Key Rating Drivers & Detailed Description

Strengths

• Strong business, financial, and managerial support from parent: SNL benefits from strong business linkages with its parent, NRB Bearings. Post its acquisition in the year 2000, NRB Bearings has turned around SNL’s performance, making it one of the most profitable bearing companies. SNL, along with NRB Bearings, commands about 70% share of the needle bearing market in India.

NRB Bearings has a well-entrenched dealer network which benefits SNL in expanding its reach in the aftermarket segment of auto components. Apart from this, both companies have a common management. CRISIL Ratings expects the business synergies to continue and financial support to be provided in a timely manner by NRB Bearings to SNL, should the need arise.

• Healthy financial risk profile: SNL has no debt on its books, which coupled with strong operating profitability supports its credit profile. With total outside liabilities to tangible networth (TOL/TNW) at 0.14 times and nil gearing expected as on March 31, 2021, SNL bearings has good headroom to raise additional funds for working capital or capital expenditure (capex). While accruals are expected to improve from fiscal 2022 which will ensure that the company will continue to remain debt free over the medium term. Networth on the other hand will gradually increase with positive accretion to reserves.

Weaknesses

• Low scale of operations: Despite healthy revenue growth at a CAGR of around 12% between fiscals 2016 and 2021, revenues stood at moderate level of Rs 37 crore in fiscal 2021.. While SNL operates in niche segment of bearings industry, the segment is small and volatile, which restricts significant ramp up in its scale of operations.

• Working capital-intensive operations: Like most automotive components players, SNL has large working capital requirement, with gross current assets of 175-220 days between fiscals 2017 and 2021. The need to cater to just-in-time delivery of components to OEMs, and the wide product basket of SNL keeps the inventory levels high. The company had inventory of four to six months in the past five years; though it is gradually improving. Furthermore, payment terms from the customers vary from two to three months, impacting receivable levels.

• 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.

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