Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A/Stable/CRISIL A1’ ratings on the bank facilities of Rico Auto Industries Ltd (RAIL; part of the Rico group).

 

The ratings continue to reflect the group's established market position, supported by diversified clientele and healthy financial risk profile backed by strong networth. These strengths are partially offset by susceptibility of operating margin to volatility in prices of metals, moderate scale of operations and large working capital requirement.

Analytical Approach

To arrive at the ratings, CRISIL Ratings has combined the business and financial risk profiles of RAIL and its subsidiaries. This is because all the entities, collectively referred to as the Rico group, have common management.

 

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:

Established market position and diversified clientele: The group enjoys established market position on account of the extensive experience of the management to develop and market critically important automotive (auto) components for two-wheelers, four-wheelers and commercial vehicles. The business volumes have been driven by sale of auto components for passenger vehicles, 2W, CV and offroads. The longstanding business relationships with renowned auto players such as BMW, Renault, KIA, GKN, and Hero Motor Corp has strengthened the market position of the group. Furthermore, the management’s business acumen has helped the group to be the sole supplier for various auto components for BMW and several semi-electric vehicle (EV) components for Toyota. The company has added new components from Knorr-Bremse, Case New Holland, Piaggio and in discussion with prospective new clients which will support revenue growth over the medium term. This is expected to lead to growth in turnover to over Rs 2400 crore in fiscal 2025 (Rs 2160 crore during fiscal 2024), supported by revenue of ~Rs 539 crore booked in the first quarter of fiscal 2025. With majority of the sale happening in second half of the fiscal, CRISIL believes the company’s business risk profile is likely to improve further, however, its sustained improvement will remain a key monitorable.

 

Healthy financial risk profile: The financial risk profile is expected to remain healthy supported by estimated gearing of 0.85-0.90 time and networth of Rs 770-790 crore, respectively, as on March 31, 2025, which demonstrates sufficient headroom to absorb any business exigencies. Further, company in undergoing debt funded capex to start its new unit in Hosur for Toyota and other OEMs, and despite this capex the capital structure is expected to remain comfortable with healthy accretion to reserves and gearing to remain below 1 times and debt protection metrics are expected to remain comfortable with interest coverage and net cash accrual to total debt ratios of 5-5.5 times and 0.35-0.40 times over the medium term. CRISIL believes timely completion of capex with no cost overrun remains key moniterable.

 

Weaknesses:

Susceptibility of operating margin to volatility in prices of metals: The operating margin of the group has been susceptible to volatility in prices of metal and any variation in the price of raw material is passed on with a monthly/quarterly lag as witnessed by moderation in operating margin to 8.03% in Q1 of fiscal 2024-25, when the prices of aluminium and ferrous metals were high. The management has developed policies to pass through any increase in prices of metal to its customers, but the benefits flow through to the company with a time difference. Therefore, with stability in prices of metals, the operating margin is expected to improve to 10-11% CRISIL believes sustenance of improved operating margin above 11%, amid sustained increase in operating income, leading to more-than-expected net cash accrual would be a key monitorable.

 

Working capital-intensive operations: Gross current assets were range-bound at 110-140 days during the three fiscals through 2024, driven by debtors of 60-90 days and inventory of 50-75 days. High GCAs have led to moderate bank limit utilisation of 76.51% on average for the 12 months through May 2024 and average return on capital employed (ROCE) of 8-10% for the two fiscals through 2024, impacting the overall financial risk profile of the group. Going forward, efficient management of the working capital cycle, amid sustained increase in operating income, leading to lower reliance on bank limits and sustained improvement in ROCE levels would remain monitorable.

 

Modest scale of operations: The company revenue decline during fiscal 2024 to Rs. 2160 crores from Rs. 2308 crores due affected sales of Renault and export EV segment. Company is projecting to book over Rs. 2400-2500 crores in FY25 crore on the back of commercialisation of new components added in fiscal 2023-24 and increased demand from both existing and new customers as supported by revenue of ~Rs 539 crore booked in the first quarter of fiscal 2025 and majority of the sale happening in second half of the fiscal, along with heathy order in hand. Going forward, receipt of healthy orders from existing and new customers leading to healthy growth in revenue will remain monitorable.

Liquidity: Strong

Bank limit utilisation was moderate at 76% on average for the 12 months ended May 31, 2024. Cash accrual is expected to be Rs 190-200 crore which will be sufficient against term debt obligation of Rs 90-100 crore over the medium term, and the surplus will cushion the liquidity of the company. The current ratio was low at 0.88 time as on March 31, 2024. The promoters are likely to extend support in the form of equity and unsecured loans to meet the working capital requirement and debt obligation.

Outlook: Stable

CRISIL Ratings believe the Rico group will continue to benefit from its ability to develop new critical auto components along with established relationships with a diversified customer base.

Rating Sensitivity Factors

Upward factors:

• Sustained and significant growth in operating income with increase in operating margin beyond 12% leading to more-than-expected net cash accrual
• Efficient management of the working capital cycle leading to lower reliance on working capital limits

 

Downward factors:

• Sustained decline in operating margin to below 8% leading to lower-than-expected net cash accrual.
• Higher-than-expected debt leading to deterioration in the financial risk profile.

About the Group

RAIL, part of the Ludhiana-based Rico group, was incorporated in March 1983. The group manufactures machined engine and die-casting and clutch parts for leading two- and four-wheeler original equipment manufacturers (OEMs) across the globe. The company is listed on the National Stock Exchange and Bombay Stock Exchange.

 

AAN Engineering Industries Ltd (AAN) is a wholly owned subsidiary of RAIL and was incorporated in January 2010. The company manufactures and assembles mechanical fuses and metal parts for electronic fuses mainly for aerospace and defence industries.

 

Rico Auto Industries Inc., USA (RAII), wholly owned subsidiary of RAIL, is engaged in trading of auto components and providing warehousing and logistics support to OEMs and tier I customers of RICO in United States of America.

 

Rico Auto Industries (UK) Ltd (RAIUL), a wholly owned subsidiary of RAIL, is engaged in trading of auto components and providing warehousing and logistics support to OEMs and tier I customers of RAIL for the North America and Brazilian markets.

 

Rico Friction Technologies Pvt Ltd (RFTPL) is 70% held by RAIL. The company manufactures friction materials for clutches and other applications.

 

Rico Fluidtronics Ltd (RFL, previously known as Magna Rico Powertrain Pvt Ltd), manufactures oil pumps and water pumps for auto engines in India and Europe. RAIL holds 100% stake in the company.

 

Rico Jinfei Wheels Ltd (RJWL; 72.39% held by RAIL and 19.36% held by RFL) manufactures aluminum alloy wheels for two-wheelers.

 

The group has 15 manufacturing facilities in Haryana, Uttarakhand, Tamil Nadu, Rajasthan and Gujarat. It is headed by Mr Arvind Kapur (Chairman, CEO & Managing Director).

Any other information: Not Applicable