Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established market position and strategic tie-ups with global players: TASL has emerged as a dominant player in India catering to the global aerospace business, supported by its strategic tie-ups with original equipment manufacturers (OEMs) and strong capabilities across the aerospace value chain. It assembles and supplies composites, such as wings, fuselage, empennage, floor beams and cabins to both tier-I and II OEMs, as well as engine components to tier-I players. It caters to marquee clients including Boeing, Sikorsky, Lockheed Martin, General Electric and has also formed JVs with Sikorsky, Lockheed Martin and Boeing.

On the domestic defence front, it serves directly to the Ministry of Defence (MoD) and its divisions - Defence Research and Development Organisation (DRDO) by participating through competitive bidding route. In the domestic market, it competes with homegrown rivals such as Bharat Electronics Ltd, Bharat Dynamics Ltd (rated ‘CRISIL A1+’), Bharat Forge Ltd, Mahindra & Mahindra (rated ‘CRISIL AAA/Stable/CRISIL A1+’), and Larsen & Toubro (rated ‘CRISIL AAA/Stable/CRISIL A1+’), amongst others.

Pertinently, TASL is well positioned to benefit from the offset requirements applicable to global OEMs and Make in India initiatives of the Government of India that act as structural tailwinds for the sector.

Strong linkages with the parent, Tata Sons: TASL is a strategically important entity for Tata Sons considering that it is the primary face of the Tata group in the aerospace and defence sectors. This is reflected in the group’s decision to consolidate related businesses under it and infusion of Rs 630 crore of equity towards the consolidation exercise in fiscal 2022. While TASL may not require ongoing funding support given healthy accruals, CRISIL Ratings believes need-based support from Tata Sons in case of any exigency or inorganic acquisitions will be available.

Weaknesses:

High working capital requirement: In the domestic defence segment, the operations are working capital intensive since billing and collections are linked to milestone completion in long tenured defence contracts. This leads to a large build-up of inventories and receivables especially in case there is a delay in execution.

The gross current assets (GCAs) were over ~450 days in fiscal 2024, on account of large unbilled revenue. However, GCAs are expected to moderate going forward, led by liquidation of unbilled revenue through timely execution of large orders in the defense segment. This will remain key monitorable.

Further, the company enjoys better terms of trade in the global aerospace business in the form of healthy customer advances, milestone-based payment and nil retention money that leads to relatively better conversion of the working capital cycle.

Moderate financial risk profile: TASL’s gearing and interest coverage ratio moderated to 2.1 times and 2.8 times respectively in fiscal 2024 compared to 1.8 times and 3.1 times respectively in fiscal 2023. With the ongoing investments yielding returns and expected liquidation of unbilled revenue with timely order execution, the gearing and interest coverage ratio are expected to remain below 1.8 times and above 2.6 times, respectively, going forward.