Detailed Rationale

CRISIL Ratings has downgraded its ratings on the bank facilities of PPAP Automotive Ltd (PPAP; a part of the PPAP group) to 'CRISIL A-/Stable/CRISIL A2+’ from 'CRISIL A/Negative/CRISIL A1’.

 

The downgrade reflects the continuous decline in the group’s business risk profile and consequently its financial risk profile. Group’s operating margin has remained under pressure due to subdued performance in the subsidiary companies and due to group’s inability to pass on the increase in the raw material prices to its customers. In fiscal 2024, the group’s operating margin declined to ~7.6% from around 8.7% in fiscal 2023 which is majorly due to consistent losses in the electric vehicle battery business in the subsidiary company PPAP Technology Pvt Ltd.; lower than expected demand has resulted in continuous losses in the segment. However, on standalone basis the performance of PPAP has remained stable with operating margin maintained at around ~8.7%.

 

Going forward, the group’s operating margin is expected to improve to 9-10% backed by improvement in PPAP’s standalone operating margin to 10-12% aided by benefit from price pass-on to customers (expected to reflect for full year in fiscal 2025) and also backed by the battery business expected to generate operating profits from H2-FY2025 as the subsidiary is now focusing on supplying batteries to solar companies and storage systems. However, any further decline in the operating margin impacting the overall credit profile will remain key monitorable.

 

Group’s operating income is estimated to be around Rs. 524 crores in fiscal 2024 as against Rs. 511 crores in fiscal 2023, with the improvement being driven by increase in price realisation; volume remained muted due to decline in sales from tooling business and due to shifting of orders for few models to FY 2025. The increase in realizations is supported by price hikes taken with few Original Equipment Manufacturers (OEM)s.

 

Networth is estimated to be around Rs 274 crore and  total outside liabilities to tangible networth (TOLTNW) ratio is estimated at ~1 time. Moderation in profitability resulted in interest coverage ratio moderating to around 2.8-2.9 times in fiscal 2024 from 3.7 times in fiscal 2023 and 5.6 times in fiscal 2022.

 

The ratings reflect PPAP's leadership position in the polyvinyl chloride (PVC) / thermo plastic olefins (TPO) auto components industry, along with strong relationships with large OEMs, and healthy financial risk profile. These strengths are partially offset by customer concentration in revenue and the exposure to volatility in raw material prices and foreign exchange (forex) rates.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of PPAP and its wholly owned subsidiaries and JV company: PPAP Technology Limited, ELPIS Automotives Private Limited and PPAP Tokai India Rubber Pvt. Ltd. (Joint venture).  This is because all these entities, collectively referred to as the PPAP group, are under a common management and have financial linkages.

 

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:

• Leadership in the PVC/TPO profiles segment and strong relationships with large OEMs: PPAP is one of the largest players in the PVC/TPO-based profiles segment for the auto industry and is associated with industry leader, Maruti Suzuki India Ltd (MSIL; rated CRISIL AAA/Stable/CRISIL A1+), besides Honda Cars India Ltd, Tata Motors Limited (rated CRISIL AA+/Stable/CRISIL A1+), Nissan Motor India Pvt Ltd, and Toyota Kirloskar Motor Pvt Ltd. The group has been gradually diversifying their customer base and now caters to a diverse set of OEMs. Revenue in fiscal 2024 has marginally improved to Rs. 524 crores from Rs. 511 crores in fiscal 2023, supported by increase in price realization and despite muted volumes. Going forward with the orders for new model from the OEMs and expected ramping up of the business in the subsidiary companies, the group’s revenue is expected to grow by 5-7% going forward.

 

• Healthy financial risk profile: Networth is estimated at around Rs. 274 crores as on March 31, 2024 (as against Rs 285 crore a fiscal year earlier; dip in networth due to net losses in fiscal 2024). TOLTNW ratio is estimated at around 1 time as on March 31, 2024. Moderation in profitability resulted in interest coverage ratio moderating to around 2.8-2.9 times in fiscal 2024 from 3.7 times in fiscal 2023 and 5.6 times in fiscal 2022. Furthermore, the group has controlled reliance on external debt as reflected in average utilisation of ~62% over the 12 months ended June 2024. With no major, debt-funded capital expenditure (capex) planned for the near-to-medium term, the financial risk profile is expected to remain comfortable.

 

Weaknesses:

• Customer concentration in revenue: The top two customers accounted for ~70% of revenue in fiscal 2024. However, customer concentration has reduced gradually over the past few years with the contribution from top two customers reducing from 78% in fiscal 2022. Furthermore, strong and preferred relationships with customers has supported and protected the group from any customer-related challenges. The group’s strategy of entering into new areas of growth such as expansion in battery segment, after-market segment, and industrial products, is expected to bring diversification and reduce customer concentration in the revenue profile. Adequate customer diversification, leading to reduction in client concentration risk, will be a key monitorable.

 

• Exposure to volatility in raw material prices and forex rates: The key raw materials, PVC and other petrochemical derivatives, are crude derivatives and hence the prices of the same are volatile. Besides, as some raw material is imported, the company is susceptible to fluctuation in foreign exchange rates. Though imports have reduced gradually over the past few years, 20-25% of raw material is still imported and hence the group remains vulnerable to volatility in raw material prices and forex rates. The group is partially able to pass on the price hike to customers due to which the operating margin declined to ~7.6% in fiscal 2024. Improvement in operating income and revival in the operating margin will remain key monitorables over the medium term.

Liquidity: Adequate

Bank limit utilization averaged at 62% for the 12 months ended June 2024. Net cash accruals are expected to be Rs 35-45 crore per annum, sufficient to meet term debt obligation of Rs.20-30 crore annually over the medium term. Low TOLTNW and strong networth also support financial flexibility.

Outlook: Stable

PPAP will continue to benefit from its established position in the market for PVC/TPO profiles for the auto industry.

Rating Sensitivity factors

Upward factors:

• Steady revenue growth driven by improved volumes and the operating margin sustaining above 10-11% over the medium term leading to increase in cash accruals.
• Stable financial risk profile of the company with gearing levels remains below 0.50 times.

 

Downward factors

• Operating margin declining below 7% at group level, leading to further weakening of net cash accruals thus impacting the liquidity profile
• Large, debt-funded capex weakening the capital structure

About the Group

Set up in 1978 as a partnership firm  PPAP was reconstituted as a public-limited company, Precision Pipes and Profiles Company Ltd, in 1995. The company got its present name in May 2014. PPAP manufactures auto sealing systems and interior and exterior injection moulded products. The company was listed on the National Stock Exchange and Bombay Stock Exchange in January 2008. 

 

PPAP Technology Limited commenced operations in 2019. The said company has been incorporated to start a new business of manufacturing of lithium battery for electric vehicle.

Elpis Components Distributors Pvt Ltd commenced its operations from Nov 2019. The group is expanding its business opportunities into new market in the field of automotive component and accessories. It is mainly involved in the business of trading of auto components. It has created a new network/dealer channel under this company and would purchase components from PPAP.

The name has been recently changed to ELPIS Automotives Private Limited.

PPAP Tokai India Rubber Private Limited: In 2012, the Company ventured into EPDM Rubber based automotive sealing systems by establishing a 50:50 Joint Venture (JV)-PPAP Tokai India Rubber Private Limited (PTI) with its Technology Partner Tokai Kogyo Co. Limited, Japan.

Any other information: Not applicable