Avantel Ltd.

Brickwork Ratings reaffirms the ratings for the Bank Loan Facilities of Rs. 57.40 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 continues to be the major revenue contributor. 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. BWR notes the company's growth plans which includes the set-up of a new corporate office and a new manufacturing unit by FY 24 which would help further strengthen the market position of the company.

• Experienced and qualified management :

  The founder and present Chairman & MD, 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.

• Healthy financial risk profile with steady improvement :

  The company has recorded a TOI of Rs.104.94 Crs during FY 22 (PY:Rs.77.70 Crs). The EBITDA has increased to Rs.27.76 Crs during FY 22 as against Rs.22.18 Crs during FY 21. Similarly PAT has improved to Rs.19.18 Crs during FY 22 as against Rs.15.33 Crs recorded during FY 21.The EBITDA margins have remained stable in the range of 26-30% YoY with an EBITDA margin of ~26% in FY22 and recovering to ~29% during Q1FY23. The TNW of the company has improved to Rs.83.72 Crs as on 31 March 2022 (PY:Rs.66.24 Crs) due to retention of profits. Gearing levels have remained comfortable though it increased to 0.15 times as on 31 March 2022 due to increased availment of working capital limits. TOL/TNW has remained static at 0.32 times as on 31 March 2022 when compared to 0.31 times as on 31 March 2021. Debt protection although strong with ISCR and DSCR at 18.37 times and 16.32 times respectively, are as such irrelevant due to negligible levels of debt. As per Q1 FY 23 unaudited financials, the company had recorded a TOI of Rs.26.99 Crs, EBITDA of Rs.7.89 Crs and PAT of Rs.5.03 Crs.

• 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. The company has an unexecuted order book of ~Rs.230 Cr to be executed over the next two years inclusive of a major order worth ~ Rs.125 Crs, which ensures short to medium term revenue visibility.

• Reputed clientele of strategic importance and positive industry outlook :

  The company mainly operates in Aerospace & Defence sector and holds Defence Industrial Licenses issued by government and its customers mainly come from the strategic sector such as space, defence, transport and telecommunications. Government's improved focus and increased budgetary allocation to the end user sectors are positives for the company. The company maintains healthy and long term relationships of over two decades with a reputed clientele that includes Indian Army, Indian Railways, Indian Airforce, Indian Navy, ISRO, DRDO, Goa Shipyard Limited, The Boeing Company, Larsen & Toubro Limited (L&T), etc

• Moderate scale of operations with exposure to risks inherent in a tender-based business :

  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 a significant improvement in the topline over the years, as marked by the CAGR of over 34% for the period 2020-22. Avantel's business is also 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. 

• 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. Furthermore, the company's primary revenue stream continues to be SATCOMs which contributes to almost 100% of the revenue and the revenue concentration is expected to continue over the short term.  However, the orders from the railways are expected to diversify the revenue stream going forward. The associated risks are also mitigated to a certain degree with the company's foray into newer areas like HF and radar subsystems.

• Working capital intensive operations :

  The company's operations continue to be working capital intensive due to relatively high inventory and receivable holding periods. The company's conversion cycle has increased to 133 days as on 31 March 2022 mainly on account of the increased inventory holding period. The company assesses long-term liquidity requirements on a periodical basis and manages them through internal accruals and committed credit lines. 

Although the company had incorporated a wholly owned subsidiary during September 2021, the performance of the group remains skewed towards Avantel Ltd, with the company accounting for >95% of the consolidated income and hence 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). 

The ability of the company to significantly increase the scale of operations while improving profitability and diversifying the concentration risks, ensuring timely completion of orders on hand and securing fresh orders, maintaining steady cash inflows, efficiently managing its debtors thereby its working capital requirements and strengthening its overall credit profile would be the key rating sensitivities. The company has outstanding contingent liabilities amounting to ~Rs.25 Crs comprising of bank Guarantees as on 31 March 2022. Any crystallization of the above contingent liabilities or prolonged recovery of receivables and the impact of the same on the financial risk profile of the company would be the key rating sensitivity factors.

Upward:

• Revenue growth with strong margins YoY, on a sustained basis.
• Steady growth in the order book position along with new order accretion and efficient order execution and timely realization of debtors
• Improved diversification of the product profile 

Downward :

• 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

The company's liquidity remains adequate as reflected in EBITDA of Rs.27.76 Crs for FY 22 which was sufficient to cover the interest and finance charges of Rs.1.51 Crs during the same period. The average utilizations of the working capital facilities has increased to ~90-95% during the last six months on account of the increased scale of operations and the company's cash and cash equivalents position reduced from Rs.42.97 Crs as on 31 March 2021 to Rs.0.82 Crs as on 31 March 2022 primarily due to the liquidation of unencumbered fixed deposits for working capital requirements and growth plans of the group. However, the absence of long-term debt and adequate net cash accruals provide ample liquidity support. The current ratio was stable at 3.11 times as on 31 March 2022.

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