| Simmonds Marshall Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL BBB-/Negative/CRISIL A3’ ratings on the bank facilities of Simmonds Marshall Ltd (SML).
Operating performance of SML is likely to be impacted in fiscal 2022 by the localized lockdowns to contain the second wave of the Covid-19 pandemic. This follows an improvement in fiscal 2021 despite the nationwide lockdown in the first quarter. Revenue growth should be healthy in fiscal 2022 driven by the expected 10-12% growth in demand for two-wheelers (contributes around 55% to the sales of SML). The tractor segment (contributes around 3% to revenue) is also likely to grow 3-5%, spurred by the expectation of a normal monsoon. Ramp-up of exports will also drive up revenue this fiscal.
However, despite recovery in second half of fiscal 2021, operating margin is estimated to have deteriorated in fiscal 2021, because of high-cost inventory, write-down of old inventory and sub-optimal coverage of fixed costs. This is compared to healthy levels of 11-12% in the past. The margin is likely to improve to 5-6% in fiscal 2022, with SML reducing high-cost inventory and taking measures to reduce overheads. The shift to a new plant in fiscal 2021 will improve operating efficiency, which will support the margin, over the medium term.
After negative accrual in fiscal 2021, cash accrual is expected at Rs 6-7 crore in fiscal 2022, albeit lower than Rs 9.5 crore in fiscal 2019. Debt protection metrics and gearing weakened in fiscal 2021. Absence of capital expenditure (capex) and improving profitability should result in a better financial risk profile this fiscal.
Liquidity remains moderate, as indicated by consistent high bank limit utilisation. The promoter has supported liquidity in the form of loans or equity in the past. The promoter infused Rs 1 crore in fiscal 2021 and will infuse more funds if required to maintain liquidity and timely debt servicing.
The ratings reflect the established market position of SML in the nuts and bolts segment and its strong relationships with major automotive original equipment manufacturers (OEMs). These strengths are partially offset by its average financial risk profile, modest scale of operations with limited revenue diversity, and large working capital requirement. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of SML and its 99% subsidiary, Stud (India) Ltd (SIL).
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, SML has established its position in the domestic market. It has built healthy relationships with customers over the past 10-15 years. Key clients include Honda Motorcycle and Scooters Ltd, Bajaj Auto Ltd (‘CRISIL AAA/Stable/CRISIL A1+’), Hero Motocorp Ltd (‘CRISIL AAA/FAAA/Stable/CRISIL A1+’), and Ashok Leyland Ltd. Recovery in economic activity and demand from OEMs in the wake of the pandemic remain key rating factors.
Weaknesses * Limited revenue diversity and volatile operating margin Despite its long track record of operations, SML’s scale remains modest, as reflected in estimated topline of Rs 130-140 crore in fiscal 2021. Also, networth is estimated to be small at Rs 41-46 crore as on March 31, 2021. Furthermore, contribution to revenue from two-wheelers is highest at around 55%, followed by commercial vehicles at around 19% and tractors at around 3%, rendering revenue susceptible to any downside in the two-wheeler segment.
Operating margin was volatile over the past five years, on account of fluctuations in material and employee expenses and higher inventory cost. High employee cost at 25-29% of sales amid the economic slowdown and higher cost inventory kept the margin under pressure in fiscal 2021. These factors, along with uptick in sales, will remain crucial for improvement in the margin in the coming quarters.
* Weak financial risk profile Networth is estimated to be modest as on March 31, 2021, hit by net losses in two consecutive fiscals. Debt was high in fiscal 2021 because of capex, and is expected to decline over the medium term. Long-term debt accounts for only 11% of the overall debt. Dependence on short-term debt is also likely to reduce in the second half of fiscal 2022 as SML reduces inventory.
Debt protection metrics have weakened, with interest coverage turning negative in fiscal 2021 compared with over 1.2 times in fiscal 2020. Gearing is estimated to have weakened to 0.97 time as on March 31, 2021, from 0.68 time a year earlier. Recovery in demand and profitability, and improvement in the working capital cycle will remain key monitorables. Cash accrual is expected at Rs 6-7 crore in fiscal 2022, compared with negative accrual in fiscal 2021. Negligible capex will help improve the credit metrics over the medium term.
Funding support from the promoter will benefit the financial risk profile. The promoter infused equity in the past two fiscals and extended unsecured loan of Rs 6.2 crore as on March 31, 2021. Interest rate on unsecured loan is 8.5%. The promoter will likely extend further support to SML, if needed.
* Large working capital requirement Gross current assets stood at 228 days as on March 31, 2021, with inventory of around 135 days and receivables of around 85 days. Reduction in high-cost inventory, timely realisation of receivables, and unutilised bank limit of Rs 2-3 crore are expected to lessen pressure on working capital management. |
Liquidity: Stretched The bank limit of Rs 29 crore was utilised 90% on average during the six months through May 2020. Bank limit utilisation is expected to remain high in the first half of fiscal 2022 because of the impact of the pandemic. Unutilised bank limit of Rs 2-3 crore, expected cash accrual of Rs 6-7 crore and funding support from the promoter will likely be used to meet term debt obligation of Rs 5 crore in fiscal 2022. Inventory reduction, timely realisations of receivables and negligible capex will free up working capital, which will reduce the pressure on liquidity. |
Outlook: Negative SML’s business risk profile will remain constrained because of the economic slowdown and decline in demand and profitability amid the pandemic. Debt protection metrics will remain weak. |
Rating Sensitivity factors Upward factors * Operating margin rising to 8-10% on a sustained basis, leading to healthy cash accrual of over Rs 10 crore * Improvement in the financial risk profile, with gearing less than 0.5 time
Downward factors * Decline in revenue by more than 20% and sustained operating loss * Further stretch in the working capital cycle, bank limit utilisation more than 95%, or large, debt-funded capex |
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 capacity to produce 5,500 tonne per annum of nuts.
In 2012, SML acquired SIL, which 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 the nine months ended December 31, 2020, SML had negative earnings before interest, tax, depreciation, and amortisation of Rs 7.57 crore (negative Rs 0.09 crore for the corresponding period of the previous fiscal) and operating income of Rs 88 crore (Rs 152 crore). |
Key Financial Indicators (Consolidated)
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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. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | |||
| Facility | Name of Lender | Amount (Rs.Crore) | Rating |
| Bill Discounting | ICICI Bank Limited | 1.5 | CRISIL A3 |
| Bill Discounting | The Zoroastrian Co-Op. Bank Limited | 0.9 | CRISIL A3 |
| Bill Discounting | Union Bank of India | 0.3 | CRISIL A3 |
| Cash Credit | ICICI Bank Limited | 10.3 | CRISIL BBB-/Negative |
| Cash Credit | The Zoroastrian Co-Op. Bank Limited | 3.97 | CRISIL BBB-/Negative |
| Cash Credit | Union Bank of India | 7.63 | CRISIL BBB-/Negative |
| Letter of Credit | ICICI Bank Limited | 8.3 | CRISIL A3 |
| Letter of Credit | The Zoroastrian Co-Op. Bank Limited | 1.9 | CRISIL A3 |
| Letter of Credit | Union Bank of India | 4.92 | CRISIL A3 |
| Proposed Long Term Bank Loan Facility | Not Applicable | 9 | CRISIL BBB-/Negative |
| Proposed Long Term Bank Loan Facility | Not Applicable | 5.75 | CRISIL BBB-/Negative |
| Rupee Term Loan | The Zoroastrian Co-Op. Bank Limited | 6.93 | CRISIL BBB-/Negative |
| Term Loan | ICICI Bank Limited | 3.6 | CRISIL BBB-/Negative |
This Annexure has been updated on 8-Sep-2021 in line with the lender-wise facility details as on 24-Aug-2021 received from the rated entity.
Criteria Details
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