Rating Rationale
April 10, 2019 | Mumbai
SAMKRG Pistons and Rings Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.20.05 Crore
Long Term Rating CRISIL A-/Stable (Reaffirmed)
Short Term Rating CRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of SAMKRG Pistons and Rings Ltd (SAMKRG) at 'CRISIL A-/Stable/CRISIL A2+'.
 
CRISIL's ratings on the bank facilities continue to reflect SAMKRG's established position in the pistons and piston-rings industry and its healthy financial risk profile, with comfortable gearing and strong debt protection metrics. These strengths are partially offset by susceptibility of SAMKRG's profitability to volatility in raw material prices and in foreign exchange rates, and limited presence in the four-wheeler segment.
 
CRISIL believes SAMKRG's financial profile will continue to remain strong over the medium term driven by healthy accruals, moderate capex requirements and marginal increase in working capital requirements envisaged.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy financial risk profile:
SAMKRG's healthy financial risk profile is marked by steady improvement in cash accruals and declining debt levels with adequate liquidity. SAMKRG's revenues grew by 8% during fiscal 2018, mainly driven by increasing business from OEMs, while operating margins at 15.7% was lower compared to 16.3% in fiscal 2017 due to higher share of OEMs in the product mix. Gearing has further improved to 0.17 times as on March 31, 2018 while the key debt protection metrics also remained comfortable.
 
SAMKRG is expected to spend an average of Rs 15 crore per year over the medium term towards upgrading its facilities, which will be funded from its internal accruals. SAMKRG distributed about 23 per cent of its profit after tax as dividend during fiscal 2018. CRISIL expects the dividend pay-out trend to continue at these levels (about 25%) over the medium term.
 
CRISIL believes that SAMKRG's financial risk profile will continue to remain healthy over the medium term, given that the company will generate healthy cash accruals to fund moderate capex requirements and marginal working capital requirements, thereby restricting further addition of debt on its books.
 
* Established position in domestic pistons and piston-rings market:
SAMKRG has an established market position in the piston and piston-rings market catering to a strong and diversified customer base in the two-wheeler market. This is well supported by the promoters' experience of more than two decades in piston manufacturing. In the original equipment manufacturers (OEM) segment, company has a long standing relationship with major two wheeler manufacturers and caters to a major share of their piston requirements. Company also has a leading market position in the replacement market, operating through a strong and wide network of dealers and distributors across India. SAMKRG is also active in capitalizing opportunities in the exports market (about 15% of net sales in fiscal 2018), driven by its superior quality products and technical expertise from Japan and German consultants.
 
SAMKRG's diversified customer base protects the company from risks associated with customer concentration. CRISIL believes that SAMKRG will maintain a stable business risk profile over the medium term, backed by its promoters' extensive experience and established relationship with customers.
 
Company had spent about Rs 20 crore during fiscal 2019 towards upgrading the facilities to meet BS VI norms. The upgraded facilities are almost fully utilized to meet the strong order inflow from OEMs during fiscal 2019. CRISIL expects this trend to translate into healthy revenue growth with stable operating margins in the medium term.
 
Weakness
* Susceptibility of profitability to fluctuations in raw material prices
SAMKRG's business is inherently exposed to fluctuations in prices of raw materials, mainly aluminium and steel. SAMKRG enters into annual pricing contracts with OEMs and any major increase raw material prices are generally transferred. However, given the severe price competition amidst OEMs, component manufacturers also come under pricing pressure to supply components at competitive rates. In the replacement market, SAMKRG is fully exposed to price fluctuations, as the maintenance of operating margins is determined by the ability to transfer the cost increases to the end market, without any impact on volumes. Over the medium term, CRISIL expects SAMKRG's margins to remain susceptible to both fluctuations in raw material prices and to pricing pressure from OEMs.
 
* Limited revenue diversity, with minimal presence in four-wheeler components segment:
SAMKRG mainly caters to the two-wheeler parts segment (95% of fiscal 2018 revenues) and has a marginal presence in the four-wheeler parts and generator sets segments. SAMKRG plans to increase its presence in the four-wheeler parts segment and has reported increased traction in the segment. However, it will remain a small player in this segment over the medium term because of intense competition from other established players. CRISIL believes that SAMKRG's concentrated operations in the two-wheeler parts segment makes it more vulnerable to any changing demand patterns or the effect of negative regulations in the two-wheeler industry.
Liquidity

Liquidity is adequate, as reflected in healthy annual accrual of Rs 23 crore in fiscal 2018, against moderate debt repayment obligations of about Rs 2 crore towards sales tax deferral loans. Accrual is expected to improve steadily to Rs 28-32 crore over the medium term, driven by stable growth in revenue and healthy profitability. Company is expected to undertake capex of about Rs 15 crore mainly towards upgrading of existing facilities over the medium term, which will be funded by its internal accruals. Furthermore, prudent management of working capital is reflected in moderate utilisation of bank limits, which averaged 54% for the 12 months ended December 2018.

Outlook: Stable

CRISIL believes SAMKRG will maintain its business risk profile over the medium term, supported by its longstanding relationships with two-wheeler OEMs, established presence in the after-market segment, and steadily growing presence in the export segment. CRISIL also believes the financial risk profile will remain healthy over this period, backed by comfortable gearing and strong debt protection metrics.
 
Upside scenario
* Significant and sustained growth in revenue supported by stable improvement in operating metrics leading to higher accruals in the medium term.
* Improvement in business profile driven by higher market share and sustained improvement in the order flow from export and OEM customers, including expansion in commercial vehicles segment.
 
Downside scenario
* Material deterioration in capital structure and debt protection metrics, driven by larger than expected debt-funded capex
* Weakened business performance or a potential negative business impact from changing regulations in the automotive industry.

About the Company

SAMKRG was set up in March 1985 by Mr S D M Rao, who is currently its chairman and managing director. The company manufactures Pistons, Piston pins and piston-rings. While its main plant is in Hyderabad, it has two other plants at Srikakulam near Visakhapatnam. SAMKRG caters mainly to the two-wheeler segment (accounted for 94% of its revenue in fiscal 2017), and has limited presence (6%) in the four-wheeler segment.
 
For the nine month period ending December 31, 2018, SAMKRG reported a profit after tax of Rs 17.8 crore on net sales of Rs 222 crore, against a profit after tax of Rs 16.1 crore on net sales of Rs 200 crore during the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended March 31   2018 2017
Revenue Rs Crores 267.2 246.4
Profit after tax (PAT) Rs Crores 20.15 19.4
PAT margins % 7.5 7.9
Adjusted debt/adjusted net worth Times 0.20 0.23
Interest coverage Times 34.2 23.8
 

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 0.05 CRISIL A2+
NA Letter of Credit NA NA NA 4.0 CRISIL A2+
NA Cash Credit NA NA NA 16.0 CRISIL A-/Stable
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  16 CRISIL A-/Stable      29-01-18  CRISIL A-/Stable      27-10-16  CRISIL A-/Stable  CRISIL A-/Stable 
Non Fund-based Bank Facilities  LT/ST  4.05  CRISIL A2+      29-01-18  CRISIL A2+      27-10-16  CRISIL A2+  CRISIL A2+ 
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 .05 CRISIL A2+ Bank Guarantee .05 CRISIL A2+
Cash Credit 16 CRISIL A-/Stable Cash Credit 16 CRISIL A-/Stable
Letter of Credit 4 CRISIL A2+ Letter of Credit 4 CRISIL A2+
Total 20.05 -- Total 20.05 --
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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