Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of NRB Bearings Ltd (NRB). Further, CRISIL Ratings has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper program of the company.

 

NRB derives nearly 60-65% of its revenue from domestic automotive (auto) original equipment manufacturers (OEMs), while about 10-12% and 20-25% are derived from domestic aftermarket and export, respectively. During fiscal 2024, the company registered a year-on-year revenue growth of 3.4% to Rs 1,094 crore, driven by growth in demand from the domestic auto sector. Growth in revenue remained impacted owing to a fire accident at its plant located in Waluj (Maharashtra). However, the plant is likely to resume operations in the current fiscal. Revenue is expected to grow 7-9% over the medium term, driven by focus on components categories fetching higher realisations, technology agnostic products and new products in the electric vehicles segment.

 

Operating margin marginally declined to 16.5% during fiscal 2024 (from 16.9%) in fiscal 2023) owing to lower absorption of overheads. However, NRB has been able to sustain its gross margin at 54-55%, led by cost-optimisation measures taken, price hikes and its ability to pass on volatility in input prices. The margin is expected to remain stable at around 16-17% over the medium term, aided by benefit from operating leverage arising out of increasing scale in operations being partly offset by inflationary pressure.

 

Financial risk profile, continues to be supported by the management’s efforts to keep debt levels under check, given the cyclical nature of the auto business. Consolidated debt reduced to Rs 173 crore as on March 31, 2024 (from Rs 322 crore a year ago) with the help of sale proceeds from the land parcel located in Thane (Maharashtra). As of result of the debt reduction in fiscal 2024, the total outside liabilities to adjusted networth ratio improved to 0.42 time (from 0.78 time year ago) and is slated to improve further with sustained accretion of profits and remain comfortable at 0.3-0.4 time over the medium term. Owing to marginal decline in operating profitability during fiscal 2024, interest cover declined to 8.11 times (11.12 times in fiscal 2023). However, with sustained profitability and reduced debt levels, interest cover should remain above 10 times over the medium term. Further, the company has comfortable liquidity position with cash surplus of Rs 121 crore as on March 31, 2024, and net cash accrual of above Rs 120 crore projected for the medium term.

 

The ratings continue to reflect NRB’s market leadership in the needle and cylindrical roller bearing segments, diverse customer profile and strong technical expertise. These strengths are partly offset by large working capital requirement, vulnerability to cyclicality in the end-user industry and pricing pressure from OEMs.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of NRB Bearings Ltd. and its subsidiaries (including the wholly owned step-down subsidiaries), as all the companies are in the same line of business.

 

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:

• Market leadership in the needle and cylindrical roller bearing segments in India: The company has an estimated market share of 60% in the needle bearing industry in India, with strong presence in the cylindrical roller, special tapered roller and special ball bearings segments. This is aided by the promoters’ extensive industry experience, robust in-house research and development facilities and strong client relationships.

 

• Diverse customer profile: NRB has longstanding relationships with Indian and global auto OEMs and Tier-I vendors. It has customers across multiple segments, including two-wheelers, commercial vehicles, passenger cars, utility vehicles, farm equipment and tractors, off-highway vehicles, railways and defense. Domestic OEMs contributed the most to its revenue (about 60-54%) in fiscal 2024, while aftermarket and export sales contributed the rest. Despite the large proportion of revenue from OEMs, no single customer with its Tier-1 supplier accounts for more than 7% of the total revenue, thereby limiting customer concentration risk.

 

• Strong technical expertise: NRB has been operating in India for over six decades and has over time built strong technical expertise and knowhow covering the full range of bearing design, from conception to software-aided simulation, testing, validation, benchmarking and production. The product range spans over 3,000 designs, which are also made to suit its customer requirements. In fiscal 2000, NRB established a dedicated engineering and design centre. In addition, there is another centre that focusses on process engineering at the plant site in Waluj Maharashtra Industrial Development Corporation. Besides, its plants use automated production and assembly machinery designed in-house, reflecting the strong technical capabilities of its team.

 

• Healthy financial risk profile: The financial risk profile is supported by healthy networth of Rs 871 crore and moderate gearing of 0.2 time as on March 31, 2024, as against Rs 678 crore and 0.47 time, respectively, a year ago. Other key credit metrics i.e. interest coverage ratio though declined to 8.1 times during fiscal 2024 (11.1 times during fiscal 2023) still remains healthy. These metrics are expected to remain healthy over the medium term, given better cash accrual.

 

Weaknesses:

• Large working capital requirement: Due to the just-in-time delivery to OEMs and large number of product stock keeping units across more than 500 products, inventory is high at 120-170 days. Furthermore, payment terms from the auto component manufacturers vary from 60-90 days, resulting in receivables of ~60-90 days. Also, the company imports around 60-70% of the key raw material (steel) from Europe (mainly Germany), Japan and other countries. Considering a transit time of 90 days and to avoid the impact of supply chain issues arising out of geopolitical issues, the company is required to stock up a huge inventory.

 

• Vulnerability to cyclical demand in the auto bearings segment and to pricing pressure from OEMs: High dependence of bearing manufacturers on the auto sector exposes them to cyclicality in demand. While bearing manufacturers enjoy reasonable pricing flexibility with OEMs, backed by mutual interdependence, and capital and technology intensity of operations, price negotiations happen with a lag, leading to price adjustment delays and impact on profitability in the interim. Furthermore, if there is a prolonged slowdown and decreasing demand for auto, it is not always possible for OEMs to completely pass on input price increase to end users. Hence, any significant hike in prices is absorbed jointly by suppliers and OEMs. Additionally, any significant decline in demand will lead to under-absorption of overheads, and hence, impact profitability of component suppliers.

Liquidity: Strong

Cash accrual is projected at Rs 120-140 crore per annum, sufficient to meet modest capital expenditure (capex) needs and minimal debt repayments over the medium term. Liquidity is also supported by cash surplus of Rs 121 crore as on March 31, 2024. Further, the fund-based working capital limit of Rs 397 crore was utilised at about 25% for the six months ended May 30, 2024. The buffer in the form of unutilised limit of Rs ~150-200 crore provides sufficient cushion in case of exigencies.

Outlook: Stable

NRB’s strong business risk profile will sustain with growth in demand from the auto industry, sustained profitability margin resulting in higher cash accrual. The financial risk profile is also expected to remain healthy due to prudent funding of capex and steady cash accrual.

Rating Sensitivity factors

Upward factors

• Significant increase in scale of operations while maintaining operating margin, leading to return on capital employed ratio improving to over 16-18% on a sustained basis
• Sustenance of healthy financial and liquidity risk profiles

 

Downward factors

• Decline in revenues or deterioration of operating margin to below 15% on a sustained basis.
• Sizeable stretch in the working capital or debt-funded capex/inorganic expansion leading to deterioration in capital structure, with gearing above 1 time on a sustained basis

About the Company

Founded by late Mr Trilochan Singh Sahney in 1965, NRB manufactures needle, cylindrical, special ball, and taper-roller bearings. It also makes other friction solution components such as planetary shafts, crank pins and kingpins. The company has four subsidiaries: NRB Holdings Ltd (holding company of NRB Bearings Europe GmbH, and NRB Bearings USA Inc), SNL Bearings Ltd (SNL), NRB Bearings (Thailand) Ltd, NRB's manufacturing facilities are at Thane, Aurangabad, Jalna, and Waluj in Maharashtra; Hyderabad; and Pantnagar in Uttarakhand. SNL's facility is at Ranchi in Jharkhand, while NRB Thailand's plant is at Rayong in Thailand. The product engineering centre at Turbhe (Maharashtra) and process and advanced materials-based engineering centre at Waluj are government accredited.

 

Ms Harshbeena S Zaveri, daughter of Mr Trilochan Singh Sahney, is the vice chairman and managing director of NRB and the chairman of the board of SNL.

Any other information: Not applicable

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
SNL Bearings	73.45%	Subsidiary
NRB Holdings Ltd, UAE	Full	Wholly owned subsidiary
NRB Bearings (Thailand) Ltd*	Full	Wholly owned step down subsidiary
NRB Bearings Europe GmbH*	Full	Wholly owned step down subsidiary
NRB Bearings USA Inc*	Full	Wholly owned step down subsidiary

*Step down subsidiaries