| S M Auto Engineering Private Limited | ||||||
| Ratings upgraded to 'CRISIL BBB+/Stable/CRISIL A2'; Rated amount enhanced for bank debt | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed rationale CRISIL Ratings has upgraded its ratings on the bank facilities of S M Auto Engineering Private Limited (SMEPL; part of the SM Auto group) to 'CRISIL BBB+/Stable/CRISIL A2' from 'CRISIL BBB/Positive/CRISIL A3+'.
The upgrade reflects the improvement in the business risk profile of the SM Auto group, as indicated by its sustained revenue growth and steady operating margin. Revenue rose ~21% on-year to Rs 1,127 crore in fiscal 2022 due to increased orders and better realisations. With steady demand from existing customers Bajaj Auto - KTM, Mercedes Benz and Renault Nissan Automotive India for their existing as well as new models, the revenue of the SM Auto group is expected to grow ~15% annually over the medium term.
The operating margin was modest ~3.7% in fiscal 2022, constrained by intense competition and no profit in the sale of catalytic convertors, which is part of the exhaust system assembly for key customers after BSVI norms. Nonetheless, the operating margin is expected to improve because of revised terms with a few customers and better economies of scale.
The financial risk profile is supported by adequate debt protection metrics as reflected in interest coverage and NCATD ratios of 3.55 times and 0.18 times for fiscal 2022. Group's capital structure remains moderate owing to regular capital expenditure (capex) and incremental working capital requirement. The group plans to expand capacity for assembly and exhaust systems and set up a facility for CED coating. The project cost of ~Rs 80 crore will be funded through term debt of Rs 55 crore and through internal accrual. Despite the debt-funded capex, the capital structure is expected to remain steady on account of higher cash generation.
The ratings continue to reflect the established market position of the SM Auto group in the automotive (auto) components industry backed by its established and reputed clientele, and its moderate financial risk profile. These strengths are partially offset by customer concentration in revenue and susceptibility to cyclicality in the auto industry. |
Analytical approach CRISIL Ratings has combined the business and financial risk profiles of SMAEPL and its subsidiary, SM Exhaust Technology Pvt Ltd (SMET). This is because the two companies, together referred to as the SM Auto group, are in similar businesses and under the same management, and have strong operational and financial linkages.
Unsecured loan of Rs 10.0 crore as on March 31, 2022, from the promoters has been treated as neither debt nor equity as the loan is likely to remain in the business over the medium term. Preference shares of Rs 4 crore have been treated as 75% equity and 25% debt as they carry low coupon, are from the promoters and will remain in the business over the medium term.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation |
Key rating drivers and detailed description Strengths: Established position in the auto components industry: The SM Auto group has established a strong market position in the auto components industry over the past four decades, backed by diversified product portfolio and clientele. Its customers include original equipment manufacturers (OEMs) such as Bajaj Auto Ltd, Mercedes Benz, Tata Motors Ltd, Renault India Pvt Ltd and Royal Enfield India Ltd. The group has upgraded and enhanced its capacities, resulting in steady increase in sales.
Efficient working capital management: The working capital is efficiently managed as indicated by gross current assets of 65-99 days for the three years through 2022, driven by inventory of 34-56 days and receivables of 32-46 days.
Moderate financial risk profile: Debt protection metrics were adequate, as indicated by interest coverage and net cash accrual to total debt ratios of 3.58 times and 0.18 time, respectively, in fiscal 2022. The capital structure is moderate, as indicated by networth of Rs 68.91 crore, gearing of 2.06 times, and total outside liabilities to tangible networth (TOLTNW) ratio of 3.34 times as on March 31, 2022. Despite the capex for capacity expansion, the financial risk profile should remain stable owing to improving operating performance and cash flow from operations.
Weaknesses: Susceptibility to volatility in raw material prices and cyclicality in the automobile industry: As the key raw materials account for around 72% of operating revenue, any slight variation in their prices may impact profitability. This risk is mitigated by the pass-through clause with key customers though any price increase is passed on to customers after a lag. Furthermore, revenue largely depends on demand from the automobile industry, which is inherently cyclical.
High customer concentration in revenue: Over 50% of the revenue comes from the top two customers, rendering the revenue and profitability susceptible to volatility in demand from these customers. |
Liquidity: Adequate Bank limit utilisation was moderate at 76% on average over the 12 months through August 2022. Expected net cash accrual of Rs 30-40 crore per annum will sufficiently cover debt obligation of Rs 16-20 crore over the medium term. Liquidity is also supported by funds from the promoters. Current ratio remains average at about 1 time. |
The SM Auto group will benefit from increasing offtake from customers and maintain steady revenue growth over the medium term. |
Rating sensitivity factors Upward factors
Downward factors
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About the group Incorporated in 1976, SMAEPL manufactures exhaust systems and heat-exchangers such as aluminium radiators, intercoolers, oil coolers, connecting rods and sheet-metal; and machined assemblies. The company is based in Pune and has seven units.
SMET, a 99% subsidiary of SMAEPL, manufactures three and four-wheeler exhaust systems and has two plants |
Key financial indicators: SMAEPL - Consolidated
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of instrument(s)
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Annexure - List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 07-Dec-2022 in line with the lender-wise facility details as on 13-Apr-2022 received from the rated entity
Criteria Details
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