Bank of India	FBWC (CC/EPC/FBD/FBP) - Sanctioned	_	15.00	15.00
Total			82.10	48.26	130.36
TOTAL (Rupees One Hundred Thirty Crores and Thirty Six lakhs Only)