Rating Rationale
July 31, 2020 | Mumbai
Menon and Menon Limited
'CRISIL BBB-/Stable/CRISIL A3' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.117 Crore
Long Term Rating CRISIL BBB-/Stable (Assigned)
Short Term Rating CRISIL A3 (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL BBB-/Stable/CRISIL A3' ratings to the bank facilities of Menon and Menon Limited (MML).
 
The ratings reflect an established market position in manufacturing of cylinder blocks and cylinder heads primarily for tractors and commercial vehicles (CVs), a reputed clientele, well-equipped and integrated facilities, average financial risk profile, and an experienced management team. The ratings also factor in comfortable debt protection measures with adequate liquidity. These strengths are partially offset by susceptibility to volatility in raw material prices and to cyclicality in end-user industries.

Analytical Approach

Goodwill of ~Rs. 123 crore generated on account of amalgamation of MML with MML Industries Limited (MMLIL) has been amortised over a period of 5 years.

Key Rating Drivers & Detailed Description
Strengths:
* Established market position, backed by well-equipped and integrated facilities and a reputed clientele:
The company is one of the prominent manufacturers of cylinder blocks and cylinder heads for tractors, CVs, and sports utility vehicles (SUVs) in India. It has two well-equipped plants with foundry and machining capabilities, and a combined capacity of about 4,400 tonne per annum (tpa). Further, it has been associated with reputed players such as John Deere India, Mahindra & Mahindra Ltd, Tata Motors Ltd, and International Tractors Ltd. The long industry presence and expertise in manufacturing critical engine components have enabled an entry into the CV segment and addition of customers.
 
* Experienced management team: 
The company is part of the Menon group, founded in the 1970s, which is well-known in the auto-components segment in Western India. MML leverages the extensive experience of its management in the castings industry and has improved its operating performance in recent years. Revenues declined to Rs 366 crore, in fiscal 2020 from Rs 436.2 crore, in fiscal 2019 on account of the overall slowdown in the automotive industry, while however operating margin sustained at 11% in fiscal 2020. Going forward, the operating performance is likely to be impacted with the continued slowdown in the automotive industry coupled with the impact of covid 19 pandemic and resulting nationwide lockdown and is expected to record a 10'15% fall in revenues along with a drop of 150 basis points in operating margin.
 
* Average financial risk profile:
Financial risk profile is average with an average capital structure reflected in gearing and total outside liabilities to adjusted networth ratios at 0.44 time and 0.61 time respectively as on March 31, 2020. Debt protection metrics were above average, with interest coverage and net cash accrual to total debt ratios of 2.98 times and 0.23 time, respectively, in fiscal 2020. Debt metrics are expected to remain at similar levels over the medium term.
 
Weaknesses:
* Exposure to cyclicality in end-user industries:
Over 60% of revenues is derived from the tractor segment and the remainder from the CV segment. Demand in these two segments will continue to be cyclical as they are linked to the monsoons and economic conditions. Thus, the scale of operations and asset utilisation remain susceptible to cyclicality in demand. A track record of sustained and improved operating performance amid the cyclical nature of demand remains a rating sensitivity factor.
 
* Susceptibility to volatility in raw material prices:
The key raw materials are pig iron, mild steel scrap, borings, and sand, which are generally procured from the domestic market. The operating margin varies due to volatility in raw material prices. However, this is mitigated by periodic price revisions and limited inventory.
Liquidity Adequate

Liquidity is adequate. Cash accrual is expected to be over Rs 21 crore in fiscals 2021 and 2022. As against repayment obligations of Rs 5.25 crore in fiscal 2021 and Rs 9.47 crore in fiscal 2022. Bank limit utilisation has been just 35% on average in the 12 months through May 2020. Current ratio was at 1.34 times as on March 31, 2020. 

Outlook: Stable

CRISIL expects MML to continue to benefit from the extensive experience of its promoters in the iron castings industry.

Rating Sensitivity factors
Upward Factors
* Sustainable improvement in revenue by 15% and stable operating margin, leading to higher cash accrual
* Improvement in financial risk profile

Downward Factors
* Higher than expected decline in revenues and fall in profitability to 7.0% or lower
* Stretch in working capital requirements leading to deterioration in the financial risk profile
About the Company

MML was incorporated in fiscal 1970 in Kolhapur, Maharashtra, to manufacture grey iron cylinder blocks and cylinder heads.  It currently has two units near Kolhapur with foundry and machine shops. It also has in-house capabilities to design tools and gauges required for the manufacture of cylinder blocks and heads. It mainly caters to the tractor, SUV, and CV segments. The company also owns a windmill with a capacity of 1.25 megawatt. Mr Vijay Menon (chairman and managing director) and his family members manage the operations.

As on February 8, 2020, MML is amalgamated with MMLIL. The name has been changed from MML Industries Limited to Menon and Menon Limited with effect from March 02, 2020

Key Financial Indicators
Particulars Unit 2020* 2019
Revenue Rs Cr. 366.67 436.2
PAT Rs Cr. -15.70 13.36
PAT Margin % -4.28 3.1
Adjusted Debt/Adjusted Networth Times 0.44 3.63
Interest coverage Times 2.9 4.80
*Provisional

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 Crore) Complexity levels Rating Assigned
with Outlook
NA Bank Guarantee NA NA NA 4 NA CRISIL A3
NA Cash Credit NA NA NA 20 NA CRISIL BBB-/Stable
NA Letter of Credit NA NA NA 3 NA CRISIL A3
NA Term Loan NA NA Mar-2027 90 NA CRISIL BBB-/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  110.00  CRISIL BBB-/Stable  12-05-20  Withdrawn 21-11-19  CRISIL BBB-/Stable  11-12-18  CRISIL BBB/Stable      Suspended 
            25-09-19  CRISIL BB+/Stable (Issuer Not Cooperating)*           
Non Fund-based Bank Facilities  LT/ST  7.00  CRISIL A3  12-05-20  Withdrawn  21-11-19  CRISIL A3  11-12-18  CRISIL A3+      Suspended 
            25-09-19  CRISIL A4+ (Issuer Not Cooperating)*           
All amounts are in Rs.Cr.
*Issuer did not cooperate; based on best-available information
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 4 CRISIL A3 Bank Guarantee 8.5 Withdrawn
Cash Credit 20 CRISIL BBB-/Stable Cash Credit 20 Withdrawn
Letter of Credit 3 CRISIL A3 Letter of Credit 6.5 Withdrawn
Term Loan 90 CRISIL BBB-/Stable Long Term Loan 28 Withdrawn
-- 0 -- Proposed Long Term Bank Loan Facility 13.53 Withdrawan
Total 117 -- Total 76.53 --
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
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
CRISILs Criteria for rating short term debt
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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