Rationale

 The rating reaffirmation takes into account the improved profitability of Premier Explosives Limited (PEL) in 9M FY2022, driven by the rising share of defence contracts, a healthy order book that provides revenue visibility and an improved credit profile due to higher cash generation. PEL's operating profit (OPBDITA, or operating profit before interest, depreciation and taxes) rose to Rs. 17.1 crore in 9M FY2022 against an OPBDITA loss of Rs. 0.7 crore in 9M FY2021. The improved performance was driven by the rising share of the high-margin defence segment even as the commercial explosives segment was adversely impacted by higher raw material prices. The ratings also derive comfort from the healthy order book of Rs. 401.1 crore at the end of December 2021 with the defence sector and the O&M services segment comprising 73% of the order book. PEL's performance is likely to improve in FY2023 on expectations of a healthy inflow of orders in the defence segment although the commercial explosives segment may continue to face raw material price headwinds. An improvement in the cash generation has improved PEL's credit profile in 9M FY2022. The interest coverage has risen to 3.2 times in 9M FY2022 against 0.9 times in FY2021, while the total debt/OPBDITA is expected to improve to around 3.0 times to 3.5 times by the end of FY2022 against 8.7 times at the end of FY2021. The ratings continue to favourably factor in the company's marquee clientele, comprising Singareni Collieries Company Limited (SCCL), Bharat Dynamics Limited (BDL) and Indian Space Research Organisation (ISRO), with repeat orders from many customers. However, PEL's customer concentration is high with the top-five customers contributing to the majority of its revenues in 9M FY2022. The ratings are constrained by the vulnerability of the commercial explosives segment's profitability to the volatility in commodity prices amid intense pricing competition. The working capital intensity also remains elevated owing to the long receivable cycle of the defence segment which can stretch up to three to six months.