Indo Shell Mould Ltd

Brickwork Ratings reaffirms the ratings for the enhanced Bank Loan Facilities of Rs. 323.84 Cr of Indo Shell Mould Ltd

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (31 Mar 2020)	Present
Fund Based	317.00	323.84	Long Term	BWR BBB- /Stable Upgraded	BWR BBB - /Stable Reaffirmation
	(10.00)	(30.00)	Short Term	BWR A3 Upgraded	BWR A3 Reaffirmation
	(20.00)	(20.00)
Non Fund Based	(15.00)	(15.00)	Short Term	BWR A3 Upgraded	BWR A3 Reaffirmation
	(5.00)	(5.00)
	(5.00)	(5.00)
	(1.00)	(1.00)
Grand Total	317.00	323.84	(Rupees Three Hundred Twenty Three Crores and Eighty Four 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

RATING ACTION / OUTLOOK

The ratings of Indo Shell Mould Limited (ISML or the company) continue to factor in the technically qualified and experienced management, long and proven track record, reputed clientele with established relationships and healthy order book position. However, the ratings remain constrained by the moderate scale of operations, low profitability margins due to intense competition and volatility in raw material prices, working capital intensive operations, leveraged capital structure, segment and customer concentration risk and the direct exposure to the risks associated with the Covid-19 and general slump in the automobile industry.

Brickwork Ratings (BWR) notes the impact of Covid-19 on the business operations of the company. Barring the disruptions during the initial lockdown days, the company’s operations were relatively less affected by the pandemic. However, the muted demand from the automobile industry caused by a weak macroeconomic environment due to Covid-19, led to a moderation in the financial risk profile of the company. On account of the established brand and the long term business relationship, the risk associated with wipe out of existing customers due to halt in operations was eliminated. The same is validated by a robust order book position aggregating to Rs.803.50 Cr at the close of the last fiscal. BWR notes that the company has availed benefits under the RBI’s Covid-19 relief package, involving deferment of interest and emergency credit lines, which has aided the business and eased the liquidity of the company to some extent, amidst the pandemic-induced disruptions.

The Stable outlook indicates a low likelihood of rating change over the medium term and reflects BWR’s belief that ISML will continue to benefit from its association with its top reputed clientele viz. Honda Motorcycles & Scooters India Pvt Ltd, Hero Motocorp Ltd, TVS Motors, etc. The outlook may be revised to Positive in case the capacity utilisation improves notably with sustained order inflows leading to better than anticipated revenues and profits with improvement in cash accruals and strengthening of financial risk profile. The outlook may be revised to Negative in case of prolonged weakness in demand sentiments leading to lower than expected capacity utilisation and muted growth in revenue.

KEY RATING DRIVERS

Credit Strengths:

• Established track record and qualified management :

  The company has been in this industry since 1973 clocking around a five-decade long track record. Mr. K Jagadeesan, the Chairman cum Managing Director of the Company, is a technocrat with around six decades of experience in the field of foundry and shell moulding technology. Other directors are also technically qualified and have long experience in the domain.

• In-house manufacturing facilities with stable capacity utilisation and high level of product quality :

  ISML’s manufacturing plants are designed and set-up with precise engineering capabilities and specialized technical functionalities to adhere to the quality norms of the buyers. ISML benefits from the in-house R&D, Quality Assurance division, Computer Aided Design (CAD) and Computer Assisted Manufacturing (CAM) facilities. Tool making, heat treatment, painting, machining and finishing and core production for high quality products can be done at economical rates. All the units are certified with TS 16949 – Quality Systems by TUV Germany. The foundry and machine shops are certified with ISO 14001 – EMS. The calibration lab is certified with NABL ISO/IEC 17025. Capacity utilization at the plants has been steadily ramped up over the years.

• Diversified product profile, dominant market share and reputed clientele :

  ISML is a manufacturer of over 200 high precision and machined components catering to automobile, auto component and hydraulic industries. The company is reportedly the largest Shell Moulding Precision Casting Manufacturer in India, holding a market share of ~60%. Also, ISML holds the highest market share in the manufacturing of hydraulic valve bodies and commercial vehicle brake compressor cylinders in India. The company is a key supplier to the industry majors viz. Honda, Hero, TVS, WABCO, Piaggio, etc for its Indian as well as global requirements.

• Healthy order book :

  The Company presently has an order book of ~Rs 804 Crs as on 31 Mar 2021, for execution during next ~1-2 years. Apart from this assured order book, the company expects to receive orders from its new customers. This ensures medium term revenue visibility. ISML has confirmed that, barring the postponement, no order has been cancelled because of the Covid-19 situation.

• Moderate Financial Risk profile :

  The company’s financial risk profile continues to remain moderate reflected by moderate revenue, modest tangible networth, adequate debt protection metrics and high gearing level. During FY20, the total operating income has declined to Rs.303.02 Cr from the FY19 level of Rs.365.98 Cr, mainly due to the Covid-impact on the automobile industry in the last quarter of FY20. In line with the revenue decline, EBITDA and PAT levels have declined y-o-y in FY20. EBITDA was Rs.47.06 Cr in FY20 against Rs.59.69 Cr in FY19. EBITDA margin continues to be adequate at ~16% in FY20. Despite the adequate EBITDA margins, the PBT was Rs.0.60 Cr in FY20, recording a poor net profit margin of 0.20%, mainly because of the high interest cost. The company has shifted to IND AS effective from FY17. The company had done a fair valuation of its assets and the networth had increased by Rs.128.92 Cr due to this. BWR has adjusted this increased portion from the TNW for assessment. Adjusted TNW has marginally improved to Rs.99.74 Cr as on 31 Mar 2020 as against Rs.88.69 Cr as on 31 Mar 2019. The capital structure of the company is leveraged as reflected by the Total debt/Adj TNW ratio of 3.32 times (PY : 3.55 times) and TOL/Adj TNW of 5.12 times (PY : 5.84 times) as on 31 Mar 2020. Debt protection metrics were adequate with ISCR of 1.31 times and DSCR of 1.09 times as at 31 Mar 2020. On a provisional basis, the company has achieved net revenue of Rs.202.20 Cr during FY21.

Credit Risks:

• Moderate scale of operations with low profitability :

  The scale of operations of the company continues to be moderate recording marginal growth over the years. However, the operational disruptions induced by the prevailing pandemic situation coupled with the weak industry demand, has led to sizable reduction in the sales turnover, during FY21. The total capacity utilisation was low at around 47% in FY20 which further declined to ~31% in FY21, under Covid-impact. Net profit margins of the company continue to be as low as 0.20% for FY20. The margins are thin mainly due to higher interest costs.

• Working Capital Intensive Operations :

  The company’s operations are working capital intensive as the company maintains inventory of over 4 months and has a receivables of about 3 months, resulting in elongated working capital cycle. This in turn increases the company’s dependence on working capital facilities to meet its funding requirements. However the elongated inventory and receivables holding period are partially offset by the longer payment terms of around 3-4 months the company enjoys with suppliers, due to the longstanding relationships. Hence, the conversion cycle is maintained at an adequate level.

• Susceptibility of earnings to the fluctuation in raw material costs and competitive pressures :

  ISML’s profit margins are susceptible to fluctuations in the prices of raw materials, primarily pig iron and scrap steel. The company operates in a fragmented domestic foundry industry, characterised by intense competition resulting in pricing pressure. This limits the company's ability to pass on the rise in raw material costs fully to the customers, impacting profits.

• High level of segment and customer concentration :

  ISML derives approximately 80% of its total revenues from the domestic automobile segment, of which ~60% is contributed by the two-wheeler industry. This exposes the company to any downturn in this industry segment. Moreover, during FY21, the top 3 customers viz. Honda, Hero and TVS, contributed over 50% of the company’s total revenue which reflects the high customer concentration. However, the reputation of the top clientele and the long term relationship mitigate these risks to an extent. Also, the company’s improved focus towards hydraulics business segment is expected to diversify the customer base going forward.

• Impact of Covid-19 and the general slump in the automobile industry :

  The demand outlook for the automobile industry remains subdued, led by a weak macroeconomic environment caused by the pandemic and significant price hikes on account of transition to BS-VI emission norms. Further, several automobile majors in Tamil nadu, where the company operates, shut down their plants due to the renewed restrictions on account of the prevailing second wave of the pandemic. Though there are signs of gradual recovery, BWR expects that the Covid-impact on the auto/auto ancillaries sector will remain for some more time, due to the delayed or deferred buying decisions. The company’s order book comprises orders to the tune of ~80% from the auto/auto ancillaries industry. Hence the company is directly exposed to the risks arising out of the Covid-19 outbreak and general slump in the automobile industry. Accordingly, the same could weaken the company’s performance and debt coverage indicators over the near-term.

ANALYTICAL APPROACH - Standalone

The Company has one wholly owned subsidiary - J Technologies India Limited and a deemed to be subsidiary - Indoshell Automotive Systems India Pvt. Ltd, both with a stake of 100%. Indoshell Precision Technologies LLC (USA) a joint venture with 49% stake. However, currently, apart from Indo Shell Automotive Systems India Pvt. Limited , the operations of the others are not meaningful. While assigning the ratings, BWR has adopted a standalone approach and applied its rating methodology as detailed in the Rating Criteria (hyperlinks provided at the end of the rationale).

RATING SENSITIVITIES

Upward

• Healthy growth in revenues, profitability, networth and improvement in overall gearing, with improvement in competitive position on a sustained basis
• Diversity of its revenue sources.

Downward

• Deterioration in key credit metrics owing to sustained pressure on revenue and profitability, a sharp rise in inventory levels and receivables or fresh capex. 
• Specific credit metrics which may result in a downward rating action include further deterioration in gearing, DSCR below unity and ISCR below 1.25 times on a sustained basis. 

LIQUIDITY INDICATORS - Stretched

Liquidity is stretched as marked by almost full utilisation of the working capital facilities, as the working capital cycle of the company remains elongated. Cash Equivalents level was ~Rs.0.09 Cr (excl margin money deposits of Rs.5.13 Cr) as on 31 Mar 2021(P). Current ratio was 1.74 times and Net cash accruals to total debt was 0.03 times as on 31 Mar 2021(P). The company’s plans to monetise the non-core assets and proposed loan take over are expected to strengthen the liquidity position during FY22. Projected cash accruals are expected to be sufficient to meet the repayment obligations and historically any shortfall is met through promoter funding. The company is expected to continue the maintenance  of DSRA equivalent to one quarter of debt servicing obligation of both principal and interest, which further strengthens the debt servicing profile. [P-->Provisional]

ABOUT THE ENTITY

Indo Shell Mould Limited (ISML) was set up as a partnership firm in Coimbatore during 1973. ISML started with manufacturing of casting components for two-wheelers and gradually scaled up to cater to various segments of the automobile and hydraulics industry. ISML was subsequently converted into a public limited company in 1995. Company’s main manufacturing units are located at Coimbatore, Tamilnadu & in the SEZ unit at Perundurai, Erode. ISML is engaged in foundry business, manufacturing ferrous and non-ferrous castings for automobile (majorly two-wheeler engines) and hydraulics and home appliances catering to both domestic and international markets. The company is a manufacturer of over 200 high precision and machined components catering to automobile, auto component and hydraulic industry in India and abroad. ISML is a key supplier to top global MNCs including Honda, Hero, Eaton, WABCO, HUSCO, Borg Warner for its Indian as well as global requirements.

Mr. K.Jagadeesan is the Chairman cum Managing Director of the Company. Mr. Balaji Jagadeesan (Managing Director) and Rajesh Jagadeesan Reddy (Joint Managing Director) are the other promoter directors.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 19-20 (Audited)	FY 18-19 (Audited)
Operating Revenue	Rs.Crs.	303.02	365.98
EBITDA	Rs.Crs.	47.06	59.69
PAT	Rs.Crs.	10.64	0.40
Tangible Net Worth	Rs.Crs.	228.66	217.61
Total Debt/Tangible Net Worth	Times	1.45	1.45
Current Ratio	Times	1.89	1.90

KEY COVENANTS OF THE FACILITY RATED

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

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

Not applicable

ANY OTHER INFORMATION

Nil

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	323.84	BWR BBB-/Stable (Reaffirmation)	31Mar2020	BWR BBB-/Stable (Upgraded)	NA	NA	NA	NA
FB SubLimit	ST	(30.00)	BWR A3 (Reaffirmation)	31Mar2020	BWR A3 (Upgraded)	NA	NA	NA	NA
FB SubLimit	ST	(20.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
NFB SubLimit	ST	(15.00)	BWR A3 (Reaffirmation)	31Mar2020	BWR A3 (Upgraded)	NA	NA	NA	NA
NFB SubLimit	ST	(5.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
NFB SubLimit	ST	(5.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
NFB SubLimit	ST	(1.00)	BWR A3 (Reaffirmation)	NA	NA	NA	NA	NA	NA
Grand Total		323.84	(Rupees Three Hundred Twenty Three Crores and Eighty Four 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
• Manufacturing Companies
• Approach to Financial Ratios
• Short Term Debt

Analytical Contacts
Naveen S Manager - Ratings Board : +91 80 4040 9940 naveen.s@brickworkratings.com	Vidya Shankar Principal Director - Ratings Board : +91 80 4040 9940 vidyashankar@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	Hero Fincorp Limited	Working Capital Demand Loan - Out-standing	30.00	_	30.00
	Sub-Limit (Sales Bill Discounting) - Sanctioned		(20.00)
2	Hero Fincorp Limited	Term Loan - Out-standing	80.00	_	80.00
3	Hero Fincorp Limited	Emergency Credit Line Guarantee Scheme (ECLGS) - Out-standing	25.00	_	25.00
4	IDBI Bank	Cash Credit - Sanctioned	32.00	_	32.00
	Sub-Limit (Bank Guarantee) - Sanctioned		(5.00)
	Sub-Limit (EPC/PCFC/FBP/EBR/FBN/FBD) - Sanctioned		(30.00)
	Sub-Limit (ILC/FLC (normal capex)) - Sanctioned		(5.00)
	Sub-Limit (LER) - Sanctioned		(1.00)
	Sub-Limit (Letter of Credit) - Sanctioned		(15.00)
5	IDBI Bank	Emergency Credit Line Guarantee Scheme (ECLGS) - Sanctioned	5.40	_	5.40
6	PHL Finvest Private Limited	Term Loan - Out-standing	151.44	_	151.44
Total			323.84	0.00	323.84
TOTAL (Rupees Three Hundred Twenty Three Crores and Eighty Four lakhs Only)