Avon Tubetech Private Limited

February 21, 2023

Ratings
Instrument/Facility Amount Ratings Rating Complexity
(Rs. Action Indicator
Crore)
Long Term Bank 35.99 IVR BBB- / Stable Outlook Assigned Simple
Facilities (IVR Triple B Minus with
Stable Outlook)
Short Term Bank 32.00 IVR A3 Assigned Simple
Facilities (IVR A Three)
Total 67.99 (Rupees Sixty-Seven crore and Ninety nine lakh only)
Details of Facilities are in Annexure 1

Detailed Rationale
The ratings assigned to the bank facilities of Avon Tubetech Private Limited draw comfort from
its established track record of promoters, growing scale of operations and moderate
Profitability, capital structure and debt coverage indicators. However, these rating strengths
are partially offset by susceptibility of profitability to volatile raw material prices and foreign
exchange fluctuation risk, Intense Competition and Concentration in revenue and, Lack of
backward integration vis-à-vis volatility in prices.

Key Rating Sensitivities:

Upward Factor:

• Substantial and sustained growth in operating income, operating margin and cash
accrual, and improvement in working capital management strengthen key credit
metrics.
• An improvement in overall credit metrics marked by improvement in liquidity position.
Downward factor:

• Low operating income and cash accrual, a stretch in the working capital cycle driven
by pile-up of inventory or stretched receivables, or sizeable capital expenditure
weakens the financial risk profile, particularly liquidity.
• Withdrawal of Unsecured Loans.
• Significant deterioration in debt metrics.
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List of Key Rating Drivers with Detailed Description

Key Rating Strengths

Established track record of promoters

The promoters Mr. Ashwani Mahajan and Mr Sunil Mahajan have experience of around three
decades each in the precision steel tube industry. The extensive experience of the
management has helped the company in establishing relationship with suppliers and
customers which has helped the company grow its operations. It is expected to continue to
support the business risk profile by facilitating timely procurement of raw materials. The
company supplies its products to reputed customers like Imperial Auto Industries Limited,
TENNECO Auto motive India Private Limited, ZF India Private Limited etc.

Growing scale of operations and Moderate Profitability

The company’s total income registered a growth of 41% in FY22 and reached Rs. 328.35
Crore. EBITDA decreased from Rs. 19.75 Crore in FY21 to Rs. 19.22 Crore in FY22. EBITDA
margin deteriorated by 262 bps from 8.48% in FY21 to 5.85% in FY22 due to high raw material
consumption cost. PBT and PAT have improved from Rs 3.73 crore and Rs 2.64 crore
respectively in FY21 to Rs 4.51 crore and Rs 3.11 crore respectively in FY22. The PAT margin
decreased by 18 bps from 1.13% in FY21 to 0.95% in FY22 in line with decline in EBIDTA
margin. The company passes on fluctuation in raw material cost to its customers on
monthly/quarterly basis depending upon customer to customer. Gross cash accruals improved
from Rs 7.76 crore in FY21 to Rs. 9.84 crore in FY22.

Moderate capital structure and debt coverage indicators

The capital structure remained moderate as on March 31, 2022. Unsecured loans from
promoters and related parties to the tune of Rs.7 crore as on March 31, 2022 have been
considered as quasi-equity as the same are subordinate to bank debt. The long-term debt to
equity and overall gearing stood at 0.44x and 1.14x respectively as on March 31,2022 as
against 0.48x and 1.04x respectively as on March 31,2021. The TOL/TNW stood at 2.45x as
on March 31, 2022. Interest coverage ratio and Total debt to GCA remained moderate at 2.47x
and 8.43x respectively in FY2022.

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Key Rating Weaknesses

Susceptibility of profitability to volatile raw material prices and foreign exchange

fluctuation risk
Avon tube tech produces Steel tubes which are used in various industries such as automobiles
and energy sector. As a raw material, the company uses hot rolled coils of various grades of
steel including mild steel, low and medium carbon steel and alloy steel. The price of steel has
historically exhibited a volatile trend and is primarily driven by the demand supply situation in
the domestic and international markets. This results in risk of price volatility on the inventory
of raw materials as well as finished goods. Furthermore, low pricing power of steel players
such as Avon Tube tech vis-à-vis their customers given the competitive nature of the industry
restricts their ability to pass on the entire increase in costs to their customers on monthly/
quarterly basis. However, Avon Tube tech follows practice of purchasing raw material as on
the date of receipt of order thereby insulating itself from any volatility in the raw material prices
to certain extent. The company is exposed to foreign currency fluctuation risk as it does not
hedge its foreign currency exposure. However, according to the management there is no
unhedged foreign currency exposure as of February 03, 2023 on account of natural hedge as
it is involved in exports as well as imports.

Intense competition and concentration in revenue

Entry barriers in the industry are low on account of limited capital and technology requirement
and also low differentiation in the end product leading to intense competition and limiting the
pricing power resulting in low profitability. The steel products manufacturing business is
characterised by intense competition across the value chain due to low product differentiation,
and consequent intense competition, which limits the pricing flexibility of the players, including
Avon Tubetech. Intense competition, in a highly fragmented industry, however, is expected to
keep scale of operations moderate over the medium term. Further, entire revenues is derived
from sale of electric resistance welding (ERW) and other category of precision tubes in
Haryana, Maharashtra and Rajasthan leading to a concentrated revenue profile, both in terms
of product portfolio and geographical presence.

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Lack of backward integration vis-à-vis volatility in prices
Raw material consumption is the single largest cost component for Avon Tubetech private
Limited. The company does not have any backward integration for its basic raw materials and
has to purchase the same from open market. Since, the raw material is the major cost driver
and with raw material prices being volatile in nature, the profit margins of the company remain
susceptible to fluctuation in raw material prices.

Analytical Approach: Standalone

Applicable Criteria:

Rating Methodology for manufacturing Companies

Financial Ratios & Interpretation (Non-Financial Sector)

Criteria for assigning rating outlook

Liquidity – Adequate
The liquidity position of the company is expected to remain adequate as it expects sufficient
cushion in its cash accruals vis-à-vis debt repayments. The average utilisation of fund-based
limits of Avon Tube Tech remained highly utilised at~ 89.51% and non-fund-based limit at ~
95.94% during the past 12 months ended Dec, 2022. The company’s operating cycle has
improved from 85 days in FY21 to 68 days in FY22 due to decline in collection period and
inventory period with an increase in scale of operations. Also, Current ratio and quick ratio
stood moderate at 1.08x and 0.60x respectively as on March 31,2022. The Unencumbered
cash and bank balance is Rs. 0.14 Crore as on March 31, 2022.

About the Company

Avon tubetech Private Limited, incorporated in 1997 as a private limited company. Avon
tubetech is engaged in manufacturing of electric resistance welded, CDW, and cold drawn
seamless tubes majorly for automobile industry. Its manufacturing units are in Palwal Tatarpur
and palwal Bhagola where ERW, CDW, CBQ & CDS tubes are manufactured with an installed
capacity of 75500 metric ton per annum.

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 Financials (Standalone) :

(Rs. crore)
For the year ended*/As on 31-03-2021 31-03-2022
Audited Audited
Total Operating Income 232.95 328.35
EBITDA 19.75 19.22
PAT 2.64 3.11
Total Debt 65.44 82.90
Tangible Net worth (including
quasi-equity) 62.83 72.94
EBITDA Margin (%) 8.48 5.85
PAT Margin (%) 1.13 0.95
Overall Gearing Ratio (x) 1.04 1.14
*Classification as per Infomerics’ standards

Status of non-cooperation with previous CRA: ACUITE Ratings vide its press release
dated June 06 ,2022 has classified the ratings of the company under Issuer Not Cooperating
category on account of non-submission of relevant information.

Any other information: Not applicable

Rating History for last three years:

Sr. Name of Current Rating (Year 2022-23) Rating History for the past 3 years
No. Instrument/Fac Type Amount Rating Date(s) & Date(s) & Date(s) &
ilities outstand Rating(s) Rating(s) Rating(s)
ing (Rs. assigned in assigned assigned
Crore) 2021-22 in 2020-21 in 2019-20

1. Long Term Long Term 35.99 IVR BBB-/ - - -

Fund Based Stable
Limits Outlook
2. Short Term Short Term 32.00 IVR A3 - - -
Non-Fund
Based Limits

Name and Contact Details of the Rating Analyst:

Name: Ms. Yashika Goyal Name: Mr. Harsh Raj Sankhla
Tel: (011) 45579024 Tel: (011) 45579024
Email: yashika.goyal@infomerics.com Email: harshraj.sankhla@infomerics.com

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 About Infomerics:
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Annexure 1: Details of Facilities

Name of Facility Date of Coupon Maturity Size of Facility Rating

Issuance Rate/ IRR Date (Rs. Crore) Assigned/
Outlook
Long Term Bank IVR BBB-/Stable
- - - 22.50
Facility- Cash Credit Outlook
Long Term Bank Facility IVR BBB-/Stable
- - - 6.00
– Overdraft Outlook

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Long Term Bank IVR BBB-/Stable
- - Jan’27 5.66
Facilities – Term Loan Outlook
Long Term Bank IVR BBB-/Stable
- - 2024 1.83
Facilities – Term Loan Outlook
Short Term Bank
- - - 31.50 IVR A3
Facility- ILCs/FLCs
Short Term Bank Facility
- - - 0.50 IVR A3
– BG

Annexure-II: List of companies considered for consolidated analysis: Not Applicable.

Annexure 3: Facility wise lender details

https://www.infomerics.com/admin/prfiles/Len-Avontubetech-feb23.pdf

Annexure 4: Detailed explanation of covenants of the rated instrument/facilities: Not

Applicable

Note on complexity levels of the rated instrument: Infomerics has classified instruments
rated by it on the basis of complexity and a note thereon is available at www.infomerics.com.