Rationale
The reaffirmation of
ratings takes into account Nelcast Limited's (Nelcast) strong operational
profile as one of the larger players in the Indian ductile iron/grey castings
market and its established clientele comprising major Original Equipment
Manufacturers (OEMs) in India and reputed tier-I auto component suppliers in
the overseas. The company has a favourable domestic–export mix and its revenues
are reasonably diversified across various segments and clients. Further,
Nelcast enjoys a healthy wallet share with its customers for its key products
and has a history of periodic repeat orders. The company reported an operating
income of Rs. 933.8 crore in FY2022, its highest in the last five years, aided
by improved demand in the domestic commercial vehicle (CV) segment, market
share improvement with specific customers and higher penetration in the export
market. However, its operating margins moderated to 7.0% in FY2022 from 7.9% in
FY2021 impacted by inadequate pass-through of the increase in commodity prices
and other costs. The company incurred significant debt-funded capex in the last
few years and its business is working capital intensive, resulting in
relatively high borrowings for the scale of operations. As on March 31, 2022,
Nelcast's net debt stood at Rs. 259.0 crore. The relatively high debt levels
coupled with moderate profit margins have resulted in moderate debt metrics.
Nelcast's net debt/OPBDITA stood at 3.9x for FY2022, while its NCA/net debt was
15.2% for the same period. The company's capital structure remains comfortable.
Going forward, Nelcast's revenues are expected to improve with recovery in the
domestic CV demand and higher penetration in the export segment. Its margins
are expected to benefit from improved operating leverage, cost optimisation
initiatives and stabilisation of its Pedapariya plant (Andhra Pradesh).
Further, the debt metrics are likely to improve, supported by improvement in
accruals as volumes recover and the absence of any debt-funded capex plans over
the medium term. On the liquidity front, ICRA expects Nelcast to meet its
medium-term commitments through internal sources of cash and yet be left with
cash surplus
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