Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Sandvik Asia Private Limited (SAPL) to ‘Stable’ from ‘Positive’ and reaffirmed the rating at ‘CRISIL AA+’, following completion of the announced demerger of three business segments into separate entities, namely Sandvik Mining and Rock Technology India Pvt Ltd and Sandvik Materials Technology India Pvt Ltd (SMRTIPL and SMTIPL, respectively). The short-term rating has been reaffirmed at ‘CRISIL A1+’. The ratings have been fully withdrawn at the company's request and on receipt of no-objection certificates from the bankers. The rating action is in line with the policy of CRISIL Ratings regarding withdrawal of bank loan ratings.

 

SAPL was earlier operating in three business segments: mining and rock technology, machining solutions and material technology. In March 2019, the board of directors had approved a scheme of demerger, whereby all three divisions were to be transferred to separate entities, with SAPL retaining only the machining solutions business. The scheme has been approved by the National Company Law Tribunal through an order dated June 25, 2020. Accordingly, pursuant to the scheme becoming effective, the mining and rock technology and material technology segments were demerged from the company and transferred to SMTIPL and SMRTIPL, respectively, with effect from April 01, 2019.

 

Revenue at a standalone level for SAPL moderated by around 11% in fiscal 2021 to an estimated Rs 729 crore because of the impact of the nationwide lockdown to contain the Covid-19 pandemic in the first quarter of the fiscal, overall pandemic-related slowdown and slowdown in the auto and aviation sectors. However, the operating margin has improved to 12% on account of steady export offtake and reduction in other costs. Revenue is expected to improve over the medium term, with business activities returning to normal and impact of the pandemic abating. Operating margin is expected to sustain at 9-12% over the medium term, as it is under a transfer pricing policy with the parent.

 

SAPL had nil debt and estimated healthy liquid surplus of Rs 498 crore as on March 31, 2021. Capital expenditure (capex) was moderate in fiscal 2021 on account of uncertainty in the business environment; however, the company is planning to undertake higher capex in fiscal 2022 for capacity expansion, expected to be funded from internal accrual and liquid surplus. Consequently, the financial risk profile will remain strong, supported by comfortable networth, negligible or nil debt and healthy liquidity.

 

The credit risk profile of SAPL continues to be healthy, supported by the strong market position of its machine tool business, healthy financial risk profile and continued operational and financial support from the parent, Sandvik AB (Sandvik; rated ‘A-/Stable/A-2’ by S&P Global Ratings).

 

The ratings continue to reflect the strong operational and financial support the company receives from the parent, Sandvik AB. The ratings also factor in the strong market position of SAPL, especially in the carbide tool segment, and healthy financial risk profile. These strengths are partially offset by susceptibility to cyclicality in end-user industries and modest profitability.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the operational and need-based funding support received by SAPL from Sandvik. This is considering the strategic importance of SAPL to Sandvik, apart from the companies being in the same line of business. Sandvik directly owns a 75% stake in SAPL, with an additional 25% through its subsidiary, Sandvik Finance BV, and shares its name and product lines with the company. Sandvik has, in the past, extended term loans as well as subscribed to preference shares of SAPL

Key Rating Drivers & Detailed Description

Strengths

Strong operational and financial support from Sandvik AB

The parent’s strong operational, need-based funding support should continue. SAPL focuses on selling the Sandvik group's entire output rather than the products solely manufactured by the company. Exports to the group companies of Sandvik account for almost half the revenue and help mitigate the impact of any slowdown in the domestic industrial goods segment.

 

Well-established market position

A diverse end-user industry base—with presence in the automotive, aerospace and construction segments - and strong clientele support the company’s market position.

 

Healthy financial risk profile

The company has a strong financial risk profile, supported by healthy networth of Rs 931 crore, a debt-free balance sheet and liquid surplus of Rs 498 crore as on March 31, 2021. Planned capex in fiscal 2022 is expected to be funded from internal accrual and liquid surplus, thus maintaining the strong financial risk profile. Expectation of need-based funding support from the parent further adds to the financial flexibility.

 

Weaknesses

Susceptibility to cyclicality in end-user industries

The engineering, mining and construction, automotive and aviation industries contribute majorly to the total revenue. Demand from these industries depends on economic trends and is inherently linked to the investment cycle. Growth in revenue, therefore, remains susceptible to economic downturns. Besides, the operating margin is susceptible to volatility in input prices and foreign exchange (forex) rates, and these factors will remain monitorables.

 

Susceptibility to forex risks

The company has significant forex exposure, as exports form around 65% of the total revenue. Majority of the company’s export and import billing is in INR. These risks are partially offset, as the company imports 75-80% of its raw material requirement, thereby creating a natural hedge. For the remaining portion, the company hedges its forex exposure through forward contracts.

Liquidity: Strong

On a standalone basis, the liquidity of SAPL remains strong, driven by expectations of steady cash accrual of over Rs 100 crore per annum over the medium term and healthy cash and equivalents of Rs 498 crore as on March 31, 2021. Bank limit utilisation was negligible over the previous 12 months.  SAPL is debt-free. Cash accrual, cash and equivalents and unutilised fund-based bank lines of Rs 80 crore are more than sufficient to meet the capex and the incremental working capital requirement. Also, the parent should continue to provide need-based liquidity support.

Outlook: Stable

The credit risk profile of SAPL will continue to benefit from the strong operational, need-based financial support from the parent, healthy market position and robust financial risk profile, with business performance expected to improve after the slowdown in fiscals 2020 and 2021.

Rating Sensitivity Factors

Upward factors

• Sustained healthy revenue growth and stable operating profitability of 14-15%
• Improvement in the credit risk profile at a standalone level
• Sustenance of the strong financial risk profile and healthy surplus liquidity

 

Downward factors

• Downward change in the credit risk profile of the parent by one or more notch
• Steep decline in revenue or profitability impacting the cash generation
• Any large, debt-funded capex or acquisition leading to sharp increase in gearing or material deterioration in liquidity
• Any adverse impact of the proposed demerger on the financial and business risk profiles

About the Company

SAPL was incorporated in Pune in 1960. The company manufactures machine cutting tools and tooling systems for advanced industrial machining operations. The products are sold under the leading brand Sandvik Coromant. SAPL has two manufacturing facilities, one each at Pune and Chiplun, both in Maharashtra.

 

Earlier, the company operated through three business divisions: machining solutions, mining (equipment and projects) and construction (equipment and projects), and materials technology. In June 2020, the company demerged into three separate entities, with SAPL housing the machining solutions business, the mining and rock technology business going to SMRTIPL and the materials technology business going to SMTIPL.

 

SAPL had five manufacturing facilities in India, one each in Mehsana, Gujarat; Hosur, Tamil Nadu; Patancheru, Telangana; and Pune and Chiplun. Sandvik Asia will retain two of the five manufacturing units at Pune and Chiplun, and the facilities in Mehsana and Hosur will go to SMT and the Patancheru facility to SMRT. The plants have quality, environmental and safety management systems in place and have been certified under universal quality standards, including International Standards Organisation (ISO) 9001 and ISO-14001.

Key Financial Indicators

Particulars	Unit	2021*	2020
Revenue	Rs.Crore	729	822
Profit After Tax (PAT)	Rs.Crore	36	108
PAT Margin	%	4.9	13.1
Adjusted debt/adjusted networth	Times	0.00	0.00
Interest coverage	Times	138.00	95.79

    *Provisional

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	42.70	NA	CRISIL AA+/Stable (Outlook Revised, Rating Reaffirmed and Withdrawn)
NA	Letter of credit and Bank Guarantee@	NA	NA	NA	127.30	NA	CRISIL A1+ (Rating Reaffirmed and Withdrawn)
NA	Packing Credit#	NA	NA	NA	37.50	NA	CRISIL A1+ (Rating Reaffirmed and Withdrawn)

*Fully interchangeable with short-term loan

#Buyer’s credit fully interchangeable with packing credit

@Short-term limit and PCFC limit are interchangeable