Rating Rationale
December 27, 2019 | Mumbai
Suprajit Engineering Limited
Rated amount enhanced
 
Rating Action
Total Bank Loan Facilities Rated Rs.246.93 Crore (Enhanced from Rs.237.41 Crore)
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities of Suprajit Engineering Ltd (SEL; part of the Suprajit group) at 'CRISIL AA/Stable/CRISIL A1+'

The ratings continue to reflect SEL's strong business risk profile, aided by an established market position, strong customer base, and a comfortable operating margin. Operating income has increased by around 11.5 percent, year-on year in fiscal 2019. Addition of new lines at Narsapura and Doddaballapur (both in Karnataka) and expected ramp up in these capacities in fiscal 2020 should support revenue growth. Improving wallet share with key customers and increasing penetration into the domestic and global aftermarket should result in a steady revenue growth, over the medium term. The growth is not expected to be impacted by any demand moderation from the domestic OEM (original equipment manufacturer) segment; this is likely to be offset by growth in exports, increase in aftermarket penetration and higher components per vehicle.

The operating margin is expected to remain comfortable at 16-17% over the medium term, supported by cost control initiatives at group firm Wescon Controls Llc (Wescon), increasing scale of operations, and leadership position in cables. The return on capital employed (RoCE) is thus likely to be sustained at about 20%, despite large capital expenditure (capex) during fiscals 2019 and 2020.

Furthermore, the financial risk profile has strengthened due to minimal dependence on external debt, From fiscal 2021, capital spending will, likely, be moderate and majorly funded through continued healthy cash accruals. This, coupled with efficient working capital management, should further strengthen key credit metrics and unencumbered liquid balances over the medium term.

The ratings reflect an established market position in the mechanical control cables and automotive lamps segment in India, diverse revenue profile, and superior operating efficiency. The ratings also factor in a strong financial risk profile. These strengths are partially offset by the moderate performance of acquired entities, and susceptibility to volatility in raw material prices and cyclicality in end-user industries.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SEL and its wholly-owned subsidiaries, Luxlite Lamps and Trifa Lamps, Suprajit Automotive Private Limited, Suprajit Europe Limited, Suprajit USA Inc, and Wescon. That's because all these entities, collectively referred to as the Suprajit group, have high management, operational, and financial integration.

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 market position in India, diversified revenue profile, and strong operating efficiency: The group is one of the largest manufacturers of mechanical control cables with a presence in both automotive and non-automotive segments. Revenue growth has been healthy over the five fiscals through 2019, driven by steady offtake and diversification into aftermarket and exports segments. The group has entered segments such as lamps, and started catering to non-automotive segments, through acquisitions, and augmented capacities in the cables business. The operating margin has been healthy at 16-17%, over the four fiscals through 2019, and should be sustained in the medium term, driven by benefits from economies of scale, higher productivity, and the leadership position allowing for passage of any hike in key raw material prices to customers.
 
* Strong financial risk profile: The networth and total outside liabilities to tangible networth(TOLTNW) ratio  were healthy at Rs 744 crore and 0.87 time, respectively, as on March 31, 2019, aided by steady accretion to reserves. Despite capex plans of Rs 100 crore for fiscals 2019 and 2020, the capital structure should remain strong, supported by prudent capex funding. Debt protection metrics were robust, with interest coverage and net cash accrual to total debt ratios of 10.55 times and 0.41 time, respectively, for fiscal 2019.
  
Weakness:
* Moderate performance of acquired entities: Performance of the lamps division was subdued on account of demand moderation for domestic OEMs as seen in flat revenue growth in 2019. Two-wheeler OEMs have begun shifting to LED (light-emitting diode) lights for their base variants, resulting in marginal demand moderation for the division. This is partially offset by increasing penetration into the domestic and global aftermarket. Wescon's turnaround in fiscal 2019 was overshadowed by increase in costs of key input material (steel), largely on account of hike in tariffs of Chinese steel imports into the US; the increase cannot be entirely passed on to the end customers. However, this impact is being mitigated through implementation of process efficiencies.
 
* Susceptibility to volatility in raw material prices and cyclicality in end-user industries: The group remains susceptible to volatility in raw material prices and pricing pressure from OEMs, as the domestic automobile industry contributes to 60% of revenue. In the exports segment, the group faces competition from other large automotive component players across the globe. Raw material cost also accounts for a large portion of overall cost of sales.  As raw materials are commoditized in nature, their prices tend to fluctuate widely, and thus impact the operating margin.
Liquidity Strong

Liquidity is strong because of sufficient cash accrual against debt repayment obligation and healthy liquid investments. Backed by the healthy scale of operations and strong operating efficiency, cash accrual is expected at Rs 160-190 crore, as against repayment obligation of around Rs 60 crore, per fiscal over the medium term. The group follows a prudent working capital management policy, resulting in moderate working capital requirement. Additionally, a high cash and cash equivalents balance is maintained. Liquidity is likely to remain strong, supported by healthy cash and cash equivalents.

Outlook: Stable

CRISIL believes the business risk profile will improve over the medium term, backed by an established market position, diverse revenue profile, and superior operating efficiency

Rating Sensitivity factors
Upward Factors:
* Continued improvement in geographic concentration and customer diversity
* Revenue growth of 20 percent while maintaining operating margins at around 14-16 percent
 
Downward Factors:
* Deterioration in TOLTNW to more than 1.5 times
* Decline in operating profitability leading to weaker than expected cash accrual.
About the Group

 SEL was incorporated at Bengaluru in 1985, promoted by Mr Ajith Kumar Rai. The company manufactures mechanical control cables used in two- and four-wheelers and by non-automotive segments, and equipment such as speedometers, tachometers, and fuel and temperature gauges for the automotive sector. It also produces halogen lamps for the automobile industry, and is a dominant player, catering to the two- and four-wheeler, passenger, commercial vehicle, and after-market segments. Merger of Phoenix Lamps Ltd with SEL became effective from April 1, 2016. In fiscal 2017, SEL has also acquired Wescon, a leading player in manufacture of non-automotive cables, particularly in North America.
 
The company, is listed on the National Stock Exchange and the Bombay Stock Exchange Ltd.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 1596 1434
Profit after tax Rs crore 134 138
Profit after tax margin % 8.4 9.7
Adjusted debt/adjusted networth Times 0.49 0.54
Interest coverage Times 10.55 8.5

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 Long Term Loan NA NA 31-Mar-23 7.61 CRISIL AA/Stable
NA Cash Credit NA NA NA 70.12 CRISIL AA/Stable
NA External Commercial Borrowings NA NA 31-Mar-23 30.45 CRISIL AA/Stable
NA Bank Guarantee NA NA NA 1.5 CRISIL A1+
NA Proposed Long Term Bank Loan Facility NA NA NA 14.6 CRISIL AA/Stable
NA Secured Overdraft Facility NA NA NA 55 CRISIL AA/Stable
NA Working capital demand facility NA NA 31-Mar-23 67.65 CRISIL AA/Stable
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Suprajit Automotive Private Limited, India 100% Wholly owned subsidiary
Suprajit Europe Limited, UK 100% Wholly owned subsidiary
Suprajit USA INC, USA 100% Wholly owned subsidiary
Wescon Controls LLC, USA 100% Wholly owned subsidiary
Luxlite Lamps SARL, Luxembourg 100% Wholly owned subsidiary
Trifa Lamps Germany, Gmbh 100% Wholly owned subsidiary
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  245.43  CRISIL AA/Stable  06-12-19  CRISIL AA/Stable      30-12-17  CRISIL AA-/Positive  30-09-16  CRISIL AA-/Stable  CRISIL AA-/Stable 
        26-03-19  CRISIL AA/Stable          04-05-16  CRISIL AA-/Stable   
Non Fund-based Bank Facilities  LT/ST  1.50  CRISIL A1+  06-12-19  CRISIL A1+      30-12-17  CRISIL A1+  30-09-16  CRISIL A1+  CRISIL A1+ 
        26-03-19  CRISIL A1+          04-05-16  CRISIL A1+   
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
Bank Guarantee 1.5 CRISIL A1+ Bank Guarantee 1.5 CRISIL A1+
Cash Credit 70.12 CRISIL AA/Stable Cash Credit 60.6 CRISIL AA/Stable
External Commercial Borrowings 30.45 CRISIL AA/Stable External Commercial Borrowings 30.48 CRISIL AA/Stable
Long Term Loan 7.61 CRISIL AA/Stable Long Term Loan 7.61 CRISIL AA/Stable
Proposed Long Term Bank Loan Facility 14.6 CRISIL AA/Stable Proposed Long Term Bank Loan Facility 14.57 CRISIL AA/Stable
Secured Overdraft Facility 55 CRISIL AA/Stable Secured Overdraft Facility 55 CRISIL AA/Stable
Working Capital Demand Loan 67.65 CRISIL AA/Stable Working Capital Demand Loan 67.65 CRISIL AA/Stable
Total 246.93 -- Total 237.41 --
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
CRISILs Criteria for rating short term debt

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