Rating Rationale
April 15, 2024 | Mumbai
Sharda Motor Industries Limited
Rating outlook revised to 'Positive'; Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities RatedRs.265.5 Crore
Long Term RatingCRISIL AA-/Positive (Outlook revised from 'Stable'; Rating Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
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 revised its outlook on the long-term bank facilities of Sharda Motor Industries Ltd (SMIL) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA-’. Rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook reflects expectation of CRISIL Ratings that the company will maintain its robust business risk profile, driven by its strong market position in exhaust and suspension systems for passenger cars, utility vehicles, light commercial vehicles, medium and heavy commercial vehicles and vans along with pan India presence and sustained healthy profitability. Revenue was Rs 2,704 crore in fiscal 2023 which is better than the CRISIL Ratings expectations during the previous review. Till December 2023, the company had achieved revenue of ~Rs 2,106 crore and is expected to clock in revenue of Rs 2,700-2,800 crore for full fiscal 2024. Growth in fiscal 2023 was driven by growth in the automobile industry and better price realisations. While the company is expecting volume growth of 9-11%, softening of raw material prices has reduced price realisations. SMIL has expertise in exhaust systems since inception, which is its core segment contributing to a significant portion in overall revenue.  

 

Improvement in profitability in fiscal 2024 is due to benefits of BS-VI real driving emissions (RDE) which was implemented from April 1, 2023. The new products are basically value-added sales parts which have ramped up from the second quarter of fiscal 2024 onwards. This has led to improvement in the earnings before interest, tax, depreciation and amortisation (EBITDA) margin along with good product mix and cost rationalisation measures undertaken by SMIL.

 

The company has been able to maintain strong capital structure with networth of more than Rs 769 crore as on March 31, 2023, on the back of steady accretion to reserves which is expected to improve further. The total outside liabilities to tangible networth (TOLTNW) ratio is maintained below 1 time during the three fiscals ending March 31, 2023. It does not have any long-term debt; thus the leverage position is expected to remain comfortable and in similar range over the medium term.

 

The ratings continue to reflect SMIL’s established market position, healthy relationships with customers, efficient working capital management and strong financial risk profile. These strengths are partially offset by risks of customer concentration and product concentration in revenue, susceptibility to increase in raw material prices and pricing pressure from original equipment manufacturers (OEMs).

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position and strong customer base: Experience of around three decades in manufacturing exhaust systems has enabled the promoters to develop heathy relationships with OEMs such as Mahindra and Mahindra Ltd (M&M; ‘CRISIL AAA/Stable/CRISIL A1+’), for which SMIL is the preferred supplier of independent front suspension systems. It also caters to various models of Hyundai Motor India Ltd (Hyundai; rated ‘CRISIL AAA/Stable/CRISIL A1+’) and Tata Motors Ltd (TML; ‘CRISIL AA/Positive/CRISIL A1+’). Apart from exhaust systems, SMIL manufactures and supplies various suspension systems and trades in catalytic convertors for its customers.  

 

  • Efficient working capital management: SMIL has high unencumbered cash balance of more than Rs 700 crore as on September 30, 2023, and nil utilization of fund-based limits for the 12 months through January 2024. SMIL’s debtors and inventory have been 30-40 days each in the three fiscals ending March 31, 2023. The working capital cycle is partially supported by the company’s ability to stretch its payables, which have been at 80-100 days in the two fiscals through 2023 and are estimated to remain at similar levels over the medium term.

 

  • Strong financial risk profile: The company has strong capital structure, which is reflected in low TOLTNW ratio of 0.81 time as on March 31, 2023. The group has maintained low TOLTNW ratio of below 1 time in the two fiscals ending March 31, 2023. Strong capital structure is supported by healthy networth of Rs 769 crore as on March 31, 2023, on the back of steady accretion to reserves and low debt. Networth is expected to improve further, supported by stable operating margin over the medium term. With regular maintenance capital expenditure (capex) of Rs 70-100 crore and in the absence of any major debt-funded capex over the medium term, the capital structure is expected to remain strong. The debt protection metrics remain robust, with interest coverage ratio of 147 times and net cash accrual to adjusted debt ratio of 6.5 times for fiscal 2023, which are expected to be in similar range in fiscal 2024.

 

Weaknesses:

  • Customer and product concentration risks in revenue: SMIL only has exhausts and suspension line businesses, along with trading of catalytic convertors for various OEMs. The top two customers in the exhaust business (M&M and Hyundai) accounted for ~71% of total revenue in the first nine months of fiscal 2024. Revenue concentration risk is expected to remain high because of reduced product portfolio with business arrangements already made between various OEMs and their vendors for BS-VI products. SMIL has expertise in exhaust systems since inception, which is its core segment and will continue to contribute a significant portion to overall revenue going ahead. Contribution from exhaust systems is more than 90% of the total revenue in fiscal 2023. Decline in customer and product concentration, over the medium term, will be a key monitorable and critical factor for ratings.

 

  • Susceptibility to increase in raw material prices and pricing pressure from OEMs: The company has limited bargaining power with OEMs, which periodically revise prices based on their financial standing and willingness. As such, any benefit in operating margin comes with a lag. SMIL has strong market position and niche product profile which enables it to pass on price increases, although with a lag, supported by healthy and sustained EBITDA margin.

Liquidity: Superior

SMIL has healthy unencumbered cash and bank balance along with liquid investments of Rs 709 crore as on September 30, 2023. Liquidity is further supported by bank limits which have not been utilised for the 12 months through January 2024.

 

SMIL is anticipated to generate cash accrual of Rs 250-300 crore against nil term debt obligation. Furthermore, regular capex is estimated at Rs 70-100 crore, which is expected to be funded entirely by cash accrual. Any major reduction in cash levels or increase in funds deployed towards non-core activities will remain a key monitorable.

Outlook: Positive

Healthy growth in revenue and sustained operating margin strengthening the credit risk profile over the medium term.

Rating Sensitivity Factors

Upward factors:

  • Sustained improvement in revenue along with operating margin sustaining at 12-13%
  • Sustenance of healthy financial risk profile

 

Downward factors:

  • Revenue degrowth along with operating margin declining to below 10%, impacting cash accrual
  • Large, debt-funded capex or investments impacting the financial risk profile with TOLTNW increasing to more than 1.5 times

About the Company

Incorporated in 1986, SMIL is managed by Mr Ajay Relan and is India’s largest manufacturer of exhausts for automotive players. SMIL’s existing product profile comprises exhausts and suspension systems for passenger cars, utility vehicles, light commercial vehicles, medium and heavy commercial vehicles, and vans. The company has nine manufacturing facilities across India to support its customer base.

 

SMIL is listed on both the Bombay Stock Exchange and the National Stock Exchange.

Key Financial Indicators

Particulars

Unit

2023

2022

Revenue

Rs crore

2704

2,261.65

Profit After Tax (PAT)

Rs crore

205.4

161.8

PAT Margin

%

7.60

7.16

Adjusted debt/adjusted networth

Times

0.05

0.05

Interest coverage

Times

148

40

*CRISIL Ratings adjusted numbers

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` 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.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

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Annexure - Details of Instrument(s)

ISIN Name of the
instrument		 Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs.Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Working Capital Facility NA NA NA 115 NA CRISIL AA-/Positive 
NA Letter of Credit NA NA NA 150 NA CRISIL A1+
NA Proposed Fund-Based Bank Limits NA NA NA 0.5 NA CRISIL AA-/Positive 
Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 115.5 CRISIL AA-/Positive   -- 16-01-23 CRISIL AA-/Stable   -- 24-11-21 CRISIL AA-/Stable CRISIL A1+ / CRISIL AA-/Stable
      --   --   --   -- 28-10-21 CRISIL A1+ / CRISIL AA-/Stable --
Non-Fund Based Facilities ST 150.0 CRISIL A1+   -- 16-01-23 CRISIL A1+   -- 24-11-21 CRISIL A1+ --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Letter of Credit 50 YES Bank Limited CRISIL A1+
Letter of Credit 30 YES Bank Limited CRISIL A1+
Letter of Credit 32 Kotak Mahindra Bank Limited CRISIL A1+
Letter of Credit 38 Kotak Mahindra Bank Limited CRISIL A1+
Proposed Fund-Based Bank Limits 0.5 Not Applicable CRISIL AA-/Positive
Working Capital Facility 30 YES Bank Limited CRISIL AA-/Positive
Working Capital Facility 30 Kotak Mahindra Bank Limited CRISIL AA-/Positive
Working Capital Facility 55 HDFC Bank Limited CRISIL AA-/Positive
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Auto Component Suppliers
CRISILs Approach to Recognising Default
Understanding CRISILs Ratings and Rating Scales

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