Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and commercial paper programme of Salzer Electronics Limited (Salzer) at  'CRISIL A/Stable/CRISIL A1' 

 

The company registered 34% growth in revenue in the nine months of fiscal 2022, compared with the corresponding period of the previous fiscal, driven by higher offtake in the switch gear division on account of uptick in industrial demand and robust demand from export markets. The switch gear and wires and cables segments each posted volume growth of 20% year-on-year in the nine months of fiscal 2022. Operating margin declined by 180 basis points (bps) to 9.2% in nine months fiscal 2022 from 11% in the previous period mainly due to hike in raw material prices and freight charges, which could not be fully passed on to customers. However, the overall margin is estimated to fall only by ~25 bps to 9.5% in fiscal 2022 on account of growth in volumes and price hikes taken by the company in Q4 of fiscal 2022. Revenue is estimated to have grown by 25% in fiscal 2022 aided by continuous flow of orders from existing and new clients.

 

Over the medium term, the company is expected to register revenue growth of 20% per annum backed by uptick in industrial demand. With increased industrial activity, demand for electricity will rise which in turn drives the demand for switchgear products in both domestic and export markets as they form an integral part in safe and secure transmission and distribution systems. Further gradual pick up in the LAN (local area network) cable business and continued demand from the agriculture sector for wires and cables is expected to support the revenue growth in medium term. The operating margin is expected to increase to ~11% over the medium term supported by higher share of exports, launch of new products entailing higher margins and series of price hikes to be taken by the company to mitigate the rise in raw material cost.

 

The rating also factors in the company’s healthy financial risk profile supported by comfortable debt protection metrics. Despite the additional debt taken in fiscal 2021, gearing was low at ~0.6 time as on March 31, 2021, and is expected at similar levels over the medium term in the absence of any major planned capex. Interest coverage ratio improved to 3.66 times in the nine months of fiscal 2022 from 2.93 times in the corresponding period of the previous fiscal, and is expected to improve further over the medium term. Liquidity will continue to be supported by sufficient accrual to meet term debt obligation of Rs 4-5 crore and routine maintenance capex of Rs 15-20 crore per annum over the medium term.

 

The ratings continue to reflect the leading market position of the company in the domestic rotary switches market, its healthy relationships with key industrial clients and an extensive distribution network. These strengths are partially offset by exposure to intense competition in the fragmented wires and cable industry and working capital intensive operations.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Salzer and its domestic subsidiary, Kaycee Industries Ltd (Kaycee), which was acquired in May 2019. This is because the entities operate under a common management and have significant business and financial linkages.

 

Please refer Annexure - List of entities consolidated, for details of the entities considered and their analytical treatment for consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Healthy revenue growth, aided by strong market position in the domestic rotary switches market

Revenue growth is likely to remain healthy, supported by the market leadership of Salzer in the Cam-operated rotary switches segment, strong product profile and established clientele. The acquisition of the nearest market competitor, Kaycee, in fiscal 2020, which is a pioneer in industrial switches, was complimentary and synergistic to the existing business and further stabilised the market position of the company. Further, the acquisition helped Salzer to expand its footprint into railways and provided access to a pan-India dealer network. Sustained revenue growth is expected to be driven by new products in the industrial switchgear segment and the marketing and distribution arrangement with Schneider Electric India Pvt Ltd (SEIPL; ‘CRISIL AAA/Stable/CRISIL A1+’). SEIPL is the erstwhile electrical and automation division of Larsen & Toubro Ltd (L&T). Continued focus on research and development and technology tie-ups with global majors should help maintain competitiveness.

 

Adequate financial risk profile

Networth was large at an estimated Rs 355 crore as on March 31, 2022. Improving networth backed by continuous accretion to reserve led to a healthy capital structure, resulting in gearing of ~0.6 time as on March 31, 2022. Debt protection metrics were stable, reflected in estimated net cash accrual to total debt and interest coverage ratios of 0.21 time and 3.33 times, respectively, in fiscal 2022. Cash accrual should improve steadily over the medium term.

 

Weaknesses:

Working capital intensive operations

Gross current assets remain high at 252 days as on March 31, 2021, due to high inventory levels and increase in debtors. The company generally maintains large inventory as it manufactures a wide range of products and stocks raw materials (especially copper) when commodity prices are favourable and to ensure continuous availability for smooth operations. Moreover, receivables remain sizeable at over 100 days on account of inherently long payment cycle due to the credit period to be given to OEMs considering the long standing relationships with them. Prudent management of working capital will remain critical over the medium term.

 

Exposure to intense competition in the electrical cables industry

Domestic manufacturers of electrical installation products face intense competition from the unorganised sector and cheap Chinese imports, as the industry has low entry barriers and the technology can be easily replicated. Although longstanding relationships with customers with guaranteed offtake and introduction of value-added products will support overall offtake in the electrical cables segment, continued exposure to competition may limit profitability.

Liquidity: Strong

Liquidity was supported by cash surplus of around Rs 18 crore as on March 31, 2021. Expected cash accrual of Rs ~70-90 crore per fiscal over medium term will sufficiently cover yearly debt obligation of Rs 4-5 crore and annual capex of Rs 15-20 crore over the medium term. With estimated gearing of 0.6 time as on March 31, 2022, the company has sufficient headroom to raise additional debt, to meet its capex and incremental working capital requirement, if necessary.

Outlook: Stable

CRISIL Ratings believes Salzer’s cash accrual will continue to improve over the medium term, supported by steady operating performance. The key credit metrics should also improve in the absence of any sizeable, debt-funded capex.

Rating Sensitivity Factors

Upward factors

• Sustained revenue growth and operating margin in the range of 11-12%
• Larger-than-expected cash accrual driven most likely by better revenue contribution from high-margin products
• Sustenance of healthy credit metrics, with gearing below 0.6 times

 

Downward factors

• Decline in revenue and fall in operating margin to 8-9% leading to lower cash accrual
• Large, debt-funded capex or acquisition or further stretch in the working capital cycle weakening the key credit metrics

About the Company

Salzer, incorporated in 1985, manufactures cam-operated rotary switches, toroidal transformers, cable ducts, isolators, modular switches, relays and automotive products. It has five manufacturing units in Coimbatore, Tamil Nadu. The company has a longstanding relationship with SEIPL (the erstwhile electrical and automation division of L&T, which remains the largest customer for Salzer's cables). Salzer also has a marketing association with SEIPL for sale and distribution of its electrical installation products in India and a few overseas markets. Salzer  sells its products overseas through associate company, Salzer Exports Ltd.

About Kaycee

Kaycee manufactures various products such as rotary cam switches, weather tight switches and breaker control switches. It was bought out by the CMS group from Bajaj Electricals Ltd in 2002. The CMS group is a leading player in IT/ITES, traffic signalling cash management, e-governance and surveillance.

 

In May 2019, Salzer entered into a share purchase agreement to acquire shares representing 72.32% stake in Kaycee from its principal promoter, Universal Trust Pvt Ltd. Furthermore, in the third quarter of fiscal 2020, Salzer increased its stake to 74.91%. Total cost of acquisition, of around Rs 18 crore, was funded through internal accrual.  

 

Profit after tax for Salzer on a standalone basis was Rs 19 crore on revenue of Rs 556 crore in the first nine months of fiscal 2022, against Rs 14 crore and Rs 416 crore, respectively, in the corresponding period of fiscal 2021

Key Financial Indicators*

As on/for the period ended March 31	Unit	2021	2020
Revenue	Rs crore	624	584
PAT	Rs crore	21	26
PAT Margin	%	3.4	4.4
Adjusted debt/adjusted networth	Times	0.63	0.58
Interest coverage	Times	3.05	3.18

    *CRISIL Ratings adjusted numbers

Any other information: Not applicable