Rationale

The ratings downgrade for Jiangyin Uni-Pol Vacuum Casting India Pvt. Ltd. (JUPL) reflects the weaker-than-expected performance of the entity, as reflected by muted profitability in the recent past on account of certain one-time accounting adjustments as well as factors such as commodity inflation, business reshuffling and adverse product mix. Profitability is likely to remain muted in the present fiscal (FY2025) as compared to historic levels, owing to the operating deleverage on account of the 20-22% YoY revenue decline anticipated for the fiscal. Muted demand in the key overseas markets such as the US and Europe is expected to result in the said revenue decline for the fiscal. JUPL is likely to see only a gradual improvement in profitability over the near to medium term. ICRA notes the deterioration in JUPL’s leverage (TD/ OPBDITA of 7.4 times) and coverage indicators (interest cover of 1.6 times) in FY2024, with only a gradual improvement anticipated in the same over the near term. The company’s strategic decision to discontinue projects with lower margins in order to focus on high-margin projects is expected to have an adverse impact on revenues but a positive impact on the profitability over the near to medium term. ICRA also notes JUPL’s revenue concentration towards diesel-engine driven vehicles, exposing it to risks arising from gradual reduction in proportion of diesel vehicles, in the light of regulatory and voluntary measures undertaken for automobile emission reduction. However, increase in penetration of turbochargers in petrol and CNG powertrains in passenger vehicles (PVs) in the last few years, after the implementation of BS VI norms in April 2020 offsets the risk to some extent. The ratings continue to draw comfort from JUPL’s stable business position as one of the leading turbine wheel manufacturers in India, catering to multiple manufacturers of turbochargers in the automotive sector. ICRA notes that the company has been able to scale up its standalone revenues to Rs. 538 crore in FY2024, supported by steady volume offtake from its key customers. Though there will be a near-term impact on revenues due to discontinuation of low-margin projects by JUPL, ICRA expects a moderate revenue growth to sustain in the longer run, given the company’s well-established relations with reputed clients in the turbocharger segment with healthy wallet share globally. Furthermore, its geographically diversified customer base provides a cushion against region-specific operational risks to an extent. While the company is exposed to fluctuations in foreign exchange (forex) rates, given the sizeable share of imports in its sourcing mix, there is some natural hedging from its operations, since it derives ~80-85% of its revenues from exports. The ratings also factor in the extensive experience of the promoter group, Doncasters, in the automotive components manufacturing industry, with global presence in the automotive, aerospace and gas turbine business verticals. Furthermore, with a presence in similar business segments, the parentage also provides JUPL with operational synergies. ICRA also notes the funding support extended by the parent entity to JUPL in the form of external currency borrowings (ECBs) and through fixed deposits against which JUPL has availed certain working capital facilities with the lenders. While the company expects to improve its liquidity position through a combination of factors including better working capital management and/or freeing up of encumbered fixed deposits going forward, developments on these fronts remain a key monitorable. The Negative outlook reflects the weak operational performance and stretched liquidity position of JUPL, with only a gradual recovery expected, going forward.