Detailed Rationale

CRISIL Ratings has downgraded its ratings on the bank facilities of SAMKRG Pistons and Rings Ltd (SAMKRG) to 'CRISIL BBB+/Stable/CRISIL A2' from 'CRISIL A-/Stable/CRISIL A2+'.

 

The rating action follows continued moderation in SAMKRG’s business performance for the second year in succession, due to slower than anticipated offtake from key original equipment manufacturers (OEMs) owing to sluggish demand from two-wheeler segment, further exacerbated by subdued rural demand with erratic and delayed monsoons. Besides, the company’s operating profitability is also expected to be weaker than expected at 9.5-10%, compared with 15-16% seen earlier, due to higher input prices, increase in employee costs, stiff competitive pressures and lower absorption of fixed costs. Ergo, net profits are expected to witness a material decline in fiscal 2024, impacting cash generation. Going forward, the piston and piston ring sector will continue to face headwinds from the move towards electric vehicle (EV) space, especially among two-wheelers, where adoption rate is highest. While SAMKRG’s management is taking initiatives to develop components for electric two wheelers, acceptance of the same and ramp up in business levels, will be critical to sustain revenue growth. Better operating leverage can also aid improvement in operating profitability, going forward.

 

Revenue growth also remained sluggish in fiscal 2023 on account of muted demand for two-wheelers, due to weak rural demand, and gradual transition to EVs supported by FAME subsidies, thereby impacting demand for pistons. This has continued in current fiscal also with revenue growth declining by 6%  during first half of fiscal 2024 and with over ~80% of revenue emanating from piston sales to two wheeler segment, SAMKRG’s revenues is expected to degrow by 4-5% in fiscal 2024. The operating profitability in fiscal 2023 was ~15% in line with the past, however it has declined by 420 bps to 9.2% in the first half of fiscal 2024 on account of increase in employee costs due to wage revisions which were long due, higher retirements, VRS & resignations. Besides, there was an increase in power costs following revision in power tariffs by the State government. Besides, overall capacity utilization declined to 70% in first half of fiscal 2024 from 87% during corresponding period of previous year due to lower piston and piston rings produced, leading to lesser fixed cost absorption.

 

Despite reduction in cash generation due to lower profitability, financial risk profile is expected to remain healthy with gearing of less than 0.2 times as on March 31, 2024 due to only nominal debt addition for capex, moderate working capital requirement, and minimal debt repayment obligations. The company is expected to generate annual cash accruals of Rs.14-16 crores, which along with moderate debt addition for capex, will suffice to meet the repayment obligations of Rs.5 crore and Rs.5.5 crore (pertaining to unsecured loans from promoters) in next two fiscals, and annual capex of ~Rs.10-12 crores.

 

The ratings continue to reflect the established position of SAMKRG two-wheeler pistons and piston-rings industry, long standing relationship with established two-wheeler manufacturers like Bajaj Auto Ltd (Bajaj Auto, rated CRISIL AAA/Stable/CRISIL A1+’), TVS Motor Co Ltd (TVSM) and Honda Motorcycle and Scooter India Pvt Ltd (HMIL) and adequate financial risk profile, reflected in comfortable gearing and healthy debt protection metrics. These strengths are partially offset by susceptibility of profitability to volatility in raw material prices, and limited revenue diversity due to limited presence in four-wheeler segment and lack of EV related products in the overall portfolio.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has considered the standalone business and financial risk profiles of SAMKRG. Unsecured loan from promoters have been treated as debt.

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the domestic pistons and piston-rings market: SAMKRG has a strong position in the piston and piston-rings market and caters to a diversified customer base in the two-wheeler segment. This is supported by promoter experience of more than two decades in manufacturing pistons. In the OEM segment (~50% of revenues), the company has longstanding relationships with established two-wheeler manufacturers like Bajaj Auto, TVS Motor and HMSI, and caters to a major share of their piston requirement. It is also widely present in the replacement market (~30% of revenues), operating through a strong network of dealers and distributors across India. Moreover, about 20% of revenue  in fiscal 2023 came from exports, driven by superior product quality. Despite diversified customer base, top 5 customers account for ~95% share of OEM revenues, exposing the company to moderate client customer concentration.

 

• Healthy financial risk profile: Financial risk profile is healthy, supported by reasonable net worth (almost Rs.180 crores), and low debt on its balance sheet. Moderate capex plans (Rs.10-15 crores per annum over next 2-3 years) and minimal debt obligations of ~Rs.10 crores in next two fiscals will ensure limited need for additional debt, leading to gearing remaining comfortable at 0.2 times at March 31, 2024 (0.11 times at March 31, 20230 Interest coverage ratio has declined from 22.11 times in fiscal 2022 to 10.52 times in fiscal 2023 on account of higher interest rates pertaining to loan unsecured loan taken from promoters to the extent of Rs.10.5 crore. Interest cover is expected at 5-6 times in fiscal 2024, which is still adequate.

 

Weaknesses:

• Susceptibility of profitability to fluctuations in raw material prices: Business is inherently exposed to fluctuations in the prices of key raw materials, aluminium silica and steel. The company enters into annual pricing contracts with OEMs and any major increase in raw material prices is generally transferred with a lag of 3-6 months. However, given the severe price competition amid OEMs, component manufacturers are also hard-pressed to supply goods at competitive rates. In the replacement market, the company is fully exposed to price fluctuations as maintaining operating margin is determined by the ability to transfer cost increases to end users without any impact on volumes. Over the medium term, margin will likely remain susceptible to both fluctuations in raw material prices and pricing pressure from OEMs.

 

• Limited revenue diversity with minimal presence in four-wheeler components segment and lack of presence in EV segment: SAMKRG has higher segmental concentration with almost 95% of revenue coming from two wheeler segment and has a marginal presence in four-wheeler parts and generator sets. Due to this reason and high competitive intensity, its revenues too have stagnated at under Rs.270 crores over the past decade (except in fiscal 2019 when revenues peaked at Rs.291 crore), with a degrowth expected in the current fiscal.

 

Though the company plans to increase its presence in the four-wheeler and export markets and has reported increased traction, it will remain a small player in this segment over the medium term because of intense competition from other established players. Concentrated operations in the two-wheeler parts industry exposes the company to any changing demand patterns or regulations. Although company plans to increase its presence in the four-wheeler segment and also plans to develop EV engine parts in collaboration with its clientele, the same is in very initial stages and is expected to take time to materialize impacting the business performance over medium term.

Liquidity: Adequate

Estimated annual cash accruals of Rs.~14-16 crore suffice to meet repayment obligations of Rs.~5 and 5.5 crore in fiscal 2024 and 2025 respectively pertaining to unsecured loans from promoters. Also there is flexibility in repayment of the unsecured loans from promoters, which can be adjusted as per the cash flow availability. Also, bank limit utilization, against drawing power available averaged 84% between November 2022 and October 2023.Company has recently enhanced their working capital limits from Rs.20 crore to Rs.28 crore in Sep 2023 which is expected to provide further cushion to the liquidity position. Capex of Rs 10-15 crore per annum towards upgrading of existing facilities will be funded through mix of internal accrual and debt.

Outlook: Stable

CRISIL Ratings expects SAMKRG`s business performance will witness moderation due to sluggish demand for two-wheelers, limited product diversity, and average operating profitability, resulting from lower operating leverage. The company's financial risk profile and liquidity position will nevertheless, remain adequate  over the near to medium term.

Rating Sensitivity factors

Upward factors:

• Better than anticipated revenue generation, including through customer and product diversity, sustained improvement in the order flow from export and OEM customers and operating profitability sustaining around 12-13%, benefitting cash generation.
• Improvement in financial risk profile, supported by better cash generation and prudent management of working capital.

 

Downward factors:

• Sustained weakness in business performance or a potential negative business impact from changing regulations in the automotive industry with continuing pressure on revenues.
• Operating profitability sustaining below 8% impacting cash generation
• Moderation in key debt protection metrics due to lower profitability, and higher than expected debt levels, due to capex or elongation of working capital, and pressure on liquidity.

About the Company

SAMKRG was incorporated in March 1985, by Mr. S.D.M. Rao. His two sons, Mr. S. Karunakar, and Mr. S. Kishore, who are mechanical engineers, joined the company in 1986 and 1990 respectively as apprentice engineers and are presently in the board and actively involved in day-to-day the operations. Post demise of Mr. Rao in May 2023, his elder son Mr. S. Karunakar was appointed as Chairman and Managing Director in July 2023. The promoter’s younger son, Mr. S. Kishore is a whole time director on the Board of the company and  continues to take care of day-to-day business operations. The promoter’s daughter, Mrs.Ratnakumari Nama take care of the finance function.

 

The company manufactures pistons, piston pins and piston-rings. While its main plant is in Hyderabad, it has two other units in Srikakulam near Visakhapatnam (Andhra Pradesh). SAMKRG caters mainly to the two-wheeler segment (accounted for 95% of its revenue in fiscal 2023) with limited presence in four-wheeler parts.

Key Financial Indicators

As on / for the period ended March 31		2023	2022
Revenue	Rs Crores	237	238
Profit after tax (PAT)	Rs Crores	15	14
PAT margin	%	6.2	5.8
Adjusted debt/adjusted net worth	Times	0.17	0.12
Interest coverage	Times	10.52	22.11

On a standalone basis, net profit was Rs 2.4 crore in the first half of fiscal 2024 on revenue of Rs 119 crore, against net profit of Rs 8.4 crore and Rs.127 crore, respectively, in the corresponding period previous fiscal.

Any other information: Not applicable