Rating Rationale
February 23, 2021 | Mumbai
Munjal Showa Limited
Ratings reaffirmed at 'CRISIL AA/Negative/CRISIL A1+'
 
Rating Action
Total Bank Loan Facilities RatedRs.144.25 Crore
Long Term RatingCRISIL AA/Negative (Reaffirmed)
Short Term RatingCRISIL A1+ (Reaffirmed)
 
Rs.6 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/Negative/CRISIL A1+' ratings on the bank facilities and commercial paper programme of Munjal Showa Limited (MSL).

 

The Negative outlook reflects the higher-than-anticipated decline in performance in fiscal 2021 following slowdown in offtake from its key customer, Hero Motocorp Limited (HMCL); rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’) due to Covid-19 and Nationwide Lockdown. Performance is also affected due to discontinued business with MSL’s second-largest client, Honda Motorcycle and Scooter India Private Limited (HMSIL), due to change in the latter’s sourcing policy. MSL's revenue fell by 26% in the 9 months of fiscal 2021 compared with the corresponding period of the previous fiscal. Operating profitability too declined to 2.2% from 4.3% during this period due to higher overheads following lower volumes. Performance is likely to improve in fiscal 2022, in line with the expected growth in the automobile segment.

 

The ratings continue to reflect MSL’s strong business linkages with customers and robust financial risk profile, supported by zero debt and substantial cash accrual. These strengths are partially offset by limited segmental and geographical diversification, leading to low bargaining power with, and pricing pressure from, original equipment manufacturers (OEMs); and modest operating efficiencies.

Key Rating Drivers & Detailed Description

Strengths:

  • Strong business linkages with main customers: MSL is a key player in the domestic shock-absorber industry and one of the leading suppliers to HMCL, the largest player in the two-wheeler market in India. The company also supplied to HMSI, however this business has discontinued due to change in the client’s sourcing policy. Apart from shock absorbers to two-wheelers, MSL also supplies struts and window balances to Maruti Suzuki India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+').

 

  • Robust financial risk profile, especially liquidity: Networth was large at Rs 617 crore and debt negligible, as on September 30, 2020. Furthermore, expected cash accrual of around Rs 25-50 crore per fiscal over the medium term will cover capital expenditure (capex) and working capital requirement. Consequently, reliance on debt will remain minimal, thereby benefitting financial risk profile. Liquidity will be further supported by cash and cash equivalents of around Rs 203 crore as on September 30, 2020, and unutilised working capital limit of Rs 20 crore.

 

Weaknesses:

  • Modest operating efficiencies: Due to a decline in orders across segments and customers, capacity utilisation is subdued and has led to increased overhead costs. Hence, operating profitability is expected to be 3-4% in the near term. However, with moderate improvement in sales to key customers, margin is expected to increase over the medium term. MSL also benefits from the fact that its three large manufacturing facilities are close to key clients, which improves control on capex and working capital management.

 

  • Limited segmental and geographical diversification: Despite increasing supplies to other OEMs, bulk of the revenue is derived from HMCL (88% in the six months through September 2020). MSL has negligible reach in the global market due to restrictions from Showa Corporation and no direct presence in the after-market segment, which fetches a higher margin. Earlier, HMSIL accounted for a healthy share of business (20% of revenue in fiscal 2013), but this declined to around 2% as Showa India Pvt Ltd is replacing MSL and is emerging as HMSIL’s largest supplier. HMSIL has also shortlisted new suppliers, including Endurance Technologies Ltd (rated ‘CRISIL AA/Positive/CRISIL A1+’). Any material change in the share of business from key customers, leading to a decline in revenue, will be a key rating sensitivity factor.

 

  • Low bargaining power against OEMs: Though the company has the flexibility to pass on any change in input cost, pushing any increase in other manufacturing overheads to customers could pose a challenge. Moreover, high dependence on OEMs and exposure to intense competition would also constrain profitability over the medium term.

Liquidity: Strong

Annual cash accrual is expected at around Rs 25-50 crore over the medium term against absence of any term debt obligation. Cash surplus was around Rs 203 crore as on September 30, 2020. Fund-based limit of Rs 15 crore largely remained unutilised in the 12 months through October 2020. Healthy accrual, liquid surplus, and unutilised bank limit should be more than sufficient to meet capex and incremental working capital requirement over the medium term.

Outlook: Negative

CRISIL Ratings believes MSL’s performance will remain subdued over the medium term, given the slowdown in sales to key customers and limited benefit from addition of new clients. Financial risk profile will, however, continue to be healthy, supported by steady accrual, modest capex, and sound working capital management.

Rating Sensitivity factors

Upward Factors

  • Substantial growth in revenue at 10% per annum, including through customer diversity
  • Significant improvement in profitability to 8-10%

 

Downward Factors

  • Continuing pressure on revenue growth due to loss of share in business from key customers
  • Operating profitability sustaining at below 4%
  • Weaker-than-expected gearing due to large, debt-funded capex/acquisition, or substantial decline in liquid surplus

About the Company

MSL was established by the erstwhile Hero group in 1985 as part of a technical and financial collaboration with Showa Corporation. Following a family arrangement in May 2010, MSL continues to be vested with Mr. Yogesh Chander Munjal, within the late Mr. Satyanand Munjal faction. Mr Yogesh Chander Munjal and family, through Dayanand Munjal Investments Pvt Ltd and Showa Corporation, had equity holdings of 40.10% and 24.90%, respectively, as on December 31, 2020. The main products are front forks and shock absorbers for the two-wheeler segment, and struts and window balancers for four-wheelers.

 

For the first nine months of fiscal 2021, profit after tax was Rs 20 crore on revenue of Rs 769 crore; vis-a-vis Rs 32 crore and Rs 1,038 crore, respectively, for the corresponding period in the previous fiscal.

Key Financial Indicators

Particulars

Unit

2020

2019

Revenue

Rs.Cr

1288

1669

Profit After Tax (PAT)

Rs.Cr

43

63

PAT Margin

%

3.3

3.7

Adjusted debt/adjusted networth

Times

0.00

0.00

Adjusted interest coverage

Times

154.17

394.88

 

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)

Complexity level

Rating assigned

with outlook

NA

Bank Guarantee

NA

NA

NA

2.25

NA

CRISIL A1+

NA

Cash Credit*

NA

NA

NA

15.0

NA

CRISIL AA/Negative

NA

Letter of Credit@

NA

NA

NA

28.0

NA

CRISIL A1+

NA

Proposed Long-Term Bank Loan Facility

NA

NA

NA

99.0

NA

CRISIL AA/Negative

NA

Commercial Paper

NA

NA

7-365 days

6

Simple

CRISIL A1+

*Interchangeable with bank overdraft

@Rs 30 crore as ad hoc unsecured import letter of credit limit

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 114.0 CRISIL AA/Negative   -- 28-02-20 CRISIL AA/Negative 28-03-19 CRISIL AA/Stable 20-03-18 CRISIL AA/Stable CRISIL AA/Stable
Non-Fund Based Facilities ST 30.25 CRISIL A1+   -- 28-02-20 CRISIL A1+ 28-03-19 CRISIL A1+ 20-03-18 CRISIL A1+ CRISIL A1+
Commercial Paper ST 6.0 CRISIL A1+   -- 28-02-20 CRISIL A1+ 28-03-19 CRISIL A1+ 20-03-18 CRISIL A1+ 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 2.25 CRISIL A1+ Bank Guarantee 2.25 CRISIL A1+
Cash Credit* 15 CRISIL AA/Negative Cash Credit* 30 CRISIL AA/Negative
Letter of Credit@ 28 CRISIL A1+ Letter of Credit@ 43.5 CRISIL A1+
Proposed Long Term Bank Loan Facility 99 CRISIL AA/Negative Proposed Long Term Bank Loan Facility 68.5 CRISIL AA/Negative
Total 144.25 - Total 144.25 -
*Interchangeable with bank overdraft
@Rs 30 crore as ad hoc unsecured import letter of credit limit
 
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for rating short term debt

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