Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities and non convertible debentures of NRB Bearings Ltd (NRB) to ‘Stable’ from ‘Negative’ and reaffirmed the rating at ‘CRISIL AA-‘. Rating on the commercial paper programme has been reaffirmed at ‘CRISIL A1+’.

 

The revision in the outlook reflects CRISIL Ratings belief that NRB’s revenue and operating profitability over the near term will improve post easing of COVID-19 pandemic situation and recovery of demand in the automotive sector.

 

NRB derives nearly 65-70% of its revenues from domestic automobile original equipment manufacturers (OEMs), while about 12-15% and 20-25% are derived from domestic aftermarket and exports respectively. Fiscal 2021 was a challenging year for the automobile sector due to a wider consumption slowdown, COVID-19 led lockdown restrictions, and commodity inflation. The company achieved better than anticipated performance with marginal revenue de-growth of ~2% mainly due healthy offtake from farm equipment segment, focus on exports and after- market. Also other automobile segments showed improved volumes during second half of the fiscal. NRB’s operating margin also improved by 270 basis points to 15.6% as a result of cost optimization efforts, higher share of revenues from exports and after market, and price hike taken in January 2021 to pass on increasing input costs.

 

Demand across automobile segments is expected to register material improvement in fiscal 2022 over fiscal 2021 resulting in a revival in OEM offtake. NRB is well placed to capitalise on this given its high share of demand from OEMs. NRB’s diverse customer profile and geographical base along with technological expertise will support sustenance its business performance over the medium term.

 

NRB’s financial risk profile, continues to be supported by management’s efforts to keep debt levels under check, given the volatile nature of the automotive business. Gearing improved from 0.77 times in fiscal 2020 to 0.42 times in fiscal 2021 and is slated to improve further with sustained accretion of profits.

 

The ratings continue to reflect NRB’s market leadership in the needle and cylindrical roller bearing segments and diverse customer profile and strong technical expertise. These strengths are partly offset by intrinsic working capital-intensive operations, vulnerability to cyclicality in the end-user industry, and pricing pressure from OEMs.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of NRB and its subsidiaries, together referred to as NRB, as all the companies are in the same business.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Market leadership in the needle and cylindrical roller bearing segments in India: The Company has an estimated market share of 70% in the needle bearing industry in India, with a strong presence in the cylindrical roller, special tapered roller, and special ball bearings segments. This is aided by the promoters’ extensive industry experience, robust in-house research and development facilities, and strong client relationships.

 

Diverse customer profile: NRB has longstanding relationships with Indian and global automobile OEMs and Tier-I vendors. It has customers across multiple segments, including two-wheelers, commercial vehicles (CVs), passenger cars, utility vehicles (UVs), farm equipment & tractors, off-highway vehicles, railways and defence. OEMs contributed the most to its revenue (about 70%) in fiscal 2021, while aftermarket and export sales contributed the rest. Despite the large proportion of revenue from OEMs, no single customer with its tier-1 supplier accounts for more than 12% of the total revenue, thereby limiting customer concentration risk.

 

Strong technical expertise: NRB has been operating in India for over 6 decades, and has over time built strong technical expertise and knowhow covering the full range of bearing design, from conception to software aided simulation, testing, validation, benchmarking  and production. The company’s product range spans over 3000 designs, which are also made to suit its customer’s requirements. In fiscal 2000, NRB established a dedicated engineering & design (E&D) centre, which is recognized by the Indian Department of Science & Technology as a world-class research and development facility. Today this is a standalone facility in Turbhe. In addition, there is another centre that focusses on process engineering at the plant site in Waluj MIDC. Besides, its plants use automated production and assembly machinery designed in-house, reflecting the strong technical capabilities of its team. This has also enabled NRB keep abreast of technological changes and in the bearings market.

 

Healthy financial risk profile: Financial risk profile is healthy. While the expected decline in cash accruals will impact credit metrics in fiscal 2021, the same is expected to improve from fiscal 2022 on the back of restoration of end market demand.  The financial risk profile is supported by healthy networth of Rs 530 crore and moderate gearing of 0.42 times as on March 31, 2021.  Other key credit metrics i.e. interest coverage ratio and net cash accruals to debt ratio remains healthy at 5.4 times and 0.39 times respectively as on March 31, 2021.

 

Weaknesses:

Working capital-intensive operations: Due to the just-in-time delivery to OEMs and large number of product stock keeping units (SKUs) across more than 500 products inventory days are high at 115-130 days. Furthermore, payment terms from the automotive component manufacturers vary from two to three months, resulting in receivable levels of ~100-110 days. The incremental working capital requirement in fiscal 2022 will be in line with revenuegrowth. .

 

Vulnerability to cyclical demand in the automotive bearings segment and to pricing pressure from OEMs:

High dependence of bearing manufacturers on the automobile sector exposes them to cyclicality in demand. While bearing manufacturers enjoy reasonable pricing flexibility with OEMs, backed by mutual interdependence, and capital and technology intensity of operations, price negotiations happen with a lag, leading to price adjustment delays and impact on profitability in the interim. Furthermore, if there is a prolonged slowdown and decreasing demand for automobiles, it is not always possible for OEMs to completely pass on input price increase to end users. Hence, any significant increase in prices is absorbed jointly by suppliers and OEMs. Additionally, any significant decline in demand will increase overheads, and hence, impact profitability of component suppliers.

Liquidity: Strong

NRB is expected to generate annual cash accruals of Rs 100-130 crore over the medium term which should take care of modest capex needs amounting to Rs. 50-60 crore per annum, and debt repayments of Rs. 20-30 crore per annum. Liquidity is also supported by cash surplus of Rs 90 crore and unused bank lines of Rs. 250 crore as on March 31, 2021.

Outlook: Stable

CRISIL Ratings believes that NRB’s revenue and operating profitability over the near term will improve post easing of COVID-19 pandemic situation and recovery of demand in the automotive sector.

Rating Sensitivity Factors

Upward Factors

• Sustained annual revenue growth of ~15-20%, while maintaining healthy operating profitability at 22-25%
• Significant improvement in capital structure resulting in negligible gearing

Downward Factors

• Decline in revenues by more than 10% or deterioration of operating margin to below 15%, most likely due to deterioration in business conditions following prolonged demand slowdown.
• Deterioration in credit metrics; eg. gearing levels of above 1.0 time, due to stretch in working capital or debt funded capex or acquisitions

About the Company

Founded by late Mr Trilochan Singh Sahney in 1965, NRB manufactures needle, cylindrical, special ball, and taper-roller bearings. It also makes other friction solution components such as planetary shafts, crank pins, and kingpins. The company has four subsidiaries: SNL Bearings Ltd (SNL), NRB Bearings (Thailand) Ltd, NRB Bearings Europe GmbH, and NRB Bearings USA Inc. NRB's manufacturing facilities are at Thane, Aurangabad, Jalna, and Waluj in Maharashtra; Hyderabad; and Pantnagar in Uttarakhand. SNL's facility is at Ranchi in Jharkhand, while NRB Thailand's plant is at Rayong in Thailand. The product engineering centre at Rabale and process and advanced materials-based engineering centre at Waluj are government accredited.

 

Ms Harshbeena S Zaveri, daughter of Mr Trilochan Singh Sahney, was appointed the company's President in January 2001. Currently, she is the Vice Chairman and Managing Director of NRB and the Chairman of the Board of SNL.

 

For the three month period ended June 30, 2021, the company reported a PAT of Rs. 16.8 crores (Net loss of Rs.14.3 crores in the corresponding period of fiscal 2020), on net revenues of Rs 201.3 crores (Rs. 62.8 crores in the corresponding period of fiscal 2020).

Key Financial Indicators (NRB Bearings Limited - Consolidated)

Particulars	Unit	2021*	2020
Revenue	Rs.Crore	762	776
PAT	Rs.Crore	56	33
PAT margin	%	7.3	4.28
Adjusted debt/Adjusted networth	Times	0.42	0.77
Interest coverage	Times	5.45	4.41

*Provisional

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Coupon Rate (%)	Date of Allotment	Date of Maturity	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
NA	Cash credit@	NA	NA	NA	80	NA	CRISIL AA-/Stable
NA	Cash credit#	NA	NA	NA	67	NA	CRISIL AA-/Stable
NA	Cash credit&	NA	NA	NA	40	NA	CRISIL AA-/Stable
NA	Cash credit^	NA	NA	NA	80	NA	CRISIL AA-/Stable
NA	Cash credit@@	NA	NA	NA	70	NA	CRISIL AA-/Stable
NA	Cash credit	NA	NA	NA	25	NA	CRISIL AA-/Stable
NA	Proposed Long Term Bank Facility Loan	NA	NA	NA	15	NA	CRISIL AA-/Stable
NA	Cash credit@@	NA	NA	NA	5	NA	CRISIL AA-/Stable
NA	Commercial paper	NA	NA	7-365 days	85	Simple	CRISIL A1+
INE349A08034	Non-convertible debentures	9.60	12-Sep-2018	12-Sep-2023	30	Simple	CRISIL AA-/Stable

@Interchangeable with buyer's credit (BC), export packing credit (EPC), bill discounting (BD), letter of credit (LC), and bank guarantee (BG)

#Interchangeable with working capital demand loan (WCDL) /LC/standby letter of credit/guarantee/EPC

&Interchangeable with WCDL, EPC, LC/BC, and capex BC

^Interchangeable with cash credit, WCDL/foreign currency non-repatriable (FCNR)/EPC/BC

@@Interchangeable with STL/CP, BC/EPC/FCNR, CC/WCDL

Annexure - List of Entities Consolidated

	Subsidiary	Extent of consolidation	Rationale for consolidation
1	SNL Bearings	73.45%	Subsidairy
2	NRB Bearings (Thailand) Limited	Full	Wholly owned subsidiary
3	NRB Bearings GmbH	Full	Wholly owned subsidiary
4	NRB Bearings USA	Full	Wholly owned subsidiary