Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Established position in the automotive component industry: The company has established a strong market position in the Indian tractor gear market over the past five decades, backed by diversified product portfolio and clientele. Its customers include original equipment manufacturers (OEMs) such as John Deere group. While there is client concentration, these customers have been dealing with BGL for over two decades and the components supplied are critical to the product, partially mitigating this risk.

Strong manufacturing infrastructure: The company has, over the years, developed strong capabilities in gear manufacturing, enabling it to be a quality and reliable supplier to reputed OEMs in the domestic as well as international markets. Facilities in Mumbra, Satara (Maharashtra), and Faridabad (Haryana) are fitted with modern equipment and certified as per International Organization for Standardization. BGL also has capable research and development facilities to support development of new product variants and evolvement of existing products to meet customer needs.

Weaknesses:

Exposure to pricing pressure from OEMs and susceptibility to volatility in raw material prices: BGL has limited pricing power with its key customers, mainly John Deere and other OEMs. Though the price variation clause with key customers protects BGL from any significant movement in input cost, there is limited flexibility to pass on increase in overheads and other costs.

Furthermore, revenue largely depends on demand from the tractor, construction equipment, and commercial vehicle segments, which is inherently cyclical. Nevertheless, the impact of these pressures on margins are likely to be mitigated by benefits of increasing volumes and increasing contribution from higher margin business. The company’s operating margin has remained in range of 4% to 9% over past 5 years through fiscal 2024.

Leveraged capital structure: Networth has declined to Rs 110 crore as on March 31, 2024 from Rs 120 crore as on March 31, 2023. Total outside liabilities to adjusted networth ratio remained weak at 2.4 times due to higher debt on books. Also, debt protection metrics were muted, with interest coverage and net cash accrual to adjusted debt ratios of 1.31 times and 0.14 time, respectively, in fiscal 2024. The metrics are expected to remain under pressure over the medium term.