Key rating drivers & detailed description

Strengths:

Continuation of strong operational, technical and financial support from the parents:

As one of the largest manufacturers of steel tubes in Japan, Maruichi has a robust credit risk profile. Although KUMA is a small subsidiary, it holds strategic importance in terms of prospects for growth and geographical diversification. Hence, the company will continue to receive technical and operational support from Maruichi and Toyota Tshusho Corporation (TTC; rated ‘A/Stable/A1’ by S&P Global Ratings); along with need-based funding. TTC also supplies around 40% of raw material to KUMA.

Established market position and customer base in exhaust tubes for the automotive industry:

The healthy market position is reflected in compound annual growth rate of 10% in revenue in the five fiscals through 2022, to Rs 496 crore. Revenue growth in fiscal 2022 is driven by improved realisation on account of rally in steel prices. It is expected to touch Rs 530-540 crore in fiscal 2023 on account of expected volumetric growth and moderation in steel prices. Clientele is strong and includes automotive exhaust manufacturers that supply to automotive original equipment manufacturers. This, along with high operating efficiency and ability to provide just-in-time supplies, should continue to support the business.

Robust financial risk profile:

Networth and gearing were strong at Rs 313 crore and 0.12 time, respectively, as on March 31, 2022. Gearing has remained below 0.5 time in the 10 fiscals through 2022 on account of nil reliance on external term debt. Total outside liabilities to tangible networth ratio has remained below 0.5 time in the four fiscals through 2022. Debt protection metrics continued to be comfortable, with interest coverage and net cash accrual to adjusted debt ratios of 33 times and 0.9 time, respectively, in fiscal 2022. Financial risk profile is expected to remain steady over the medium term, backed by funding support from the parents, moderate profitability, and absence of long-term debt.

Weaknesses:

Large working capital requirement

Gross current assets (GCAs) were 250 days as on March 31, 2022, because of sizeable inventory of 110-120 days (since the company offers steel tubes in many sizes) and credit of 90-100 days extended to customers. Though increasing exports will continue to keep GCAs at 250-300 days over the medium term, credit of 90 days from TTC will support working capital.

Vulnerability to fluctuations in raw material prices and forex rates

Raw materials constitute 75-85% of the total cost of production. The company imports 45-50% of raw materials, leading to forex exposure. Furthermore, prices of key input, steel coils, are highly volatile. Given the limited ability to pass on any rise in raw material prices to customers, profitability will remain susceptible to fluctuations in input and forex rates.

Key financial indicators

Annexure - Details of Instrument(s)

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