Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the long term bank facilities of NRB Bearings Limited (NRB) at ‘CRISIL AA-/Stable‘. Rating on commercial paper programme has been reaffirmed at ‘CRISIL A1+’.

 

NRB derives nearly 65-70% of its revenues from domestic automobile original equipment manufacturers (OEMs), while about 10-12% and 20-25% are derived from domestic aftermarket and exports respectively. With recovery in demand from automobile industry coupled with price hike, revenue grew by 24% at Rs.944 crore during fiscal 2022 as against Rs.759 crore during fiscal 2021. With the continued growth momentum in domestic auto industry, during first nine months of fiscal 2023, company registered revenue growth of 8% compared to corresponding period of previous year. This was despite some sluggishness witnessed in the export market in this period.

 

Demand across automobile segments is expected to register growth over the medium term resulting in improvement in domestic offtake. NRB is well placed to capitalise on this given its high share of demand from OEMs. NRB’s diverse customer profile and geographical base along with technological expertise will support sustenance of its business performance over the medium term. Going forward, revenue growth is expected to be supported by increasing focus on E-mobility parts for EV segment and healthy offtake from auto industry.

 

The operating margins stood at 13.7% in fiscal 2022 (FY21:13.3%) lower than the pre-pandemic levels mainly on account of increase in freight costs as well as write off of bad debts of Rs.28 crore in fiscal 2022 (FY21: Rs.14 crore). Operating margins restored to 15.9% during nine months ended December 31, 2022.. With the cooling off freight costs and input costs, operating profitability is expected to stabilise at 16-17% over the medium term.

 

NRB’s financial risk profile, continues to be healthy supported by strong networth of Rs.616 crore and gearing of 0.41 times as on September 30, 2022. The company plans to incur capex of Rs.200 crore over the next 4 years; which is expected to be funded in equal proportion by internal accruals and debt. Gearing is slated to improve further with sustained accretion of profits and remain comfortable in the range of 0.2-0.4x times over the medium term. Further debt protection metrics will continue to remain comfortable with interest coverage and net cash accruals to adjusted debt expected to be above 8.4 times and 0.4 times over the medium term.

 

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

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of NRB and its subsidiaries (including step down subsidiaries), together referred to as NRB, as all the companies are in the same 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 is one of the major players in the needle bearing industry in India, with a 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 automobile OEMs and Tier-I vendors. It has customers across multiple segments, including two-wheelers, commercial vehicles (CVs), passenger cars, utility vehicles (UVs), farm equipment & tractors, off-highway vehicles, railways and defence. OEMs contributed the most to its revenue (about 60-65%) in fiscal 2022, 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 6-7% of the total revenue, thereby limiting customer concentration risk.

 

• Strong technical expertise: NRB has been operating in India for over 6 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 company’s product range spans over 3000 designs, which are also made to suit its customer’s requirements. NRB has an  dedicated engineering & design (E&D) centre Turbhe, which is recognized by the Indian Department of Science & Technology as a world-class research and development facility. In addition, there is another centre that focusses on process engineering at the plant site in Waluj MIDC. Besides, its plants use automated production and assembly machinery designed in-house, reflecting the strong technical capabilities of its team. The proposed capex of Rs.200 crore will cater to capacity expansion in Thailand subsidiary as well as  strengthening of its presence in the EV segment by development of new products. This has also enabled NRB keep abreast of technological changes in the bearings market.

 

• Healthy financial risk profile: The financial risk profile is supported by healthy net-worth of Rs 616 crore and moderate gearing of 0.41 times as on September 30, 2022.  Debt protection metrics such as interest coverage ratio and net cash accruals to adjusted debt are estimated to remain healthy at 8.4 times and 0.5 times during fiscal 2023. These metrics are expected to remain at comfortable levels over the medium term, given better accruals.

 

Weaknesses:

• Working capital-intensive operations: The Company imports 25-30% of its raw material requirements of which a major component is imported from Europe and Japan. Due to the just-in-time delivery to OEMs and higher transit for imported raw materials, Company is required to maintain larger inventory and thus has high  inventory days at 115-130 days. Furthermore, payment terms from the automotive component manufacturers vary from two to three months, resulting in receivable levels of ~90-110 days.

 

• Vulnerability to cyclical demand in the automotive bearings segment and to pricing pressure from OEMs: High dependence of bearing manufacturers on the automobile 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 automobiles, it is not always possible for OEMs to completely pass on input price increase to end users. Hence, any significant increase in prices is absorbed jointly by suppliers and OEMs. Additionally, any significant decline in demand will increase overheads, and hence, impact profitability of component suppliers.

Liquidity: Strong

NRB is expected to generate annual cash accruals of Rs 120-150 crore over the medium term which should take care of modest capex needs amounting to Rs.45- 55 crore per annum, and debt repayments of Rs. 25-35 crore per annum. Liquidity is also supported by cash surplus of Rs 71 crore as on September 30, 2022 and moderately utilized bank lines to an extent of 58% for past six months ended December 31, 2022.

Outlook: Stable

CRISIL Ratings believes that NRB’s revenue and operating profitability over the near term will improve with better offtake from the automotive sector, increase in OEM volumes, sustained profitability margins resulting in higher cash accruals. Financial risk profile is also expected to remain healthy, due to prudent funding of capex, and steady accruals.

Rating Sensitivity factors

Upward factors

• Sustained annual revenue growth of ~15-20%, while generating healthy operating profitability at over 20%
• Sustained strong debt metrics, with gearing levels remaining below 0.5 times
• Build-up of liquid-surpluses

 

Downward factors

• Decline in revenues by more than 10% or deterioration of operating margin to below 15% on a sustained basis, most likely due to sluggish business conditions
• Deterioration in debt metrics; eg. gearing levels of above 1.0 time, due to stretch in working capital or debt funded capex or acquisitions

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 five subsidiaries including stepdown subsidiaries: NRB Holdings Limited (holding company of NRB Bearings Europe GmbH and NRB Bearings USA Inc), NRB Bearings (Thailand) Ltd and SNL Bearings Ltd (SNL). NRB's manufacturing facilities are at Aurangabad, Jalna, and Waluj in Maharashtra; Hyderabad; and Pantnagar in Uttarakhand.  NRB’s board of directors has approved the plan of monetisation of assets at Thane and Aurangabad wherein Thane plant has been closed.. SNL's facility is at Ranchi in Jharkhand, while NRB Thailand's plant is at Rayong in Thailand. The product engineering centre at Turbhe 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.

 

For the nine month period ended December 31, 2022, the company reported a PAT of Rs. 61 crores (Rs.58 crores in the corresponding period of fiscal 2022), on net revenues of Rs 744 crores (Rs. 689 crores in the corresponding period of fiscal 2022).

Key Financial Indicators (NRB Bearings Limited - Consolidated)

Particulars	Unit	2022	2021
Revenue	Rs crore	944	759
PAT	Rs crore	76	56
PAT margin	%	8.0	7.3
Adjusted debt/Adjusted networth	Times	0.49	0.48
Interest coverage	Times	7.13	4.43

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

@ Interchangeable with buyer's credit (BC), export packing credit (EPC), bill discounting (BD), letter of credit (LC), and bank guarantee (BG)

#Interchangeable with working capital demand loan (WCDL) /LC/standby letter of credit/guarantee/EPC

&Interchangeable with WCDL, EPC, LC/BC, and capex BC

^ Interchangeable with cash credit, WCDL/foreign currency non-repatriable (FCNR)/EPC/BC

@@ Interchangeable with STL/CP, BC/EPC/FCNR, CC/WCDL

Annexure – List of entities consolidated

Subsidiary	Extent of consolidation	Rationale for consolidation
SNL Bearings	73.45%	Subsidiary
NRB Holdings Limited’	Full	Subsidiary
NRB Bearings (Thailand) Limited	Full	Subsidiary
NRB Bearings GmbH*	Full	Wholly owned step down subsidiary
NRB Bearings USA*	Full	Wholly owned step down subsidiary

*NRB Bearings GmbH and NRB Bearings USA are transferred under a new entity ‘NRB Holdings Limited’ (wholly owned subsidiary of NRB Bearings Limited). Approval from Board of Directors for disinvestment of entire stake held in NRB Bearings (Thailand) Limited by NRB Bearings Ltd. by way of sale and transfer of stake to NRB Holdings Limited is held in place and the closure of the aforesaid transaction will take sometime.