Rating Rationale
July 28, 2020 | Mumbai
Surbhi Satcom Private Limited
Rating downgraded to 'CRISIL BB/Stable'
 
Rating Action
Total Bank Loan Facilities Rated Rs.22 Crore
Long Term Rating CRISIL BB/Stable (Downgraded from 'CRISIL BB+/Stable')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its long term bank loan rating of Surbhi Satcom Private Limited (SSPL; part of the Surbhi group) to 'CRISIL BB/Stable' from 'CRISIL BB+/Stable'.

Downgrade in the rating factors in factors in the decline in the business risk profile with scale of operations reducing to Rs 94.5 crore estimated for fiscal 2020 against Rs 112.7 crore for fiscal 2019. The growth is expected to remain muted for current fiscal as well on account of COVID-19 impact.  Further, with the proposed capex being undertaken which is partly debt funded, the financial risk profile of the group is getting impacted with surge in debt levels and weaker debt protection metrics. The turnaround of this project in stipulated timelines with minimum pressure on existing business would be the key monitorable factor going forward.

The ratings continue to reflect extensive experience of the promoters in the telecom and digital equipment manufacturing industry. The group also has an above-average financial risk profile. These strengths are partially offset by exposure to intense competition, susceptibility to government regulations and policies and project related risk.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of SSPL, Surbhi Broadband Pvt Ltd (SBPL), and Surbhi Telelinks Pvt Ltd (STPL). This is because the entities, together referred to as the Surbhi group, are under a common management, operate in related businesses and have common customers and suppliers, and common treasury operations.

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
Strengths:
* Extensive experience of the promoters in the telecom and digital equipment manufacturing industry: The promoter family has over 35 years of experience in manufacturing and trading in telecom and digital equipment. Their experience, keen grasp of market dynamics, and healthy relationships with suppliers and customers, have helped the group navigate business cycles. Backward integration into manufacture of printed circuit boards (PCBs) and increase in the production line would help improve operating efficiency and also diversify product offerings. The group's management has a track record of being agile and successfully adapting to changes in the external environment, including government policies, to maintain competitive edge. The management has regularly updated product portfolio to suit evolving technological requirement, as indicated by continuous development in the design and functionality of products.
CRISIL believes the management's extensive experience and focus on research on development will help sustain business growth and improve operating efficiency.
 
* Above-average financial risk profile: Financial risk profile comfortable marked with moderate gearing ratio of 1.2 times and adequate networth of Rs 53.20 crore as on March 31, 2018 for the group as a whole estimated at 1.09 times and Rs 62 crore estimated as on March 31, 2020. Debt protection metrics were comfortable, with interest coverage and net cash accrual to adjusted debt ratios of 2.7 times and 0.09 time, respectively, for fiscal 2020. The financial risk profile is also supported by moderate operating margin. However, with the proposed capex of adding new units which would be partially debt funded, the financial risk profile might get impacted which shall remain the key sensitivity factor.
 
Weaknesses:
* Exposure to intense competition and susceptibility of operations to government regulations: Intense competition from both organised and unorganised players in the electrical components industry keeps the bargaining power with large customers low, and restricts the scope for passing on increase in raw material cost to customers, thus straining profitability. Furthermore, any change in government regulations and policies, related to import duties, anti-dumping policies, under initiatives of Make in India and Digital India, can adversely impact sales and margin.
 
* Project related risk: The group is undertaking significant capital expenditure for setting up 2 new units in Noida each under SSPL and STPL, for manufacturing of electrical products using Surface Mount Technology (SMT) to manufacture populated Printed Circuit Boards (PCBs) for any electronic product like Mobile, LED lights, TV, laptops, Power supply, digital setup boxes, and other products. The total project cost is estimated at Rs 212 crore (to be debt funded to the tune of 70%). Of the total project, Phase 1 (estimated of a cost of Rs 130 crore) would be undertaken in next 2 years. The land has already been acquired and the construction has started. The promoters already have extensive experience in this industry and are well versed with the technology to be used. The turnaround of this project in stipulated timelines with minimum pressure on existing business would be the key monitorable factor going forward.
Liquidity Stretched

Liquidity is adequate marked with bank limit utilisation of around 88 percent for the past twelve months ended June 2020. The net cash accruals are estimated to be just sufficient against debt obligations over the next 2-3 years. The additional cushion could be used to fund the incremental working capital requirement. Current ratio is estimated to be weak at 0.9 time as on March 31, 2020. Liquidity is supported through promoters funding by way of unsecured loans.  

Outlook: Stable

CRISIL believes the group will continue to benefit from the extensive experience of its promoters.

Rating Sensitivity factors
Upward factors
* Improvement in scale of operations by 20% or profitability by 300 basis point.
* Improvement in working capital cycle
* Operationalization of the new plant in timely manner
 
Downward factors
* Decline in scale of operations by 10% or profitability by 100 basis point.
* Increase in working capital requirement
* Large debt funded capex plans weakens capital structure and exerts pressure on liquidity.
About the Group

Incorporated in 1981 by the Aggarwal family, the Surbhi group has been in various verticals of manufacturing and trading wires and cables, Catv /Smatv, IPTv set top boxes, telecom equipment, and software development. Operations are managed by Mr Rajeev Kumar Aggarwal (chairman) and Mr Alok Aggarwal (managing director).

SPPL manufactures set top boxes for Internet Protocol TV (IPTV) and Cable TV (CATV), with fiscal 2016 being its first year of operations.

SBPL imports and trades in telecommunication and CATV products.

STPL manufactures and markets wires, cables, and connectors.

Key Financial Indicators - Standalone - SSPL
As on / for the period ended March 31   2020 2019
Operating income Rs crore 59.27 64.20
Reported profit after tax Rs crore 0.21 0.30
PAT margins % 0.36% 0.47%
Adjusted Debt/Adjusted Net worth Times 2.53 2.61
Interest coverage Times 2.4 1.8

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon
rate (%)		 Maturity date Issue size
(Rs crore)		 Complexity level Rating assigned with outlook
NA Cash Credit NA NA NA 15 NA CRISIL BB/Stable
NA Long Term Loan NA NA Mar-2025 7 NA CRISIL BB/Stable
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
Surbhi Satcom Pvt Ltd Full consolidation Common management; business fungibility
Surbhi Telelinks Pvt Ltd Full consolidation Common management; business fungibility
Surbhi Broadband Pvt Ltd Full consolidation Common management; business fungibility
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  22.00  CRISIL BB/Stable      27-04-19  CRISIL BB+/Stable  30-01-18  CRISIL BB+/Stable    --  -- 
Non Fund-based Bank Facilities  LT/ST    --    --    --  30-01-18  CRISIL A4+    --  -- 
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
Cash Credit 15 CRISIL BB/Stable Cash Credit 15 CRISIL BB+/Stable
Long Term Loan 7 CRISIL BB/Stable Long Term Loan 7 CRISIL BB+/Stable
Total 22 -- Total 22 --
Links to related criteria
Assessing Information Adequacy Risk
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Approach to Recognising Default
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt
Criteria for rating entities belonging to homogenous groups
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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