Rationale

 The rating action considers the improvement in the credit profile of Virtuoso Optoelectronics Limited (VOEPL) in FY2024 and ICRA’s expectation of a stable performance in the near-to-medium term. In FY2024, VOEPL’s credit profile was supported by a strong growth in revenues (up 58% YoY) and earnings, primarily driven by a healthy demand in the air conditioning (AC) segment. VOEPL ventured into water dispenser and commercial refrigeration product segments and is also adding deep freezers, semi-automatic washing machines and components for toy manufacturing to its product portfolio over the near-tomedium term, thus supporting business diversity. Given the favourable demand outlook for its products, VOEPL plans to make capital expenditure of Rs. 110-120 crore over the next two years, following a spend of over Rs. 60 crore in FY2024. The rating action also considers strengthening of the net worth base, with equity infusion of Rs. 105.8 crore in FY2024, and Rs. 60 crore expected to be infused (last tranche of warrants) in FY2025. The same is likely to be used for growth capital, as a part of the company’s growth plans and is expected to keep the borrowing levels range bound. The rating also considers the experienced management team with requisite professional set-up, coupled with a reputed client base, resulting in repeat business. In addition, over the years, VOEPL has backward integrated into manufacturing key AC components, which supported its growth and profitability. The rating is, however, constrained by VOEPL’s exposure to the inherent seasonality in the refrigeration and air conditioning (RAC) business, leading to volatility in revenues and profitability. Given the seasonality in the RAC industry, the company requires sustained working capital loans for its operations to manufacture and distribute its products. It also needs to continually invest in building capacities and developing new products to meet its customer demands and sustain its competitive advantage. Furthermore, VOEPL, like other electronics manufacturers, faces high dependence on imported raw materials/ components and is susceptible to any significant supply chain disruption. The rating also considers the company’s high product and customer concentration, with a single customer / product accounting for more than 75% of its total revenues in FY2024. However, the product and customer concentration are expected to reduce, with the company’s initiatives towards manufacturing new products and addition of customers. The rating also factors in VOEPL’s moderate coverage metrics over the years, which are expected to remain range-bound in the near to medium term, given its regular debt-funded capex requirement in business and high working capital requirements. Judicious funding of the capex and efficient working capital management, to keep the liquidity requirements at manageable levels, will remain key rating sensitivities on an ongoing basis.