Rationale

 The rating upgrade and change in the outlook to Positive factors in the improvement in the credit profile of the parent, Shirdi Sai Electricals Limited (SSEL; rated [ICRA]BB+ (Positive)/[ICRA]A4+), and the growth in the scale and the margins of Indotech Transformers Limited (ITL). In 9M FY2022, ITL's revenues rose 66% YoY to Rs. 180.78 crore from Rs. 109.19 crore in 9M FY2021. Given the current order book of Rs. 239.4 crore as on December 31, 2021, the company's revenues are expected to grow at a healthy rate in FY2022 and FY2023. The operating margin improved to 5.6% in FY2021 and 5.1% in 9M FY2022 (against 1.0% in FY2020), led by the company's increased focus on higher load capacity power transformers where the realisations and margins are better as well as the improvement in the operating efficiencies. Further, the ratings derive comfort from the extensive experience of the promoter, namely Shirdi Sai Electricals Limited (SSEL), and ITL's proven operational track record in the transformer industry spanning nearly three decades. The ratings positively factor in SSEL's established position and its significant scale of operations in the transformer industry, which is expected to provide operational synergies to ITL and lend economies of scale. ICRA also takes note of the company's comfortable capital structure and debt protection metrics. However, the ratings are constrained by its linkages with its parent company (SSEL), whose credit profile is relatively weak (rated at [ICRA]BB+ (Positive)/A4+) due to a stretched liquidity position on account of high receivables. Further, the ratings take into consideration the company's higher customer concentration risk, where the top-10 customers contributed 64% and 63% to the total revenues in FY2021 and 9M FY2022, respectively. Nonetheless, the counterparty risk remains low owing to its reputed clientele. Further, ITL operates in the transformer industry, which is highly fragmented and competitive, resulting in pricing pressures to some extent. The ratings also consider the high working capital intensity of operations and the susceptibility of profitability to the volatility in raw material prices as 30-40% of the order mix does not have a price variation clause.