Detailed Rationale

CRISIL Ratings on the bank facilities of Viney Corporation Private Limited (VCPL; part of the Viney group) continues to reflect VCPL group's established market position with strong customer relationships, diversified geographical presence both in India and international markets and strong financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices, slowdown in the auto sector and working capital-intensive operations. The group also faces significant competition in the wiring harness industry and has limited pricing power over OEMs.

 

On December 30, 2020, CRISIL Ratings revised its rating outlook on the long-term bank facilities of VCPL to 'Negative' from 'Stable' while reaffirming the rating at 'CRISIL A-'. The outlook revision reflects exit of Mr Viney Prakash Aggarwal and other members of the Aggarwal family from the Viney group during fiscal 2021. Consequently, the private equity (PE) fund Synergy Metals Investments Holding Limited (SMIHL) has acquired majority stake in VCPL from November 2020. The exit of shareholders is through buy back of shares and settlement between shareholders and SCPL, resulting in reduction in overall networth of the company. Furthermore, since SCPL is now a major shareholder with 50.01% stake, it will be critical to monitor management policies with expectation of no major deviation over the medium term.

 

The rating also factors in the acquisition of HH Industries by VCPL during fiscal 2021, with the acquisition being largely funded through external term debt. However, the group has sufficient accrual to meet its debt obligation over the medium term. Besides, VCPL has also acquired stake in Urarvi T Wage Lumps Ltd, funded through the group’s own funds. CRISIL, for now, does not expect any material impact on the credit risk profile of the VCPL group in light of the above events. But, sustenance of the business and financial risk profiles remain key monitorables on account of the exit of Mr Viney Prakash Aggarwal, PE fund immersion and increase in debt levels. For fiscal 2021, CRISIL expects business performance to remain slightly subdued because of the economic slowdown and the Covid-19 pandemic, which will lead to lower offtake from original equipment manufacturers (OEMs) and tier-1 systems suppliers in line with the demand decline in the end markets.

Analytical Approach

For arriving at the rating, CRISIL Ratings has combined the business and financial risk profiles of VCPL and its subsidiaries, Vimercati Italy and Viney Corp Middle East Ltd (VCMEL), along with step-down subsidiaries, Vimercati East Europe SRL (Vimercati Romania) and Viney Corp East Europe SRL (VCEL Romania). Viney Auto Exports Pvt Ltd (VAEPL) was windup in fiscal 2020. All these companies, collectively referred to as the Viney group, are in the same business. VCPL holds 100% stake in Vimercati Italy, VCMEL and VAEPL.

 

The business and financial risk profiles of HH Industries has been combined. This is because the VCPL group acquired it in fiscal 2021, and VCPL's management has 100% control over it.

 

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:

* Established market position and extensive experience of the promoters in the automotive (auto) component sector:

The company’s established market position is backed by diversified product profile and healthy relationships with reputed OEMs and tier-1 systems suppliers. The products cater to the two-wheeler, four-wheeler and replacement market segments, resulting in a diversified customer base. Furthermore, association with global OEMs through overseas entities set up in Italy and Romania have resulted in healthy revenue generation both in the domestic and overseas markets. The group recorded healthy compound annual growth rate of 9.25% in revenue over the previous five fiscals ending fiscal 2021. Revenue growth will be impacted in fiscal 2021 on account of slowdown in the auto industry and the Covid-19 pandemic. However, with more than 70% revenue coming from overseas, through Vimercati Italy, it aids the business risk profile.

 

* Healthy financial risk profile: 

The financial risk profile is expected to remain adequate over the medium term despite increase in debt levels in fiscal 2021. Total outside liabilities to adjusted networth (TOLANW) ratio increased to 1.28 times as on March 31, 2020, from 1.0 time a year ago as the group contracted a term loan for acquiring group entities. However, the ratio should moderate by end of fiscal 2021 on account of healthy accretion to reserves and timely payment of term debt. Interest coverage and net cash accrual to total debt ratios were over 21 times and 0.67 time, respectively, in fiscal 2020 and are estimated to be over 12 times and 0.30 time, respectively, in fiscal 2021.

 

* Established customer base:

The group has a leading market position in the wiring harness segment of the auto components industry and caters to customers in India and overseas. It has established relationships with customers and supplies to major tier-1 suppliers such as Minda Corporation Ltd (‘CRISIL A+/Stable/CRISIL A1’) and Motherson Sumi Systems Ltd (‘CRISIL AA+/Negative/CRSIL A1+’) in the domestic market. Diversified customer profile and product portfolio help maintain growth in revenue and profit even in case of a drop in demand from a particular segment and will benefit the group's business risk profile over the medium term.

 

Weakness:

* Exposure to cyclicality in the auto industry and limited pricing power because of dependence on tier-1 suppliers and exposure to risks relating to volatility in raw material prices:

The business is susceptible to inherent cyclicality in the auto industry, linked to performance of the economy. Furthermore, intense competition in the wiring harness segment and high dependence on tier-1 suppliers and OEMs limits pricing power. While the group has an escalation clause to pass on input cost increase to its customers, however the prolonged economic slowdown and pandemic have resulted in decreasing demand and the ability to pass on increase in other manufacturing overheads for OEMs is restricted. Operating margin is vulnerable to fluctuations in the prices of raw materials and foreign exchange (forex) rates. However, with the group’s strong market position and management practices, the margin is expected to remain stable over the medium term.

 

* Moderately working capital-intensive operations:

Gross current assets were estimated at 180 days as on March 31, 2019 (169 days as on March 31, 2018), driven by inventory and receivables of 88 days and 79 days, respectively, (85 days and 71 days), on account of the large product portfolio. The company maintains large raw material inventory. Working capital management was aided by credit of 91 days from suppliers. With greater focus on exports and commensurate increase in the scale of operations, working capital requirement may increase over the medium term.

Liquidity: Strong

Cash accrual is estimated at over Rs 95 crore in fiscal 2021, against scheduled debt obligation of Rs 45 crore. The surplus cash will be used as working capital. Cash generation is expected to improve against debt obligation in fiscals 2022 and 2023. Utilisation of fund-based limit was low at 8% on average in the 12 months through October 2020. Unencumbered cash and bank balance was outstanding at Rs 112 crore as on March 31 2020, with current ratio at 1.97 times. However, any large, debt-funded capex or acquisition affecting the credit metrics will remain a key rating sensitivity factor.

Outlook Negative

CRISIL Ratings believes the Viney group's business and financial risk profiles might get impacted because of the exit of the promoters, buy-back of shares and PE funding. Also any substantial impact on overall business risk profile would be a key rating sensitivity factor.

Rating Sensitivity factors

Upward factors

* Increase in operating income to Rs 1,200 crore and sustenance of operating margin at 15-17%

* Healthy capital structure, with TOLANW ratio less than 1.25 times

 

Downward factors

* Sharp decline in operating performance and operating margin dropping to below 12%

*Deterioration in the capital structure, with no major, debt-funded capex or acquisition resulting in gearing of more than 1.0 time over the medium term.

About the Group

VCPL, incorporated in 1992 and managed by Mr Brijesh Agarwal and his uncle, Mr Viney Agarwal, as a closely-held public limited company, which manufactures wiring harnesses, connectors and switches for the auto sector. It caters to tier-1 manufacturers in the auto components value chain. In fiscal 2021, VCPL is converted from closely-held public limited company to private limited company.

 

VCPL acquired a majority stake in Vimercati Italy in 2011. This company manufactures electro-mechanical and electronic components, switches, modules, mechatronic units and integrated devices for the auto market.

 

Vimercati Romania, a subsidiary of Vimercati Italy, has a plant in Romania, which manufactures auto components for European customers.

 

VCMEL, incorporated in fiscal 2015, is a Middle East-based subsidiary and a holding company.

 

VCEL Romania is a Romania-based subsidiary of VCMEL. The Viney group is setting up a plant under this company to cater to European customers.

 

HH industries manufactures copper insulated wires which are used in manufacturing of wiring harness.

Key financial indicators: Consolidated

As on / for the period ended March 31		2020	2019
Operating income	Rs crore	1171	1137
Reported profit after tax (PAT)	Rs crore	69.13	90.84
PAT margin	%	5.91	7.99
Adjusted debt/adjusted networth	Times	0.50	0.43
Interest coverage	Times	21.65	21.71

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	90.0	NA	CRISIL A-/Negative

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Viney Corporation Pvt Ltd	Fully consolidated	-
Vimercati SPA	Fully consolidated	100% subsidiary and strong business and financial linkages
Viney Corp Middle East Ltd	Fully consolidated	100% subsidiary and strong business and financial linkages
Vimercati East Europe SRL	Fully consolidated	100% step-down subsidiary and strong business and financial linkages
Viney Corp East Europe SRL	Fully consolidated	100% step-down subsidiary and strong business and financial linkages
HH Industries	Fully consolidated	100% subsidiary and strong business and financial linkages