Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of SNL Bearings Limited (SNL) at ‘CRISIL A/Stable/CRISIL A1’.

 

The ratings continue to reflect the business, financial, and managerial support that SNL receives from its parent, NRB Bearings Ltd (NRB, rated ‘CRISIL AA-/Stable/CRISIL A1+’). These strengths are partially offset by SNL’s modest scale of operations, working capital-intensive operations and vulnerability to cyclicality in automobile industry.

 

SNL derives nearly 33-36% of its revenues from NRB, its parent Company followed by 55-57% from domestic automobile original equipment manufacturers (OEMs) and balance through domestic and export aftermarket and scrap sales.

 

Revenues witnessed growth by ~19% at Rs 44 crore during fiscal 2022 (FY21: Rs.36 crore) on the back of increased volume offtake due to pent-up demand and recovery in auto sector. This in turn was also aided by price hikes emanating from commodity price inflation. During nine months ended December 31, 2022, Company booked revenue of Rs.37 crore with  growth of 11% over the previous fiscal. Demand across automobile segments is expected to register growth over the medium term resulting in improvement in domestic offtake. SNL is well placed to capitalise on this given its high share of demand from its parent Company as well as other OEMs.

 

Operating margins expanded by approximately 450 basis points (bps) to 28.3% on account of gross margin expansion of 230 bps and positive operating leverage benefits due to higher volumes. Operating margins stood at 25.2% during nine months ended December 31, 2022 due to inflationary pressure in comparison to 29% in the corresponding period of previous fiscal. With the cooling off freight costs and input costs, operating profitability is expected to stabilise at 25-27% over the medium term.

 

SNL’s financial risk profile continues to be comfortable supported by networth of Rs.51 crore as on September 30, 2022 and negligible debt. Capital structure will remain robust with total outside liabilities to adjusted networth (TOLANW) estimated at 0.14 times as on March 31, 2022, and is expected to remain at 0.13 times over the medium term. Net cash accruals of Rs.7-10 crore combined with cash surplus of Rs.19-22 crore will be sufficient to fund the capex requirement of Rs.4-10 crore over the next 4 years and any additional working capital obligations.

Analytical Approach

CRISIL Ratings has assessed the standalone credit profile of the Company and factored in support from the parent (NRB Bearings Ltd) considering it is in same line of business and has strong operational and technical linkages with the parent. CRISIL Ratings believes that SNL will, in case of exigencies, receive financial support from its parent.

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, is one of the major players in needle bearing market in India.

 

NRB Bearings has a well-entrenched dealer network which is expected to benefit SNL in expanding its reach in the aftermarket segment of auto components. Apart from this, both companies have a common management. CRISIL 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 negligible debt on its books, while strong operating profitability supported its debt protection metrics. With TOL/TNW at 0.14 times and nil gearing expected as on March 31, 2022, SNL bearings has good headroom to raise additional funds for working capital or capex. Accruals are expected to improve from fiscal 2023 onwards 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

The Company has lower scale of operations reflected in its revenues that stood at moderate level of Rs 44 crore in fiscal 2022. While SNL operates in niche segment of bearings industry, the segment is small and volatile which restricts significant ramp up in scale of operations.

 

• Working capital-intensive operations

Like most automotive components players, SNL has large working capital requirement, with gross current assets of 175-230 days between fiscals 2017 and 2022. The need to cater to just-in-time delivery of components to OEMs, and higher transit time for imported raw materials keeps the stock inventory levels high. The company had inventory of three to five months in the past five years; though it is gradually improving. Furthermore, payment terms from the automotive component manufacturers 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.

Liquidity: Adequate

The cash surplus is expected to be sufficient and is projected to maintained at current levels for the nominal capex spend in fiscal 2023. Since the company is virtually debt free, there is no pressure on the cash flows for repayments, driven by unutilized bank lines of Rs 5 Cr as on December 31, 2022, in addition to liquid surplus of Rs 20 Cr as of March 2022, and minimal debt repayment obligations.

Outlook: Stable

CRISIL Ratings believes that SNL Bearing’s business risk profile will improve with growth in demand from auto industry, increase in OEM volumes, sustained profitability margins resulting in higher cash accruals. Financial risk profile is also expected to remain healthy, due to minimal capex, steady accruals and support from parent company.

Rating Sensitivity factors

Upward factors

• Sustained double digit revenue growth and operating profitability margin above 29.0%
• Sustenance of healthy financial risk profile
• Improvement in credit ratings of NRB

Downward factors

• Revenue de-growth of more than 15-20% or fall in operating profitability margins below 15.0% 
• Significant debt funded capex leading to gearing more than 0.75-1.0 time
• Downgrade in credit ratings of NRB

About the Company

SNL, formerly known as Shriram Needle Bearing Industries Ltd, was established in 1979 by the Shriram group in Ranchi, Jharkhand. It was promoted as a joint venture of the DCM Shriram group, which has business interests in sugar, alcohol, fine chemicals, and rayon tyre cord, and INA Germany, a leading manufacturer of bearings worldwide. The company got its present name after it was acquired by NRB Bearings in June 2000.

 

SNL manufactures cage-guided drawn cup needle bearings, connecting-rod needle cages for piston pins and crank pins, among other needle bearings. About 33-36% of its output is sold to NRB Bearings.

About the parent

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, NRB Bearings USA Inc and 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 plans 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.

Key Financial Indicators (SNL)

Particulars	Unit	2022	2021
Revenue	Rs crore	44	36
Profit after tax	Rs crore	9	6
PAT margins	%	20.3	17.0
Adjusted debt/Adjusted networth	Times	0.00	0.00
Interest coverage	Times	NM	NM

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

SIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit*	NA	NA	NA	5.0	NA	CRISIL A/Stable
NA	Cash Credit	NA	NA	NA	3.0	NA	CRISIL A/Stable
NA	Bill Discounting	NA	NA	NA	1.00	NA	CRISIL A1
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	5.10	NA	CRISIL A/Stable

*Interchangeable with letter of credit to the extent of Rs.1 crore.