Rationale

 To arrive at the rating, ICRA has taken a consolidated view of Flash Electronics (India) Private Limited (FEPL; rated [ICRA]A (Stable)/[ICRA]A2+) and its wholly-owned subsidiary, Flash Viven Machining Technologies Private Limited (FVMT), given their common management, strong operational and financial linkages (including extension of corporate guarantee by FEPL to FVMT) and fungibility of cash flows between the two entities. Together these entities are referred to as the Flash Group/ the Group. The rating assigned to FVMT factors in Flash Group’s established business position and the extensive experience of its promoters in the domestic automotive components industry. Additionally, its established relationship with Bajaj Auto Limited (BAL), one of the leading two-wheeler (2W) original equipment manufacturers (OEMs) in India, provides further comfort. Over the years, the Group has maintained a strong market position supported by its sizeable manufacturing set-up, strong technical capabilities and product development expertise, strengthened by its status as an anchor supplier to BAL. The assigned ratings also take into consideration the Group’s diversified presence across different product categories including e-mobility/ electric vehicle (EV) components. Also, the ratings consider the company’s strong and able management and its healthy share of business with its principal customers. The Group's product portfolio is characterised by the presence of both traditional products, such as regulators, gear assemblies, shafts and sensors; and advanced product categories, such as electronics, magnetos, LED lightings, e-mobility components and others. This mitigates the potential risk owing to changes in the powertrain mix, especially in the 2W segment. Leveraging the same, the company has established relationships with a reputed client base of domestic and international OEMs and tier-1 suppliers, in addition to BAL. Over the years, FEPL has diversified its operations across five major segments, electronics and electricals (~47% share of revenues in FY2023), EV components (5%), metallics (23%), engine components (17%) and sprockets (8%). FMVT reported net losses in its initial years of operations till FY2022, primarily driven by suboptimal capacity utilisation due to adverse impact of the pandemic and shortage of semi-conductors on the automotive industry. However, there has been considerable improvement in the company’s performance from FY2023, as marked by healthy revenue growth and improvement in operating margins, leading to increased accrual generation. This has been aided by steady ramp up in capacity utilisation with the addition of new customers (BAL, BRP Rotax Gmbh, Yamaha Motor India Pvt. Ltd., etc) and increasing contribution from exports. The ratings also draw strength from the Group's improving financial risk profile, as reflected by steady revenue growth and improvement in profitability, resulting in healthy accrual generation. Coupled with some reduction in debt levels, this has supported the improvement in the Group’s credit metrics in recent years. In the near term, the Group's growth prospects will be driven by scale-up in its EV business and exports, wherein the company has secured new businesses from new and existing customers. ICRA expects the Group's capex plans to be modest (i.e., ~Rs. 30 crore p.a.) in the near term, as it will continue to prioritise leveraging its existing asset base, especially in the metallics and EV segments. However, to strengthen its presence in the EV components space, Flash Group is likely to consider an investment to manufacture four-wheeler EV components over the medium term. ICRA expects this investment to be financed through equity funds, as the Group intends to raise equity capital. Its plans to raise equity capital, along with the potential conversion of compulsory convertible debentures (CCDs) into equity, will augment the capital structure and strengthen credit profile of the Group, which remains monitorable. The ratings are, however, constrained by the vulnerability of the Group’s profitability to inherent fluctuations in prices of key raw materials, as well as competitive pressures in the auto component industry. Nevertheless, the risk is mitigated to an extent as the Group enjoys raw material pass-through clauses with customers, although with a lag of a quarter. In addition, the Group benefits from the first-mover advantage and holds single-source supplier status for most of its products. Flash Group is also exposed to high customer concentration risk, with its top customer accounting for a significant share of its total revenue. However, the healthy share of business, key supplier status and BAL’s leading market position in the industry provide some comfort. While it scores favourably on product diversity, its relatively higher exposure to the 2W segment and to its largest customer impact the ratings at present. ICRA notes that the Group is making considerable efforts to diversify its business profile by gaining a share of business from other customers, especially in international markets. The Stable outlook on the long-term rating reflects ICRA’s expectation that the Flash Group will continue to benefit from its established business position, long-standing relation with BAL and its broad-based growth across its business segments.