Rating Rationale
February 28, 2020 | Mumbai
Munjal Showa Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.144.25 Crore
Long Term Rating CRISIL AA/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.6 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facilities of Munjal Showa Limited (MSL) to 'Negative' from 'Stable', and reaffirmed the rating at 'CRISIL AA'; the rating on the commercial paper programme and short-term facilities has been reaffirmed at 'CRISIL A1+'.
 
The outlook revision reflects the higher-than-anticipated decline in performance in fiscal 2020 following slowdown in offtake from its key customer, Hero Motocorp Ltd (HMCL; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), due to the weak demand for two-wheelers. Performance is also affected by the declining share of business with MSL's second-largest client, Honda Motorcycle and Scooter India (HMSI), due to change in the latter's sourcing policy. MSL's revenue fell by 20% in the 9 months of fiscal 2020 compared with the corresponding period of the previous fiscal. Operating profitability too declined to 4.3% from 5.6% during this period due to higher overheads following lower volumes. While performance is likely to improve in fiscal 2021, it is expected to remain modest, in line with the expected growth in the automobile segment and declining share of business with HMSI.
 
The ratings continue to reflect MSL's strong business linkages with customers and robust financial risk profile, supported by zero debt and substantial cash accrual. These strengths are partially offset by limited segmental and geographical diversification, leading to low bargaining power with, and pricing pressure from, original equipment manufacturers (OEMs); and modest operating efficiencies.

Key Rating Drivers & Detailed Description
Strengths:
* Strong business linkages with main customers: MSL is a key player in the domestic shock-absorber industry and one of the leading suppliers to HMCL, the largest player in the two-wheeler market in India. The company also supplies to HMSI, though the share of business is on the wane due to change in the client's sourcing policy. Apart from shock absorbers to two-wheelers, MSL also supplies struts and window balances to Maruti Suzuki India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+').
 
* Robust financial risk profile, especially liquidity: Networth was large at Rs 615 crore and debt negligible, as on September 30, 2019. Furthermore, expected cash accrual of around Rs 60 crore per fiscal over the medium term will cover capital expenditure (capex) and working capital requirement. Consequently, reliance on debt will remain minimal, thereby benefitting financial risk profile. Liquidity will be further supported by cash and cash equivalents of around Rs 190 crore as on September 30, 2019, and unutilised working capital limit of Rs 20 crore.
 
Weaknesses:
* Modest operating efficiencies: Due to a decline in orders across segments and customers, capacity utilisation is subdued and has led to increased overhead costs. Hence, operating profitability is expected to be 4-5% in the near term. However, with moderate improvement in sales to key customers, margin is expected to increase over the medium term. MSL also benefits from the fact that its three large manufacturing facilities are close to key clients, which improves control on capex and working capital management.
 
* Limited segmental and geographical diversification: Despite increasing supplies to other OEMs, bulk of the revenue is derived from HMCL (78% in the nine months through September 2019). MSL has negligible reach in the global market due to restrictions from Showa Corporation and no direct presence in the after-market segment, which fetches a higher margin. Earlier, HMSI accounted for a healthy share of business (20% of revenue in fiscal 2013), but this declined to around 9% as Showa India Pvt Ltd is replacing MSL and is emerging as HMSI's largest supplier. HMSI has also shortlisted new suppliers, including Endurance Technologies Ltd (rated 'CRISIL AA/Positive/CRISIL A1+'). Any material change in the share of business from key customers, leading to a decline in revenue, will be a key rating sensitivity factor.
 
* Low bargaining power against OEMs: Though the company has the flexibility to pass on any change in input cost, pushing any increase in other manufacturing overheads to customers could pose a challenge. Moreover, high dependence on OEMs and exposure to intense competition would also constrain profitability over the medium term.
Liquidity Strong

Annual cash accrual is expected at around Rs 60 crore over the medium term against absence of any term debt obligation. Cash surplus was around Rs 190 crore as on September 30, 2019. Fund-based limit of Rs 20 crore largely remained unutilised in the 12 months through January 2020. Healthy accrual, liquid surplus, and unutilised bank limit should be more than sufficient to meet capex and incremental working capital requirement over the medium term.

Outlook: Negative

CRISIL believes MSL's performance will remain subdued over the medium term, given the slowdown in sales to key customers and limited benefit from addition of new clients. Financial risk profile will, however, continue to be healthy, supported by steady accrual, modest capex, and sound working capital management.

Rating Sensitivity Factors
Upward Factors
* Substantial growth in revenue at 10% per annum, including through customer diversity
* Significant improvement in profitability to 7-8%


Downward Factors
* Continuing pressure on revenue growth due to loss of share in business from key customers
* Operating profitability sustaining at below 5%
* Weaker-than-expected gearing due to large, debt-funded capex/acquisition, or substantial decline in liquid surplus.

About the Company

MSL was established by the erstwhile Hero group in 1985 as part of a technical and financial collaboration with Showa Corporation. Following a family arrangement in May 2010, MSL continues to be vested with Mr Yogesh Chander Munjal, within the late Mr Satyanand Munjal faction. Mr Yogesh Chander Munjal and family, through Dayanand Munjal Investments Pvt Ltd and Showa Corporation, had equity holdings of 39% and 26%, respectively, as on December 31, 2019. The main products are front forks and shock absorbers for the two-wheeler segment, and struts and window balancers for four-wheelers.
 
For the first nine months of fiscal 2020, profit after tax was Rs 32 crore on revenue of Rs 1,038 crore; vis-a-vis Rs 49 crore and Rs 1,292 crore, respectively, for the corresponding period in the previous fiscal.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs. cr. 1669 1582
Profit After Tax (PAT) Rs. cr. 63 77
PAT Margin % 3.7 4.9
Adjusted debt/adjusted networth Times 0.00 0.00
Adjusted interest coverage Times 394.88 402.97

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity Date Issue size
(Rs.Cr)
Rating assigned
with outlook
NA Bank Guarantee NA NA NA 2.25 CRISIL A1+
NA Cash Credit* NA NA NA 30.0 CRISIL AA/Negative
NA Letter of Credit@ NA NA NA 43.5 CRISIL A1+
NA Proposed Long-Term Bank Loan Facility NA NA NA 68.5 CRISIL AA/Negative
NA Commercial Paper NA NA 7-365 days 6 CRISIL A1+
*Interchangeable with bank overdraft
@Rs 30 crore as ad hoc unsecured import letter of credit limit
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
Commercial Paper  ST  6.00  CRISIL A1+      28-03-19  CRISIL A1+  20-03-18  CRISIL A1+  26-04-17  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  98.50  CRISIL AA/Negative      28-03-19  CRISIL AA/Stable  20-03-18  CRISIL AA/Stable  26-04-17  CRISIL AA/Stable  CRISIL AA/Stable 
Non Fund-based Bank Facilities  LT/ST  45.75  CRISIL A1+      28-03-19  CRISIL A1+  20-03-18  CRISIL A1+  26-04-17  CRISIL A1+  CRISIL A1+ 
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
Bank Guarantee 2.25 CRISIL A1+ Bank Guarantee 2.25 CRISIL A1+
Cash Credit* 30 CRISIL AA/Negative Cash Credit* 30 CRISIL AA/Stable
Letter of Credit@ 43.5 CRISIL A1+ Letter of Credit@ 43.5 CRISIL A1+
Proposed Long Term Bank Loan Facility 68.5 CRISIL AA/Negative Proposed Long Term Bank Loan Facility 68.5 CRISIL AA/Stable
Total 144.25 -- Total 144.25 --
*Interchangeable with bank overdraft
@Rs 30 crore as ad hoc unsecured import letter of credit limit
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 Criteria for rating short term debt

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