Rating Rationale
June 30, 2020 | Mumbai
Salzer Electronics Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.283.31 Crore (Enhanced from Rs.248.31 Crore)
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
 
Rs.20 Crore Commercial Paper CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL A/Stable/CRISIL A1' ratings on bank facilities and commercial paper of Salzer Electronics Limited (Salzer).
 
CRISIL's ratings continue to reflect Salzer's leading market position in the domestic rotary switches market, healthy relationships with key industrial clients and its adequate financial risk profile. These strengths are partially offset by exposure to intense competition in the electrical cables industry and working capital-intensive operations.
 
Standalone revenue increased 1% in fiscal 2020 compared with the previous fiscal, as the healthy 10% growth in the industrial switchgear business, driven by increase in exports to the US and European markets, was partially offset by decline of 17% in the building products segment, which mainly caters to the real estate sector. Operating margin improved to 11.64% in fiscal 2020 from 11.37% in fiscal 2019, mainly aided by a favourable product mix.
 
Business performance was, however, impacted since the last quarter of fiscal 2020, after implementation of a nationwide lockdown to contain the Covid-19 pandemic and slowdown in industrial activity thereafter.  
 
Salzer's operations in fiscal 2021 are likely to be aided by healthy export orders in the switchgear business and sustained offtake of wires and cables from the agriculture sector. These segments account for about 88% of revenue.  Furthermore, cost-control initiatives and soft input prices will support the profitability during the year. Therefore, for fiscal 2021, revenue may de-grow by 5-8%, while the margin may remain at 10-11%.
 
Performance in the medium term will be supported by uptick in industrial activity, continued offtake likely from the agriculture segment and product launches.
 
Salzer has adequate cushion in its balance sheet and liquidity to absorb the anticipated slowdown in demand in the near term. The company had liquid funds of Rs 10.5 crore and unutilised bank limit of Rs 40 crore as on March 31, 2020. Furthermore, collection of receivables from original equipment manufacturers (OEMs) resumed in April. These should suffice to fund fixed expenses of Rs 4-5 crore per annum. The company is also availing a principal moratorium on its term loan to conserve cash.

Analytical Approach

For arriving at its rating, CRISIL has combined the business and financial risk profiles of Salzer and, its domestic subsidiary, Kaycee Industries Ltd, which was acquired in May 2019. This is because these entities operate under a common management, with significant business and financial linkages. Moreover, CRISIL has amortised goodwill of Rs 2.35 crore generated on account of acquisition of Salzer Magnet Wires Ltd, over a period of five years starting from fiscal 2019.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths:
* Leading market position in the domestic rotary switches market; marketing tie-up with Larsen & Toubro Ltd (L&T; 'CRISIL AAA/FAAA/Stable/CRISIL A1+'); and sustained focus on research and development (R&D)
Revenue growth should remain healthy over the medium term, supported by the company's market leadership in the cam-operated rotary switches segment; launch of new products in industrial switchgears; higher-margin products in the wires and cables business; and the distribution arrangement with L&T. Furthermore, continued focus on R&D and technology tie-ups with global majors will help maintain technology competitiveness.
 
* Adequate financial risk profile:
The adequate financial risk profile is reflected in networth of about Rs 307 crore and gearing of about 0.57 time as on March 31, 2020. Debt protection metrics should remain stable over the medium term, with net cash accrual to total debt and interest coverage ratios of around 24% and 3.12 times, respectively, in fiscal 2020 (22% and 3.24 times, respectively, in fiscal 2019). Furthermore, after a marginal decline in fiscal 2021, cash accrual may remain steady over the medium term and gradually enhance the financial risk profile.
 
Weaknesses:
* Working capital-intensive operations: Operations are marked by large inventory and stretched receivables. The company maintains inventory of around 100 days as it has to manufacture and maintain stock of a wide range of products. Also, raw materials (especially copper) are stocked when prices of commodities are favourable, thus constraining the working capital cycle. Receivables are high around 100 days, because of the inherent long payment cycle. Prudent management of operations remains critical going forward.
 
* Exposure to intense competition in the electrical cables industry: Domestic manufacturers of electrical installation products face intense competition from the unorganised sector, and from cheap Chinese imports, as the industry has low entry barriers, and the technology used can be easily replicated.
 
Although longstanding relationships with customers and introduction of value-added products will support offtake in the cables segment, exposure to competition is likely to persist over the medium term, thus limiting profitability.
Liquidity Strong

Liquidity is marked by a surplus of around Rs 11 crore and access to unutilised bank limit of Rs 40 crore,  which should suffice to fund the monthly fixed expenses of around Rs 1-1.5 crore. The company is also availing principal moratorium on its term loan to conserve cash. Cash accrual is likely to improve gradually to Rs 30 crore per fiscal, once operations normalise. During fiscal 2021, annual capex is to be pruned to Rs 8 crore, and the maturing debt obligation will be lower around Rs 4 crore, due to the moratorium availed. With a gearing of 0.57 time as on March 31, 2020, Salzer has sufficient headroom to raise additional debt, to meet its capex and incremental working capital requirement, if necessary.

Outlook: Stable

CRISIL believes Salzer's steady operating performance will continue to drive healthy cash generation over the medium term, despite certain headwinds in the near term, following the spread of the Covid-19 pandemic. Furthermore, key credit metrics should improve over this period in the absence of any sizeable debt-funded capital expenditure (capex).

Rating Sensitivity factors
Upward factors
* Sustained revenue growth of 18-20%, with operating margin sustaining above 13%
* Larger-than-expected cash accrual, driven most likely by better revenue contribution from high-margin new products, while revenue growth and profitability of existing products are sustained
* Sustenance of healthy credit metrics, with gearing below 0.6 time
 
Downward Factors
* Significant decline in revenue by over 15% and drop in operating margin to 8-9%, negatively impacting cash flow
* Large debt-funded capex or acquisition, or stretched working capital cycle (marked by gross current asset days sustaining above 260 days) 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 L&T. Its 51:49 cable manufacturing joint venture with L&T, Salzer Cables Ltd, was merged with Salzer effective April 1, 2008.
 
L&T held 26% stake in Salzer; the stake was liquidated in July 2015 as part of L&T's initiative to divest its non-core investments. However, L&T remains the largest customer for Salzer's cables. Salzer also has a marketing association with L&T 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 products such as rotary cam switches, weather tight switches and breaker control switches and was originally 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 for acquisition of shares representing a 72.32% stake in Kaycee from its principal promoter Universal Trust Pvt Ltd. Furthermore, in the third quarter of fiscal 2020, Salzer increased its total stake to 74.91%. Total cost of acquisition, of around Rs 18 crore, was funded through a mix of debt and internal accrual.  
 
Profit after tax was Rs 26 crore on revenue of Rs 567 crore in fiscal 2020 against Rs 24 crore and Rs 560 crore, respectively, in the previous fiscal.

Key Financial Indicators*
As on / for the period ended March 31   2020 2019
Revenue Rs crore 568 560
PAT Rs crore 26 23
PAT margin % 4.6 4.2
Adjusted debt/adjusted net worth Times 0.57 0.52
Interest coverage Times 3.12 3.24
*CRISIL adjusted numbers

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs Crore)		 Complexity
levels		 Rating Assigned
with Outlook
NA Bank Guarantee NA NA NA 8.84 NA CRISIL A1
NA Cash Credit NA NA NA 112.05 NA CRISIL A/Stable
NA Foreign Letter of Credit NA NA NA 7.0 NA CRISIL A/Stable
NA Letter of Credit NA NA NA 15.0 NA CRISIL A1
NA Term Loan NA NA Feb-26 18.37 NA CRISIL A/Stable
NA Term Loan NA NA Jul-24 9.0 NA CRISIL A/Stable
NA Bill Discounting NA NA NA 18 NA CRISIL A1
NA Bill Discounting NA NA NA 3 NA CRISIL A/Stable
NA Cash Credit*** NA NA NA 85 NA CRISIL A/Stable
NA Foreign Letter of Credit*** NA NA NA 5 NA CRISIL A/Stable
NA Proposed Long-Term
Bank Loan Facility		 NA NA NA 2.05 NA CRISIL A/Stable
NA Commercial Paper NA NA 7-365 days 20 Simple CRISIL A1
***These facilities are available for Salzer Electronics Ltd-Unit II under Multiple Banking Arrangement. However, its overall utilisation is subject to Maximum Permissible Drawing Powers of the said Unit.
 
Annexure - List of entities consolidated
Sr.no Name of the entity Extent of consolidation Rationale for consolidation
1 Salzer Electronics Ltd Full Holding
2 Kaycee Industries Ltd Full Co-subsidiary
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
Commercial Paper  ST  20.00  CRISIL A1  28-05-20  CRISIL A1  26-09-19  CRISIL A1  26-09-18  CRISIL A1    --  -- 
        15-01-20  CRISIL A1               
Fund-based Bank Facilities  LT/ST  247.47  CRISIL A/Stable/ CRISIL A1  28-05-20  CRISIL A/Stable/ CRISIL A1  26-09-19  CRISIL A/Stable/ CRISIL A1  26-09-18  CRISIL A/Stable/ CRISIL A1  06-06-17  CRISIL A-/Positive/ CRISIL A1  CRISIL A-/Positive 
        15-01-20  CRISIL A/Stable/ CRISIL A1               
Non Fund-based Bank Facilities  LT/ST  35.84  CRISIL A/Stable/ CRISIL A1  28-05-20  CRISIL A/Stable/ CRISIL A1  26-09-19  CRISIL A/Stable/ CRISIL A1  26-09-18  CRISIL A/Stable/ CRISIL A1  06-06-17  CRISIL A-/Positive/ CRISIL A1  CRISIL A-/Positive/ CRISIL A1 
        15-01-20  CRISIL A/Stable/ CRISIL A1               
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 8.84 CRISIL A1 Bank Guarantee 8.84 CRISIL A1
Bill Discounting 3 CRISIL A/Stable Bill Discounting 3 CRISIL A/Stable
Bill Discounting 18 CRISIL A1 Bill Discounting 18 CRISIL A1
Cash Credit 112.05 CRISIL A/Stable Cash Credit 157 CRISIL A/Stable
Cash Credit*** 85 CRISIL A/Stable Foreign Letter of Credit 27.7 CRISIL A/Stable
Foreign Letter of Credit 7 CRISIL A/Stable Letter of Credit 6.4 CRISIL A1
Foreign Letter of Credit*** 5 CRISIL A/Stable Term Loan 27.37 CRISIL A/Stable
Letter of Credit 15 CRISIL A1 -- 0 --
Proposed Long Term Bank Loan Facility 2.05 CRISIL A/Stable -- 0 --
Term Loan 27.37 CRISIL A/Stable -- 0 --
Total 283.31 -- Total 248.31 --
***These facilities are available for Salzer Electronics Ltd-Unit II under Multiple Banking Arrangement. However, its overall utilisation is subject to Maximum Permissible Drawing Powers of the said Unit.
 
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 Engineering Sector
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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