Rating Rationale
January 30, 2020 | Mumbai
Simmonds Marshall Limited
Ratings downgraded to 'CRISIL BBB-/Negative/CRISIL A3'
 
Rating Action
Total Bank Loan Facilities Rated Rs.65 Crore
Long Term Rating CRISIL BBB-/Negative (Downgraded from 'CRISIL BBB/Stable')
Short Term Rating CRISIL A3 (Downgraded from 'CRISIL A3+')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its ratings on the bank facilities of Simmonds Marshall Limited (Simmonds Marshall) to 'CRISIL BBB-/Negative/CRISIL A3' from 'CRISIL BBB/Stable/CRISIL A3+'.
 
The downgrade reflects a sharp moderation in Simmonds Marshall's operating performance due to slowdown in demand from automobile original equipment manufacturers (OEMs; end users). Revenue may decline by 20% in fiscal 2020, also resulting in drop in operating margin to 2-3% from 8% in fiscal 2019 due to high-cost inventory and sub-optimal coverage of fixed costs; this is compared to healthy levels of 11-12% in the past. As a result, cash accrual is expected to reduce sharply, resulting in large debt. Furthermore, working capital requirement remained high, despite lower scale of operations, as high-cost inventory continued to be high. Debt protection metrics may also weaken in fiscal 2020, with interest coverage ratio dropping to 1.22 times and gearing increasing to 0.78 time, as compared to 4.4 times and 0.58 time, respectively, in fiscal 2019.
 
The ratings also factor in weakening of Simmonds Marshall's liquidity due to consistent high bank limit utilisation, which averaged over 90% during the six months through December 2019. Utilisation may remain high over the medium term as well due to the sizeable working capital requirement. Funding support extended by the promoters in timely manner for any exigency will remain a key monitorable.
 
Decline in volumes for the two-wheeler and commercial vehicle segments from April to December 2019 and the expected delayed recovery for these segments compared to passenger vehicles in the next fiscal may pose challenges to sustain revenue in the near term. Thus, cash accrual is expected to be low at Rs 0-2 crore in fiscal 2020 compared to earlier levels of Rs 10-14 crore. Profitability may remain subdued due to weak demand, suboptimal capacity utilisation, and impact of higher cost of material. Further, working capital requirement to remain relatively higher due to elevated inventory levels.
 
The ratings reflect Simmonds Marshall's position in the fasteners segment, led by longstanding relationship with customers. These strengths are partially offset by average financial risk profile, modest scale of operations with limited revenue diversity, and large working capital requirement.

Analytical Approach

For arriving at the ratings, CRISIL 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 - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths
* Established position in the fasteners segment, backed by longstanding customer relationship
With presence of over five decades in the fasteners business, the company has established its position in the domestic market and has healthy relationship with customers for the last 10-15 years. Key clients include Honda Motorcycle and Scooters Ltd, Bajaj Auto Ltd (rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), Hero MotoCorp Ltd (rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), and Ashok Leyland Ltd. However, demand from OEMs post BS VI implementation April 2020 onwards will remain a key factor as two wheelers and commercial vehicles prices are stated to increase due to tougher emission requirements.
 
Weaknesses
* Limited revenue diversity
The company manufactures nuts and bolts for major automobile OEMs. Notwithstanding the long track record of operations, scale remains modest, as reflected in topline of Rs 195 crore in fiscal 2019. Also, networth was small at Rs 64 crore as on March 31, 2019. Furthermore, client base mainly comprises two-wheeler manufacturers, which exposes revenue to any downside in the concerned segment.
 
* Weakening of financial risk profile
Debt protection metrics were average, with interest coverage of 1.22 times for fiscal 2020. Gearing may increase to 0.78 time as on March 31, 2020, from 0.58 time a year ago. With expected operating margin of 2-3% in fiscal 2020, debt protection metrics are likely to further weaken due to low cash accrual of Rs 0-2 crore. Dependence on short-term debt is likely to increase due to higher working capital intensity. Recovery in demand, improvement in the working capital cycle, and consolidation of plants in Chakan (Maharashtra) will remain key monitorables.
 
* Working capital-intensive operations:
Gross current assets were 199 days as on March 31, 2019, with inventory of 128 days and receivables of around 77 days. High-cost inventory, liquidity crunch with the OEMs, and low cash balance are expected to increase working capital requirement, which would further pressurise liquidity.
Liquidity Stretched

Bank limit of Rs 26 crore was utilised at nearly 90% during the six months through Dec 2019 Unutilised bank limit (Rs 2-4 crore) and funding support from the promoters will be used to repay term debt obligations of Rs 4 crore in fiscal 2020 and for capital expenditure purposes. Further, promoters, in the past, have shown intent to provide timely support in case of exigency.

Outlook: Negative

CRISIL believes Simmonds Marshall's business risk profile will remain constrained by the ongoing automobile slowdown, expected gradual recovery in demand, and weak profitability. Furthermore, financial risk profile may deteriorate due to higher dependence on debt.
 
Rating sensitivity factors
Upward factors
* The operating margin rising to 8-10% on a sustained basis, leading to healthy cash accrual of over Rs 10 crore
* Improvement in financial risk profile, with gearing at less than 0.5 times

Downward factors
* Decline in revenue by more than 20% and operating profitability to below 2%
* Further stretch in the working capital cycle, or any large, debt-funded capital expenditure

About the Company

Simmonds Marshall, 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. Unit in Kasarwadi (Maharashtra) has capacity to produce 5,500 tonne per annum of nuts.
 
In 2012, Simmonds Marshall acquired SIL that manufactures studs for heavy commercial vehicle manufacturers. During 2014, Simmonds Marshall entered into a joint venture with Francis Kirk and Son Ltd (Francis Kirk; UK) to manufacture fasteners for the UK market; the manufacturing will be undertaken at Simmonds Marshall's Kasarwadi plant and products will be marketed by Francis Kirk.
    
For the six months ended September 30, 2019, Simmonds Marshall reported a net profit of Rs -1 crore (Rs 4 crore for the corresponding period of the previous fiscal) on an operating income of Rs 78 crore (Rs 91 crore).

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 195 188
Reported profit after tax (PAT) Rs crore 5.9 10
PAT margins % 3 5.3
Adjusted debt/adjusted networth Times 0.6 0.4
Interest coverage Times 4.4 6.6

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with outlook
NA Cash Credit NA NA NA 21.9 CRISIL BBB-/Negative
NA Letter of Credit NA NA NA 15.12 CRISIL A3
NA Bill Discounting NA NA NA 2.7 CRISIL A3
NA Rupee Term Loan NA NA Aug-21 2.73 CRISIL BBB-/Negative
NA Rupee Term Loan NA NA May-21 2.4 CRISIL BBB-/Negative
NA Rupee Term Loan NA NA Jan-22 1.8 CRISIL BBB-/Negative
NA Term Loan NA NA May-22 3.6 CRISIL BBB-/Negative
NA Proposed Long Term Bank Loan Facility NA NA NA 14.75 CRISIL BBB-/Negative
 
Annexure - List of entities consolidated
Sr. No Subsidiary Companies: Subsidiary/Joint Venture Extent of consolidation
1 M/s Stud India Ltd Subsidiary 99%
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  49.88  CRISIL BBB-/Negative/ CRISIL A3      24-09-19  CRISIL BBB/Stable/ CRISIL A3+  07-09-18  CRISIL BBB+/Stable/ CRISIL A2  11-07-17  CRISIL BBB+/Stable/ CRISIL A2  CRISIL BBB/Positive/ CRISIL A3+ 
Non Fund-based Bank Facilities  LT/ST  15.12  CRISIL A3      24-09-19  CRISIL A3+  07-09-18  CRISIL A2  11-07-17  CRISIL A2  CRISIL A3+ 
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
Bill Discounting 2.7 CRISIL A3 Bill Discounting 2.7 CRISIL A3+
Cash Credit 21.9 CRISIL BBB-/Negative Cash Credit 21.9 CRISIL BBB/Stable
Letter of Credit 15.12 CRISIL A3 Letter of Credit 15.12 CRISIL A3+
Proposed Long Term Bank Loan Facility 14.75 CRISIL BBB-/Negative Proposed Long Term Bank Loan Facility 14.75 CRISIL BBB/Stable
Rupee Term Loan 6.93 CRISIL BBB-/Negative Rupee Term Loan 6.93 CRISIL BBB/Stable
Term Loan 3.6 CRISIL BBB-/Negative Term Loan 3.6 CRISIL BBB/Stable
Total 65 -- Total 65 --
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 Criteria for Consolidation

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