Detailed Rationale

CRISIL Ratings has downgraded its rating on the long-term bank facilities and commercial paper of Munjal Showa Limited (MSL) to ‘CRISIL A/Stable/CRISIL A1’ from ‘CRISIL A+/Stable/CRISIL A1+’.

 

The downgrade in ratings reflects sustained moderation in the business risk profile of the company.  The business risk profile remains constrained by limited customer diversification, rising competitive intensity and low bargaining power with original equipment manufacturers (OEMs. The scale of operations has declined by ~5% in fiscal 2024 to Rs 1173 crores compared to Rs.1241 crores for fiscal 2023 majorly on account of muted demand from its key customers along with softening realization. The company’s operating margin continues to remain low and witnessed further moderation to 1.4% during fiscal 2024 against 2.5% in fiscal 23. Company reported revenue of Rs.311 crore with ~6% sequential growth in Q1FY25. Going forward the revenue growth shall remain flattish to low single digit in near to medium term. Growth in scale of operations have been constrained owing to high customer concentration and inability to diversify the customer profile. Same has also resulted in a slower than expected ramp up in performance leading to lower capacity utilisations and continued sustained low operating profitability.

 

Operating margins were impacted in fiscal 24 owing lower operating leverage. However, company has taken multiple cost corrective measures to align its operating profitability. Cost corrective measures such as change in SOP, allotment of VRS to the employees and investments in solar power will lead to some improvement in operating margins. Margins in Q1FY25 were improved to around 2.3% in and is expected to sustain at similar levels going forward.

 

Despite a modest business risk profile, the ratings centrally derive comfort from strong financial risk profile, backed by strong networth of Rs. 663 crore as on Mar 31, 2024 and a debt free balance sheet. Low reliance on debt has led to strong gearing of less than 0.1 time since fiscal 2013. Liquidity profile also remained strong with unencumbered cash and equivalent of ~~Rs 225 crore (including investments in mutual funds of Rs.205 crore) and Rs.59 crore of non-convertible debentures as on Mar 31, 2024.

 

Net cash accrual of Rs 18-20 crore per annum would be sufficient to meet capital expenditure (capex) requirement of Rs 10-12 crore in current fiscal, as well as working capital needs. Further, company had access to working capital limits of Rs. 63.5 crore which are unutilized supported strong liquidity.

Analytical Approach

CRISIL Ratings has considered the standalone business and financial risk profiles of MSL.

Key Rating Drivers & Detailed Description

Strengths:

Established business linkages with key customers and above-average scale of operations

MSL is a key player in the domestic shock-absorber industry and one of the leading suppliers to Hero MotoCorp Ltd (HMCL; ‘CRISIL AAA/Stable/CRISIL A1+’), the largest player in the two-wheeler market in India. Earlier, MSL used to supply shock absorbers to Honda Motorcycle and Scooters India Ltd (HMSI). However, it has discontinued this for the last 3-4 years due to change in the client’s sourcing policy. MSL also supplies struts and window balances to Maruti Suzuki India Ltd ('CRISIL AAA/Stable/CRISIL A1+'). HMCL accounts for 80-85% of total revenue.

 

Healthy financial risk profile

Networth was adequate at Rs 663 crore and the balance sheet continued to be debt free as on March 31, 2024. Despite low profitability, debt protection metrics remained healthy due to nil debt. Though cash accrual is expected to remain modest owing to subdued operational efficiency, it will be adequate to meet capex (Rs 10-12 crore) and working capital requirement. Liquidity is supported by healthy cash surplus (Rs 225 crore as on March 31, 2024), as well as unutilised fund-based bank limit of Rs 63.5 crore. Reliance on debt is expected to remain minimal going forward as well.

 

Weaknesses:

Modest operating efficiency

Due to a decline in orders across segments and customers concentration, low capacity utilisation (55-60%) leading to lower absorption of fixed costs. This is compounded by low bargaining power with OEMs, leading to inability to pass on increased input costs to customers. These factors constrained the margins to ~1.4% in fiscal 24. However, MSL is taking various cost corrective measures like change in their SOP, allotment of VRS to its employees and installation of Solar Power Plant. These measures shall help to sustain operating profitability is at 2-2.5% over near to medium term. However, MSL benefits from the fact that its three large manufacturing facilities are close to key clients, which allows it to manage their requirements efficiently.

 

Limited segmental and geographical diversification

Despite increasing supplies to other OEMs, bulk of the revenue is derived from HMCL (>80%). MSL has negligible reach in the global market due to restrictions from its collaborator and second-largest shareholder, Showa Corporation. Also, it has no direct presence in the high-margin aftermarket segment. Earlier, HMSI had accounted for a healthy share of business (20% of revenue in fiscal 2013), but this declined as Showa India Pvt Ltd (100% subsidiary of Showa Corporation) replaced MSL as the largest supplier of HMSI. Ability to diversify revenue base and increase supplies to electric two-wheeler OEMs will be critical for revenue growth as HMCL has also been inducting new suppliers for shock absorbers.

 

Low pricing power against OEMs

The company has limited flexibility to pass on any change in input cost and increase in other manufacturing overheads to customers. Moreover, high dependence on OEMs and exposure to intense competition would continue to constrain operating profitability, as seen in the past 3-4 fiscals.

Liquidity: Strong

Liquidity profile remained strong with cash surplus of around Rs 225 crore as on Mar 31, 2024. Further, presence of unutilized fund-based working capital limits of Rs 63.5 crore provides additional cushion.  Annual Net cash accrual of Rs 18-20 crore would be sufficient to meet capex of Rs 10-12 crore as well as working capital requirement.

Outlook: Stable

The company’s performance will remain modest over the medium term, given the high customer concentration and low product diversification. Financial risk profile will, however, continue to be healthy over the medium term, supported by sufficient cash accrual and modest capex spends.

Rating Sensitivity Factors

Upward factors:

• Substantial growth in revenue, including through customer and product diversification
• Improvement in operating margin to over 4-5% benefitting cash generation

 

Downward factors:

• Steady pressure on revenue growth coupled with operating margins sustaining below 2% on sustained basis impacting cash generation
• Weaker-than-expected gearing led by large, debt-funded capex/acquisition, or substantial decline in liquid surplus

About the Company

MSL was set up by the erstwhile Hero group in 1985, in technical and financial collaboration with Showa Corporation, Japan. After the family arrangement in May 2010, MSL continues to be vested with Mr Yogesh Chander Munjal within the Satyanand Munjal faction.

 

The Yogesh Chander Munjal family, through Dayanand Munjal Investments Pvt Ltd and Showa Corporation, had equity holdings of 40.10% and 24.90%, respectively, in MSL as on September 30, 2023. The company’s main products are front forks and shock absorbers, which it supplies to the two-wheeler segment. It also manufactures struts and window balancers for the four-wheeler segment. Facilities are in Gurugram and Manesar (both in Haryana) and Haridwar (Uttarakhand).

Any other information: Not Applicable