Rating Rationale
December 18, 2020 | Mumbai
Classic Stripes Private Limited
'CRISIL A-/Stable' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.129 Crore
Long Term Rating CRISIL A-/Stable (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A-/Stable' rating to the long-term bank facilities of Classic Stripes Private Limited (CSPL).
 
The rating reflects CSPL's established market leadership position in the decals segment, healthy profitability and adequate financial risk profile. These strengths are partially offset by the dependence on the cyclical two-wheeler segment, exposure to client concentration risks and sizeable investments in group companies.

Analytical Approach

* For arriving at its rating, CRISIL has considered the standalone business and financial risk profiles of CSPL.
* CRISIL has also adjusted CSPL's networth for the following:
* Goodwill of Rs 323 crore created in fiscal 2017 due to the merger of two special purpose vehicles ' Resync Auto Solutions Pvt Ltd and Ganadhipa Graphics Pvt Ltd.
The above goodwill has been fully amortised by fiscal 2020
* Investments worth Rs 205 crore (as on March 31, 2020) made in the promoter group companies -- Mist Knowledge Park and Durabuild Technologies.

Key Rating Drivers & Detailed Description
Strengths 
* Established market leadership position in decals segment
CSPL has a robust market share of over 50% of the two-wheeler decal market in India and supplies to many leading two-wheeler original equipment manufacturers (OEMs). The company has an established relationship with the market leader in motorcycles segment in India, Hero Motocorp Ltd (Hero; 'CRISIL AAA/Stable/CRISIL A1+'). Besides being the sole supplier of decals to Hero, CSPL supplies decals to other major two-wheeler OEMs such as Bajaj Auto Ltd ('CRISIL AAA/Stable/CRISIL A1+'), and Yamaha Motor Company Ltd. CSPL has also successfully registered with other OEMs like TVS for which the first batch of goods will be delivered shortly.
 
* Healthy profitability due to strong operating efficiencies
Given CSPL's strong product quality and low rejection rates (of below 2% consistently over the last three decades), the company has maintained a healthy operating margin of over 20% during the five fiscals through 2020. Business has been affected in fiscal 2021 owing to the economic slowdown that resulted from the nationwide lockdown imposed by the government to curb the spread of Covid-19. However, the company has taken various cost-rationalisation measures to mitigate the impact on margins. Hence, profitability should sustain at over 25% in the medium term as well.
 
* Adequate financial risk profile
Financial risk profile should remain comfortable. Debt protection metrics were healthy, with adjusted interest coverage and net cash accrual to total debt ratios of 5.27 times and 0.47 time, respectively, in fiscal 2020. The leverage, however, is constrained by adjusted networth of just Rs 42 crore as on March 31, 2020 (after adjusting for goodwill and investments in group companies). Gearing was hence high at around 3 times as on March 31, 2020. However, capital structure is expected to strengthen going forward, supported by steady accretion to reserve, negligible support extended to group entities and a moderate capital expenditure (capex) of Rs 10-15 crore per annum.
 
Weaknesses
* Significant dependence of the company on the cyclical two wheeler segment
CSPL derives over 90% of its revenue from the two-wheeler segment, which is linked to the economy. Any significant downturn in the two-wheeler segment will hit the company's performance. In fact, CSPL's performance in fiscals 2020 and 2021 has been impacted by the cyclical slowdown in the industry, which has been further exacerbated by the ongoing pandemic. However, the company's ongoing efforts to further widen its product portfolio provide some comfort. Currently, around 5% of the revenue is derived from other segments (including aftermarket (1-2%), exports (1-2%) and non-auto products (2-3%), which is expected to further increase over the medium term with the management's focus on reducing concentration to the two-wheeler industry.
 
* Exposure to client concentration risks
The top-three customers contributed to about 85% of the total revenue for fiscal 2020, exposing CSPL to client concentration risks. However, the risk is mitigated to an extent due to long-term association with the reputed clientele.
 
* Sizeable investments in group companies
CSPL had extended substantial support to other group companies of the promoters over fiscals 2019 and 2020. Total investments and loans extended to group companies was Rs 205 crore as on March 31, 2020. Any further incremental support to group companies will constrain financial flexibility.
Liquidity Adequate

Liquidity is likely to remain healthy. Cash accrual is projected at over Rs 60 crore per annum over the medium term, sufficient to meet the yearly debt obligation of Rs 30 crore for fiscals 2021 and 2022. There is ample headroom in the working capital limit of Rs 25 crore, which has so far been completely unutilised. Cash and bank balances were Rs 18 crore as on September 30, 2020. However, the company has sizeable investments in group companies. Any further support extended to group companies will constrain financial flexibility and hence remains closely monitored.

Outlook: Stable

CSPL should continue to benefit from its longstanding relationship with the two-wheeler OEMs and an established market presence. Financial risk profile will also remain healthy, backed by comfortable gearing and strong debt protection metrics.

Rating Sensitivity factors
Upward factors
* Significant and sustained revenue growth (of over 15%), supported by acquisition of new customers or increased wallet share with existing customers
* Steady accretions to networth and progressive repayment of debt, leading to gearing improving to less than 1 time
 
Downward factors
* Revenue dropping by over 20% owing to a significant decrease in market share
* Larger-than-expected, debt-funded capex or group investments, resulting in gearing rising over 2 times
* Weakened business performance or a potential negative business impact from any unfavourable regulation in the automotive industry
About the Company

CSPL was incorporated in 1987. It is the flagship company of the Astarc group, which is diversified with business focus on printing and imaging solutions, infrastructure, automobile, agricultural, and early-stage investments. The founder, Mr Kishore Musale, is a first-generation entrepreneur and the current Chairman of the company. Daily operations are spearheaded by his son, Mr Salil Musale, who is also CSPL's Managing Director.
 
CSPL is one of the largest producers of automotive graphics in the world. The company has its state-of-art manufacturing facilities in Pelhar (Maharashtra), Sanand (Gujarat) and Haridwar (Uttarakhand). During a year, the company supplies decals to meet the requirement of about 20 million vehicles including two-wheelers, four-wheelers, tractors, trucks, buses, recreational vehicles, lawn movers and power sport vehicles. CSPL holds a robust 50% share of the automotive OEM market in India.

Key Financial Indicators
As on/for the period ended March 31 2020 2019
Revenue Rs crore 340 379
Profit after tax (PAT) Rs crore 51 100
PAT margins % 15.0 26.4
Adjusted debt/adjusted networth Times 3.08 11.69
Interest coverage Times 5.27 6.14

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Cr) Complexity Levels Rating Assigned with Outlook
NA Term Loan NA NA 10-May-24 102.94 NA CRISIL A-/Stable
NA Working Capital Facility NA NA NA 22 NA CRISIL A-/Stable
NA Proposed long term bank loan facility NA NA NA 4.06 NA CRISIL A-/Stable
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  129.00  CRISIL A-/Stable    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Working Capital Facility 22 CRISIL A-/Stable -- 0 --
Proposed Long Term Bank Loan Facility 4.06 CRISIL A-/Stable -- 0 --
Term Loan 102.94 CRISIL A-/Stable -- 0 --
Total 129 -- Total 0 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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