Rationale

The revision in outlook to Negative factors in ICRA's expectation that the profitability of Asian Granito India Limited (AGL) is likely to remain under pressure in the near to medium term, in the backdrop of sharp increase in gas prices. ICRA notes that the gas price has witnessed significant upsurge in the recent past, especially in the subsidiary, Crystal Ceramic Industries Pvt. Ltd. (CCIPL). Notwithstanding the periodic price revisions undertaken by the company, its inability to fully pass on the same in a timely manner has resulted in a significant moderation in the operating profitability during FY2022 and Q1 FY2023. Nonetheless, given the low leverage, the debt coverage indicators are expected to remain at a comfortable level with interest cover likely to remain over four times going forward. Apart from the susceptibility of its profitability to adverse fluctuations in raw material and fuel prices, the ratings also remain constrained by the working capital-intensive nature of the company's operations. AGL derives a sizeable share of its revenues from the project business, which results in an elongated receivable cycle and higher working capital intensity than other similar-sized peers in the industry. The ratings also factor in the intense industry competition from large as well as mid-sized players in the organised market, and the cyclicality associated with the real estate sector, which remains the key end-user of tiles. ICRA also notes the search and seizure operation carried out by the Income Tax (I-T) department at various locations of the Group during May 2022 and would continue to closely monitor any further developments related to this event and take appropriate rating action, if necessary. The ratings, however, factor in the improvement in the capital structure of AGL, following the fund raising of ~Rs. 225 crore and ~Rs. 440 crore through a rights issue in October 2021 and May 2022 respectively, resulting in a substantial reduction in the overall debt levels supporting the liquidity position of the company. Of the proceeds from the right issue, around Rs. 165 crore has been utilised towards debt reduction, which would improve the capital structure, while the balance is currently parked in fixed deposits with the banks/financial institutions, and will be utilised towards ongoing capacity expansion plans and working capital requirements. Nonetheless, the fund raising is expected to result in a significant moderation in the return indicators until commensurate returns from the capex starts flowing in. The ratings continue to favourably consider the extensive experience of AGL's promoters in the tiles industry and the company's established brand positioning in the domestic market, which, along with its diversified product range and wide distribution network, have resulted in steady sales growth.