Rating Rationale
May 05, 2020 | Mumbai
SAMKRG Pistons and Rings Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.22.05 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 Limited (SAMKRG) at 'CRISIL A-/Stable/CRISIL A2+'.
 
Amidst a wider consumption slowdown, liquidity crunch and transition to stringent BS-VI emission norms, fiscal 2020 was a challenging year for the Indian automobile industry. The situation was further aggravated due to the spread of Coronavirus (N-Covid 19) in the last quarter of the fiscal year. SAMKRG's revenues declined by 18% during nine-month period of fiscal 2020 over the corresponding previous period due to lower offtake from original equipment manufacturers (OEM), though partially mitigated by steady volumes in the replacement market.  Operating profitability during this period, however improved to 17.6% (compared to 14.3% during the previous comparable period) driven by internal cost optimization measures as well as higher contribution per unit from BS-VI variant products.
 
Demand in fiscal 2021 is also expected to remain subdued both in the domestic and export markets due to the on-going lockdown situation and challenging business environment. Revocation of the lockdown will be contingent upon directive from the Central government and extent of spread of COVID-19. A sustained long period of plant closures can result in deterioration in credit quality of automotive component players, including SAMKRG. On the other hand, a faster restoration of demand and the ability of SAMKRG to revert back to operational stability will be key monitorables.
 
CRISIL believes SAMKRG's financial profile will continue to remain strong despite the moderating in accruals, driven by moderate capex plans and working capital requirements. Liquidity will be supported by unutilized bank lines of about Rs 7 Cr and large outstanding receivables from OEMs for about Rs 40 Cr as of March 2020.
 
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.

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. Despite the one off decline in accruals anticipated in fiscal 2021, gearing is expected to remain stable at below 0.15 times (compared to 0.16 times as on March 31, 2019). Other key debt metrics in interest coverage ratios and net cash accruals to total debt ratios are also expected to remain healthy at above 20 times and 1.0 times respectively over the medium term.
 
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 25 per cent of its profit after tax as dividend during fiscal 2019. 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 2019), 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 has led to better realizations for BS-VI compliant products from fiscal 2020. CRISIL expects this trend to translate into healthy revenue growth with stable operating margins in the medium term.
 
Weaknesses:
* 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 2019 revenues) and has a marginal presence in the four-wheeler parts and generator sets segments. SAMKRG plans to increase its presence in the export market 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 Adequate

Liquidity is adequate, as reflected in healthy annual accrual of about Rs 27 crore expected in fiscal 2020, against moderate debt repayment obligations of about Rs 2 crore towards sales tax deferral loans. Accrual is expected to improve steadily to Rs 18-25 crore over the medium term, driven by restoration of volume growth from fiscal 2022 and healthy profitability. Company is expected to undertake capex of about Rs 15 crore per annum 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 36% for the 12 months ended January 2020.

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.

Rating Sensitivity factors
Upward factors
* Significant and sustained growth in revenue (greater than 10%) 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 and passenger vehicles segment.
 
Downward factors
* Material deterioration in capital structure and debt protection metrics, driven by larger than expected debt-funded capex leading to gearing above 0.75 times
* 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, 2019, SAMKRG reported a profit after tax of Rs 16.8 crore on net sales of Rs 182 crore, against a profit after tax of Rs 17.8 crore on net sales of Rs 222 crore during the corresponding period of the previous fiscal.

Key Financial Indicators
As on / for the period ended March 31   2019 2018
Revenue Rs Crores 289 267
Profit after tax (PAT) Rs Crores 21.0 14.7
PAT margins % 7.2 5.5
Adjusted debt/adjusted net worth Times 0.16 0.20
Interest coverage Times 31.48 34.23
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 6.0 CRISIL A2+
NA Cash Credit NA NA NA 16.0 CRISIL A-/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  16.00  CRISIL A-/Stable      22-05-19  CRISIL A-/Stable  29-01-18  CRISIL A-/Stable      CRISIL A-/Stable 
            10-04-19  CRISIL A-/Stable           
Non Fund-based Bank Facilities  LT/ST  6.05  CRISIL A2+      22-05-19  CRISIL A2+  29-01-18  CRISIL A2+      CRISIL A2+ 
            10-04-19  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 6 CRISIL A2+ Letter of Credit 6 CRISIL A2+
Total 22.05 -- Total 22.05 --
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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