Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Simmonds Marshall Limited (SML) to ‘Stable’ from ‘Negative’ while reaffirming the rating at ‘CRISIL BBB-’. The rating on the short-term facilities is reaffirmed at ‘CRISIL A3’

 

SML’s performance showed a healthy recovery in fiscal 2022 recording revenues of Rs. 158 crore; a year on year growth of 18%. Aided by improvement in OEM volume demand, the quarterly revenue run-rate of Rs. 45-50 crore is expected to sustain going forward. Company has also diversified its revenue profile by reducing dependence on the 2W sector (~45% of revenue in FY22 as compared to 60-65% in the past) and increasing share from Commercial Vehicle (CV) and tractor segment. Positive growth outlook for CV and tractor sales along with recovery in 2W demand is expected to augur well for SML.

 

Operating margins witnessed material recovery in fiscal 2022 at 7.1% after reporting losses in prior periods due to clean-up of high inventory levels and higher volumes translating to better operating leverage. SML turned net cash accrual positive in fiscal 2022. While commodity prices continue to remain elevated, any softening of prices may aid in better profitability. Company is able to pass on price although the same is with a lag of one to two quarters. Margins are expected to remain steady in the range of 8-10% over the medium term.

 

Capital structure remains moderate with higher than anticipated debt levels and gearing of 1.45x times in fiscal 2022. Same is expected to improve going forward on account of minimal capex and progressive repayment of existing debt. SML has low dependence on long term debt with outstanding long term debt of ~Rs. 17 crores. Long term debt comprises ECLGS loan of ~6 crore availed during past 1-2 years to shore up liquidity and reduce average cost of borrowing

 

Liquidity is adequate with unutilised limits of Rs. 2-3 crores (10-12% of total limits of Rs.29 crore) being maintained on an average. Management has indicated that they would always maintain some cushion in bank lines to cater to unforeseen events. Company has also improved its working capital efficiency by reducing its inventory levels to 132 days in FY22 from 150 days in FY21. Improvement in debtor realization and higher creditor days is also expected to support liquidity position over the near term. The rating also draws comfort from resourceful promoters and willingness to support in cases of exigency as reflected in infusion of equity of Rs. 1 crore in fiscal 2021 and Rs.1.5 crore in fiscal 2022. Promoter has a healthy networth and has always provided support as and when required.

 

The ratings continue to reflect the established market position of SML in the nuts and bolts segment and strong customer relationships with major automotive original equipment manufacturers (OEMs). These strengths are partially offset by sub-par financial risk profile, modest scale of operations with limited revenue diversity, and large working capital requirement. Going forward, timely funding support from the promoter as and when required will remain a key monitorable

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Simmonds Marshall and its 99% subsidiary, Stud (India) Ltd (SIL), together referred to as Simmonds Marshall.

 

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

Strength:

Established position in the fasteners segment, backed by longstanding customer relationships

With presence of over five decades in the fasteners business, the company has established its position in the domestic market. It has healthy relationships with customers for the last 10-15 years. Contribution to revenue from two-wheelers is highest at around 45%, followed by commercial vehicles at around 19% and tractors at 3%.

 

Key OEM clients include Honda Motorcycle and Scooters Limited, Bajaj Auto Limited (rated ‘CRISIL AAA/Stable/CRISIL A1+’), Hero Moto Corp Limited (rated ‘CRISIL AAA/Stable/CRISIL A1+’), Ashok Leyland Limited and TVS Motor Company Limited. However, demand from OEMs, and recovery in economic activity will remain key rating factors.

 

Weaknesses:

Limited revenue diversity and volatile operating margin

The company manufactures nuts and bolts for major automobile OEMs. Notwithstanding the long track record of operations, scale remains modest, as reflected in estimated topline of around ~Rs 158 crore in fiscal 2022. Also, networth was small estimated at around Rs 37 crore as on March 31, 2022. Furthermore, the client base mainly comprises two-wheeler manufacturers, which exposes revenue to any downside in the concerned segment.

 

Operating margin remained volatile over the past five years, on account of variation in material costs (35-45% of sales), high employee expenses (25-30% of sales) and higher inventory cost. Amid slowdown in auto industry, high cost structure have kept margin under pressure in fiscal 2022. The company has the ability to pass on prices although the same is with a lag due to limited bargaining power with OEMs. SML incurred high overheads over the past 1-2 years due to consolidation of its plants to a new facility in Chakan, Pune which is expected to result in manufacturing and logistics cost efficiencies leading to margin accretion. These variables, along with uptick in sales, in the coming quarters will remain crucial for improvement in the margin.

 

Sub-par financial risk profile

Debt protection metrics continue to remain sub-par, albeit recovery in fiscal 2022 supported by improvement in operating profitability. Interest coverage ratio stood at 1.28x times in fiscal 2022 as compared to negative in fiscal 2021. Gearing is estimated to have increased to 1.45x time as on March 31, 2022, from 0.58x times in fiscal 2020. Further recovery in demand and margin, and improvement in the working capital cycle will remain key monitorable. Funding support from the promoter will benefit the financial risk profile. The promoter has been consistently infusing funds in the form of equity over the last 2 fiscals and unsecured loans from the promoter stands at Rs 8.6 crore as on March 31, 2022. Interest rate on these unsecured loans is at 8%. The promoter is expected to provide further support to SML, in case of exigencies.

 

Working capital-intensive operations:

Gross current assets remained high at 201 days as on March 31, 2022 although an improvement from 228 days a year ago, with inventory of around 132 days and receivables of around 60 days. Reduction in high-cost inventory and timely realisation of receivableshelped ease out liquidity pressure.

Liquidity: Adequate

Bank limits were highly utilized at 88% during the 12 months ended January 2022. Unutilized bank limit of Rs 2-3 crore and funding support from the promoter were used to repay term debt obligation in fiscal 2021 and fiscal 2022. During the current fiscal, efficient management of working capital due to inventory reduction, timely debtor realizations and ability to stretch creditor period coupled with minimal capex requirement, is expected to ease pressure on liquidity. Net cash accruals are also expected to improve to the range of Rs.10-15 crore which can comfortably cover its debt repayments of Rs.4-5 crore over the medium term

Outlook: Stable

CRISIL Ratings believes SML’s business risk profile will improve with recovery in OEM demand which is expected to result in improvement in operating profitability and accruals.  However, debt protection metrics are expected to remain moderate going forward and is expected to witness gradual recovery.

Rating Sensitivity Factors

Upward factors

• Sustained improvement in scale of operations with operating margins above 9-11% resulting in improved cash generation
• Improvement in working capital cycle resulting in lower reliance on debt leading to improvement in financial risk profile

 

Downward factors

• Sharp decrease in scale of operations with operating margins below 6% materially impacting cash generation
• Further stretch in the working capital cycle or large capex increasing reliance of external debt thereby impacting overall debt protection parameters

About the Company

SML, incorporated in 1960 and promoted by Mr. Shiamak Marshall, manufactures nuts and bolts for the automotive segment and caters primarily to commercial vehicle and two-wheeler manufacturers. The company’s manufacturing unit in Kasarwadi, Maharashtra, has the capacity to produce 5,500 ton per annum of nuts.

 

In 2012, SML acquired SIL that manufactures studs for heavy commercial vehicle manufacturers. In 2014, the company entered into a joint venture with Francis Kirk and Son Ltd (Francis Kirk; UK) to manufacture fasteners for the UK market; with manufacturing undertaken at the Kasarwadi plant and products marketed by Francis Kirk.

 

For fiscal 2022, SML reported a net loss of Rs.5 crore on an operating income of Rs. 158 crore.

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs.Crore	134	156
Reported profit after tax (PAT)	Rs.Crore	-18	-5
PAT margin	%	-13.3	-2.9
Adjusted debt/adjusted networth	Times	1.3	0.7
Interest coverage	Times	-0.3	1.3

CRISIL adjusted numbers

Any other information: Not applicable