Rating Rationale
June 18, 2020 | Mumbai
Simmonds Marshall Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.65 Crore
Long Term Rating CRISIL BBB-/Negative (Reaffirmed)
Short Term Rating CRISIL A3 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL BBB-/Negative/CRISIL A3' ratings on the bank facilities of Simmonds Marshall Limited (SML).
 
Operating revenue is estimated to have declined 20% in fiscal 2020, on account of slowing automotive demand, impact of the Covid-19 pandemic and subsequent lockdown in March 2020. Revenue is expected to moderate further in fiscal 2021, because of the impact of the lockdown on operations in the first quarter of fiscal 2021, and gradual recovery. The tractor segment (contributes ~3% of the revenue) is expected to grow in the mid- to high-single digits because of growth momentum seen in the agricultural sector and expectation of normal monsoon. Demand for two-wheelers which contributes ~55% of the sales is expected to fall 15-20% and commercial vehicle segment which contributes ~19% of the revenue may witness contraction by 25-30% on account of decline in overall economic activity and slower recovery post first quarter of the current fiscal.
 
Operating margin is estimated to have moderated to 2-3% in fiscal 2020, because of high-cost 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 5-8% in fiscal 2021, as SML reduces high-cost inventory and carries out cost-cutting measures to reduce overheads. The shift to a new plant in June 2020, will result in lower overheads, which will support the margin.
 
As a result, cash accrual is expected to improve in fiscal 2021, to Rs 3-4 crore, compared to Rs 0-1 crore in fiscal 2020, albeit lower than Rs 9.5 crore in fiscal 2019. Furthermore, because of reduction in inventory and timely realisation of receivables, SML is expected to receive additional working capital which will support liquidity in the near term. Inventory levels, which were Rs 52 crore in March 2020, are expected to reduce to Rs 45-47 crore by September 2020. Debt protection metrics have weakened in fiscal 2020, as indicated by interest coverage ratio dropping to 1.2 times and gearing increasing to 0.68 time , as compared to 4.4 times and 0.58 time, respectively, in fiscal 2019. Absence of capital expenditure (capex) in fiscal 2021, and improving profitability would result in improving financial risk profile of the company.
 
Liquidity remains moderate, as indicated by consistent high bank limit utilisation, which averaged 85-90% during the six months through May 2020. Bank limit utilisation is expected to remain high in the first half of the current fiscal because of the impact of the pandemic and is expected to come down in the second half as demand picks up and high-cost inventory reduces, leading to improved margin and minimal capex.
 
The ratings 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 average financial risk profile, modest scale of operations with limited revenue diversity, and large working capital requirement. The promoter infused Rs 1.1 crore in January 2020 to support operations. Going forward, timely funding support from the promoter will remain a key monitorable

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SML 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
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 55%, followed by commercial vehicles at around 19% and tractors at ~3%.

Key clients include Honda Motorcycle and Scooters Ltd, Bajaj Auto Ltd (rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), Hero Moto Corp Ltd (rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'), and Ashok Leyland Ltd. However, demand from OEMs, post implementation of BS VI standards, 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 150 crore in fiscal 2020. Also, networth was small at around Rs 40 crore as on March 31, 2020. Furthermore, the client base mainly comprises two-wheeler manufacturers, which exposes revenue to any downside in the concerned segment.

Operating margin has remained volatile at 3-11% over the past five years, on account of varied material and employee expenses and higher inventory cost. High employee cost at 23-25% of sales amid slowdown and higher cost inventory have kept margin under pressure in fiscal 2020. The same variables, along with uptick in sales, in the coming quarters will remain crucial for improvement in the margin.
  
* Weak financial risk profile
Debt protection metrics have weakened, with interest coverage ratio at 1.2 times in fiscal 2020, compared to over 4 times in fiscal 2019. Gearing is estimated to have increased to 0.68 time as on March 31, 2020, from 0.58 time a year ago. However, dependence on short-term debt is likely to reduce in the second half of fiscal 2021, as SML's inventory has reduced. Recovery in demand and margin, and improvement in the working capital cycle will remain key monitorables. Funding support from the promoter will benefit the financial risk profile. Total infusion in the form of unsecured loans from the promoter stands at Rs 6.2 crore, post incremental support of Rs 1.1 crore in January 2020. Interest rate on these unsecured loans is at 8.5%. The promoter is expected to provide further support to SML, in case of exigencies.
 
* Working capital-intensive operations:
Gross current assets increased to 221 days as on March 31, 2020, with inventory of around 130 days and receivables of around 80 days. Reduction in high-cost inventory, timely realisation of receivables, and cushion in bank limit utilisation of Rs 3-4 crore are expected to lessen pressure on working capital liquidity.
Liquidity Stretched

The bank limit was highly utilised at 85-90% during the six months through May 2020. Unutilised bank limit of Rs 3-4 crore and funding support from the promoter were used to repay term debt obligation of Rs 4 crore in fiscal 2020, and for capex. During the current fiscal, the company will see receive additional working capital on account of inventory reduction, postponement of debt repayment because of moratorium on bank facilities and minimal capex requirement, which will lead to reduced pressure on liquidity.

Outlook: Negative

CRISIL believes SML's business risk profile will remain constrained by the ongoing economic slowdown and slowing demand and profitability. Debt protection metrics will remain weak until recovery.

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 operating profitability to below 2%
* Further stretch in the working capital cycle, bank limit utilisation more than 95%, or any 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 the capacity to produce 5,500 tonne 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 the nine months ended December 31, 2019, SML reported a net profit of Rs 3.6 crore (Rs 5.7 crore for the corresponding period of the previous fiscal) on an operating income of Rs 110 crore (Rs 140 crore in the corresponding period of the previous fiscal).

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 195 188
Reported profit after tax (PAT) Rs crore 5.9 10
PAT margin % 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
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
M/s Stud India Ltd 99% Subsidiary
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  30-01-20  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  30-01-20  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-/Negative
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-/Negative
Rupee Term Loan 6.93 CRISIL BBB-/Negative Rupee Term Loan 6.93 CRISIL BBB-/Negative
Term Loan 3.6 CRISIL BBB-/Negative Term Loan 3.6 CRISIL BBB-/Negative
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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