Rating Rationale
July 28, 2020 | Mumbai
Sharda Motor Industries Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.177.5 Crore (Enhanced from Rs.167 Crore)
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable' rating on the long-term bank facilities of Sharda Motor Industries Limited (SMIL) and assigned its 'CRISIL A1+' rating to the short term bank facility.
 
The rating continues 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), 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 A1+') and Tata Motors Ltd (TML; 'CRISIL AA-/Negative/CRISIL A1+'). Apart from exhaust systems, SMIL manufactures and supplies various suspension systems and also trades in catalytic convertors for its customers.
 
* Efficient working capital management
SMIL manages its working capital efficiently, which is reflected in high unencumbered cash balance estimated at Rs 173 crore as on March 31, 2020, and nil utilisation of fund-based limits for the 12 months ending May 31, 2020. SMIL's debtors and inventory have been at 30-40 days each in the three years ending March 31, 2020, and are estimated to remain at similar levels over the medium term. The working capital cycle is ably supported by SMIL's ability to stretch its payables, which have been at 80-90 days in the three years ending March 31, 2020, and are estimated to remain at similar levels over the medium term.
 
* Strong financial risk profile
SMIL's capital structure is healthy with total outside liabilities to tangible networth (TOLTNW) ratio, estimated at 0.6 time as on March 31, 2020, which is only slightly higher than 0.56 time as on March 31, 2019. This is largely on account of decline in networth because of de-merger of the seating business into NDR Auto Components Limited in FY20. Going ahead, continuous accretion to reserves and the absence of major debt-funded capital expenditure (capex) should ensure that the TOLTNW ratio improves further. The debt protection metrics were also robust, with interest coverage ratio of 129 times for fiscal 2020.
 
Weaknesses:
* Customer concentration and product concentration risks in revenue
SMIL's seating business supplies were made only for Maruti Suzuki Ltd ('CRISIL AAA/Stable/CRISIL A1+'). The contribution from these indirect sales had continuously been declining over the last three years. Its contribution declined from 30% to overall revenue in fiscal 2017, to 17% in fiscal 2019, and just 8% in the nine-month period ending December 2019. Post the de-merger of the seating business, which became effective as on March 16, 2020, SMIL only manufactures and sells exhausts and suspension lines. Going ahead, exhausts business will contribute the most to the revenue followed by catalytic convertors, which SMIL trades for its customers. Both these products combined will continue to contribute more than 90% of annual sales.
 
The top two customers in the exhaust business (M&M and Hyundai) accounted for 64% of total revenue in the nine-month period ending December 2019, against 57% contribution from the same customers in fiscal 2019. Revenue concentration risk is expected to remain high because of the reduced product portfolio and business deals having been reached between various OEMs and their vendors for BS-VI products. It is highly likely that there will be major reduction in customer and product concentration over the medium term, which will be a key monitorable.
 
* 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.
Liquidity Superior

SMIL has healthy unencumbered cash and bank balance of Rs 173 crore as on March 31, 2020. Liquidity is further supported by nil utilisation of its Rs 170 crore fund-based bank lines.
 
SMIL is anticipated to generate cash accrual of over Rs 60 crore in fiscal 2021, against nil term debt obligation. Furthermore, the organic capex is estimated at Rs 25 crore in fiscal 2021, which will be lower than that of fiscal 2020, and 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: Stable

CRISIL believes SMIL will continue to benefit, over the medium term, from its established position, healthy relationships with OEMs, and steady demand for passenger cars and utility vehicles.
 
Rating Sensitivity Factors
Upward factors
* Sustained increase in cash accrual by 40% over the medium term
* Improvement in operating margins and RoCE

Downward factors
* Large, debt-funded capex or investments impacting the financial risk profile with debt to earnings before interest, depreciation, tax and amortisation (EBIDTA) ratio declining to more than 2 times
* Higher-than-anticipated deterioration in revenue or profitability impacting liquidity.

About the Company

SMIL was incorporated in 1986. SMIL, managed by Mr. Ajay Relan, 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. SMIL 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 2020 2019
Revenue Rs.Crore 887 1161
Profit After Tax (PAT) Rs.Crore 58 88
PAT Margin % 6.7 7.7
Adjusted debt/adjusted networth Times 0.0 0.0
Interest coverage Times 129 3293

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 Level Rating Assigned  with Outlook
NA Working Capital Facility NA NA NA 170 NA CRISIL AA-/Stable
NA Sales Bill Discounting NA NA NA 7.5 NA CRISIL A1+
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
Fund-based Bank Facilities  LT/ST  177.50  CRISIL AA-/Stable/ CRISIL A1+  25-06-20  CRISIL AA-/Stable  05-03-19  CRISIL AA-/Stable  01-08-18  CRISIL AA-/Stable  28-07-17  CRISIL AA-/Stable  CRISIL A+/Stable 
                    01-02-17  CRISIL A+/Positive   
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
Sales Bill Discounting 7.5 CRISIL A1+ Working Capital Facility 167 CRISIL AA-/Stable
Working Capital Facility 170 CRISIL AA-/Stable -- 0 --
Total 177.5 -- Total 167 --
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 Auto Component Suppliers
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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