Rating Rationale
May 21, 2020 | Mumbai
SNL Bearings Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.14.1 Crore
Long Term Rating CRISIL A/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1 (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long term bank loan facilities of SNL Bearings Limited's (SNL) to 'Negative' from 'Stable' while reaffirming its rating at 'CRISIL A'. The short term rating is reaffirmed at 'CRSIL A1'.

The revision in outlook reflects impact of the continued slow-down in offtake from the automobile sector on SNL's business performance, and the revision in outlook of its parent, NRB Bearings Ltd (NRB) to 'CRISIL AA-/Negative/CRISIL A1+' from 'CRISIL AA-/Stable/CRISIL A1+' due to lower than expected business performance.

Fiscal 2020 was a challenging year for the automobile sector due to a wider consumption slowdown, liquidity crunch and transition to stringent BS-VI emission norms. The situation further aggravated due to the spread of Coronavirus (N-Covid 19) and the consequent lockdown in both domestic and overseas markets, restricting any material recovery in demand for fiscal 2021 as well.  Consequently, the revenue of SNL, which de-grow by an estimated 17% in fiscal 2020, will further de-grow by ~15% in fiscal 2021. Operating margins will also be impacted due to lower capacity utilization and consequent lower absorption of overheads.

NRB is also expected to witness material decline in revenues and profitability in fiscals 2020 and 2021, though financial risk profile and liquidity will continue to remain healthy.

SNL's ratings continue to reflect the business, financial, and managerial support that SNL receives from its parent, NRB. These strengths are partially offset by SNL's modest scale of operations, working capital-intensive operations and vulnerability to cyclicality in automobile demand.

Analytical Approach

The ratings of SNL factor in support expected from its parent NRB. CRISIL believes that SNL will, in case of exigencies, receive support from its parent, considering parent holding of 74.39%, operational, technical and financial support in the form of offtake of about 50% sales.

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 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, 2020, SNL bearings has good headroom to raise additional funds for working capital or capital expenditure (capex). While accruals are expected to moderate in fiscal 2020 and 2021, the expected reduction in capex and working capital requirement 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 2014 and 2019, revenues stood at moderate level of Rs 39 crore in fiscal 2019. The expected de-growth in fiscal 2020 and 2021 will moderate revenues further during this period. 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 150-175 days between fiscals 2015 and 2019. 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.
Liquidity Adequate

SNL has no debt obligations. The company is expected to generate about Rs 1.6 - 2.0 cr of cash accrual in FY21. The cash and marketable securities is expected at about Rs 7 cr as on Mar 31, 2020. The cash generated by business, cash surplus and the unutilized fund based bank lines of Rs 5 cr would be sufficient for any capex and additional working capital requirements in FY21.

Outlook: Negative

CRISIL believes that SNL's business risk profile will be affected by the lockdowns and the slowdown in the auto sector. However, the company will continue to benefit from its healthy financial risk profile and support it receives from NRB.

Rating Sensitivity factors
Upward factors
* Sustained revenue growth of more than 25% and profitability margin >20%
* Improvement in credit ratings of NRB
 
Downward factors
* Revenue de-growth of more than 20% in fiscal 2021 or fall in operating profitability below 12%
* Significant debt funded capex leading to gearing more than 0.7 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 40% 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 four subsidiaries: SNL Bearings Ltd, NRB Bearings (Thailand) Ltd, NRB Bearings Europe GmbH and NRB Bearings USA Inc. The company's manufacturing facilities are at Thane, Aurangabad, Jalna, and Waluj (all four in Maharashtra); Hyderabad (Telangana) and Pantnagar (Uttarakhand). SNL's facilities are at Ranchi (Jharkhand); while NRB Thailand's plant is in Rayong in Thailand. The product engineering centre in Thane and process and advanced materials-based engineering centre at Waluj are government accredited.

Ms Harshbeena S Zaveri, daughter of Mr Trilochan Singh Sahney, was appointed the company's President in January 2001. Currently, she is the Vice Chairman and Managing Director of NRB Bearings and the Chairman of the Board of SNL Bearings.

Key Financial Indicators - SNL
Particulars Unit 2019 2018
Revenue Rs crore 39.8 38.0
Profit After Tax (PAT) Rs crore 8.1 8.3
PAT Margins % 20.0 21.4
Adjusted debt/Adjusted networth Times 0.00 0.01
Interest coverage Times 2261.22 1450.78
 
Year to Date Figures
Particulars Unit 9M-20 9M-19
Revenue Rs crore 26 31
PAT margins % 12.7 20.0
Interest coverage Times 495.0 NA

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Crore) Rating assigned with outlook
NA Cash Credit* NA NA NA 5.0 CRISIL A/Negative
NA Cash Credit NA NA NA 3.0 CRISIL A/Negative
NA Bill Discounting NA NA NA 1.00 CRISIL A1
NA Proposed Long Term Bank Loan Facility NA NA NA 5.10 CRISIL A/Negative
*Interchangeable with letter of credit to the extent of Rs.1 crore.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  14.10  CRISIL A/Negative/ CRISIL A1      30-09-19  CRISIL A/Stable/ CRISIL A1  29-06-18  CRISIL A/Positive/ CRISIL A1  27-09-17  CRISIL A/Stable/ CRISIL A1  CRISIL BBB+/Stable/ CRISIL A2 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bill Discounting 1 CRISIL A1 Bill Discounting 1 CRISIL A1
Cash Credit* 5 CRISIL A/Negative Cash Credit* 5 CRISIL A/Stable
Cash Credit 3 CRISIL A/Negative Cash Credit 3 CRISIL A/Stable
Proposed Long Term Bank Loan Facility 5.1 CRISIL A/Negative Proposed Long Term Bank Loan Facility 5.1 CRISIL A/Stable
Total 14.1 -- Total 14.1 --
*Interchangeable with letter of credit to the extent of Rs.1 crore.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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