Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL BBB+/Stable/CRISIL A2' ratings on the bank facilities of SAMKRG Pistons and Rings Ltd (SAMKRG).

 

Revenue grew by ~4.5% in fiscal 2024, as the robust 13% growth in domestic two-wheeler (2W) original equipment manufacturer (OEM) segment that contributes ~60% to the company’s sales, was offset by the steep 14% decline in exports due to weak macro-economic conditions in key export destinations and flattish aftermarket sales. SAMKRG has higher product and segment concentration where the entire revenue in fiscal 2024 is from piston and piston rings and over 95% of the topline came from domestic 2W customers. Over the medium term, revenue is likely to grow at ~8-10% supported by strong offtake from domestic 2W OEMs.

 

Operating profitability declined to 13.3% in fiscal 2024 from 15% the previous fiscal, primarily due to the steep increase in employee cost during the first half of the year owing to sizeable retirements and salary hikes that were pending because of Covid related disruptions. However, margins eventually recovered to 15-17% in the second half on account of change in the procurement mix. Over the medium term, operating margin is expected at 14-15% due to expected improvement in offtake from domestic 2W OEMs and change in the procurement mix.

 

Financial risk profile witnessed marginal moderation in fiscal 2024 with interest coverage ratio declining from 10.52 times in fiscal 2023 to 8.69 times primarily on account of increase in interest rates on bank loans by ~1%. For the same comparative period, gearing too increased marginally from 0.11 time to 0.16 time due to rise in overall debt levels owing to increase in working capital loan from Rs 18.4 crore in fiscal 2023 to Rs 30 crore in fiscal 2024. Over the medium term, gearing is expected to remain at 0.16- 0.18 times despite expected availment of a fresh term loan of Rs 12.5 crore in fiscal 2025 for part funding the capital expenditure (capex) requirement of Rs 20 crore. This is due to expected moderation in the working capital debt as the company has changed the procurement strategy, where it is procuring raw material backed by inland letters of credit (LCs), which is expected to reduce the working capital requirement.

 

Liquidity is expected to be adequate with cash accruals of Rs 23-25 crore over the medium term which will be sufficient to part fund the capex of Rs 20-22 crore over the medium term. The company also proposes to repay the unsecured loan of Rs. 10.5 crore along with accrued interest. Further, term loan repayments are expected to commence fiscal 2026 onwards. Bank limit utilisation averaged 90% for the 12 months ended July 2024.

 

The ratings continue to reflect the established position of SAMKRG in 2W pistons and piston-rings industry, long-standing relationship with established 2W manufacturers such as Bajaj Auto Ltd (Bajaj Auto, rated CRISIL AAA/Stable/CRISIL A1+’), TVS Motor Co Ltd (TVSM) and Honda Motorcycle and Scooter India Pvt Ltd (HMIL) and healthy financial risk profile, reflected in comfortable gearing and debt protection metrics. These strengths are partially offset by susceptibility to volatility in raw material prices, and constricted revenue diversity due to limited presence in four-wheeler (4W) segment and lack of electric vehicle (EV) related products in the overall portfolio.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

• Established position in the domestic pistons and piston-rings market: SAMKRG has a strong position in the piston and piston-rings market and caters to a diversified customer base in the 2W segment. This is supported by promoter experience of more than two decades in manufacturing pistons. In the OEM segment (~56% of revenue), the company has longstanding relationships with established 2W manufacturers such as Bajaj Auto, TVS Motor and HMSI, and caters to a major share of their piston requirement. It is also widely present in the replacement market (~29% of revenue), operating through a strong network of dealers and distributors across India. Moreover, about 16% of revenue in fiscal 2024 came from exports, driven by superior product quality. Despite diversified customer base, top 5 customers account for ~90% share of OEM revenue, exposing the company to moderate customer concentration.

 

• Healthy financial risk profile: Financial risk profile moderated marginally in fiscal 2024 on account of lower profitability and hence impacted debt metrics - Interest coverage ratio declined from 10.52 times (fiscal 2023) to 8.69 times (fiscal 2024) and net cash accrual to adjusted debt (NCAAD) ratio from 1.32 times to 0.85 time, primarily on account of increase in interest rates on bank loans by ~1% and rise in overall debt levels. Gearing has increased from 0.11 time as on March 31, 2023, to 0.16 time as on March 31, 2024, on account of increase in short-term loan from Rs 18.4 crore in fiscal 2023 to Rs 30 crore in fiscal 2024. The company is expected to take a fresh term loan of Rs 12.5 crore in fiscal 2025 for capex requirement towards procurement of new machinery for process efficiency improvement. The company also enhanced non-fund-based limits from Rs 5 crore to Rs 15 crore in May 2024 for LC requirement towards procurement of alloys from Phoenix Industries at competitive prices, which will lead to an increase in the credit period and reduce working capital requirement. Hence the increase in term loan is offset by a decline in working capital requirement allowing the company to maintain gearing at the same levels in fiscal 2025. However, with repayment of term loan commencing fiscal 2026 and decreasing working capital requirement, gearing is expected reduce to below 0.1 time along with improvement in interest cover and NCAAD.

 

Weaknesses:

• Susceptibility to fluctuations in raw material prices: Business is inherently exposed to fluctuations in the prices of key raw materials, aluminium, silica and steel. The company enters annual pricing contracts with OEMs and any major increase in raw material prices is generally transferred with a lag of 3-6 months. However, given the severe price competition amid OEMs, component manufacturers are also hard-pressed to supply goods at competitive rates. In the replacement market, the company is fully exposed to price fluctuations as maintaining operating margin is determined by the ability to transfer cost increases to end users without any impact on volumes. Over the medium term, margin will likely remain susceptible to both fluctuations in raw material prices and pricing pressure from OEMs.

 

• Limited revenue diversity with minimal presence in 4W components segment and lack of presence in the EV segment: SAMKRG has higher segmental concentration with almost 95% of revenue coming from 2W segment and has a marginal presence in 4W parts and generator sets. Due to this reason and intense competition, revenue has stagnated under Rs 270 crore in the past decade (except fiscal 2019 when revenue peaked at Rs.291 crore).

 

Though the company plans to expand its presence in the 4W and export markets and has reported increased traction, it will remain a small player in this segment over the medium term because of intense competition from other established players. Concentrated operations in the 2W parts industry exposes the company to any changing demand patterns or regulations. Although the company plans to increase its presence in the 4W segment and intends to develop EV engine parts in collaboration with its clientele, the same is in very initial stages and is expected to take time to materialise impacting the business performance over medium term.

Liquidity: Adequate

Estimated cash accrual of Rs 23-25 crore over the medium term will suffice to meet repayment obligations Rs 2.5 crore per annum of term loan fiscal 2026 onwards. The company also proposes to repay the unsecured loans from promoters of Rs. 10.5 crore in fiscal 2025 and plans to undertake a capex of Rs 20 crore, which will be funded through a mix of term debt and internal accrual. The bank limit utilisation, against drawing power available averaged 90% for the 12 months ended July 2024.

Outlook: Stable

CRISIL Ratings expects SAMKRG`s business performance to improve over the medium term due to robust demand for two-wheelers, and better operating profitability. The company's financial risk profile and liquidity position will nevertheless remain adequate over the near-to-medium term.

Rating sensitivity factors

Upward factors

• Sustained growth in revenue, including through customer and product diversity, along with steady improvement in order flow from export and OEM customers and operating profitability sustaining at 15-16%, benefiting cash generation.
• Improvement in financial risk profile, supported by better cash generation and prudent management of working capital.

 

Downward factors

• Sustained weakness in business performance or a potential negative business impact from changing regulations in the automotive industry with continuing pressure on revenue.
• Operating profitability sustaining at 9-10% impacting cash generation
• Moderation in key debt protection metrics due to lower profitability, and higher-than-expected debt levels because of capex or elongation of working capital cycle, and pressure on liquidity.

About the Company

SAMKRG was incorporated in March 1985, by Mr S.D.M. Rao. His two sons, Mr S Karunakar, and Mr S Kishore, who are mechanical engineers, joined the company in 1986 and 1990, respectively, as apprentice engineers and are presently in the board and actively involved in the day-to-day operations. Post the demise of Mr Rao in May 2023, his elder son Mr S. Karunakar was appointed as Chairman and Managing Director in July 2023. The promoter’s younger son, Mr S. Kishore, is a whole-time director on the Board of the company and continues to take care of day-to-day business operations.

 

The company manufactures pistons, piston pins and piston-rings. While its main plant is in Hyderabad, it has two other units in Srikakulam near Visakhapatnam (Andhra Pradesh). SAMKRG caters mainly to the 2W segment (accounted for 95% of its revenue in fiscal 2023) with limited presence in 4W parts.

Any other information: Not applicable