Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Salzer Electronics Ltd (SEL) at 'CRISIL A/Stable/CRISIL A1'. Further, CRISIL Ratings has withdrawn its rating on the commercial paper (CP) programme of SEL at the company’s request. There is no outstanding against the CP, as confirmed by the issuer. The rating action is in line with the withdrawal policy of CRISIL Ratings.

 

SEL is expected to record a revenue growth of around ~13-14% in fiscal 2024 from 33% in fiscal 2023 due to slower offtake from end-user segments amid elections and slowdown in exports. However, turnover is expected to register 18-20% growth in fiscal 2025, driven by the switch gear segment and sales of wire and cable products on account of uptick in industrial demand, healthy growth in building products segment and anticipated improvement in offtake from key export markets of North and South America and Europe. Increasing push by the Ministry of Power under its Revamped Distribution Sector Scheme (RDSS) to replace all the existing energy meters with smart meters will drive revenue growth in the smart meter division. SEL is currently setting up a unit to manufacture smart meters at a cost of ~Rs 33 crore, and revenue offtake is expected from the second quarter of fiscal 2025. Furthermore, gradual pick-up in the LAN (local area network) cable business and continued demand from the agriculture sector for wires and cables are also expected to support revenue growth over the medium term.

 

Operating margin for  fiscal 2024 is set to improve 40-50 basis points (bps) on-year to ~9.8% in fiscal 2024 from 9.3%, supported by moderation in raw material prices and price hikes; resulting in improved revenue under the switch gear and wires & cables segments. Margin is expected to increase further by 60-70 bps in fiscal 2025 on the back of healthy share of exports, launch of new products (smart meters), and expected price hikes amid stable raw material prices.

 

CRISIL Ratings has also noted that, during fiscal 2024, promoter group entities –  Salzer Spinners Ltd, Salzer Exports Ltd and Quebec Information Services India Ltd – have exercised their outstanding share warrants which has augmented the networth by ~Rs.33 crore during the fiscal. This was part-funded through term debt of ~Rs 15 crore raised by the group entities by pledging promoter shareholding in SEL; and the debt obligation will be met by promoter entities. After this transaction, the promoter shareholding increased to 37.32% as of March 2024 from 33.18% as of March 2023.

 

The ratings also factor in the company’s adequate financial risk profile, including healthy debt protection metrics. Gearing was estimated to be comfortable at ~0.64 time as of March 31, 2024, despite increase in working capital debt over the past two fiscals. Gearing is expected to improve further with only nominal debt-funded capital expenditure (capex) expected over the medium term. Interest coverage ratio is expected to be 3-4 times. Annual cash accrual of Rs 80-85 crore will be adequate to meet modest debt obligation. Working capital limit was utilised ~89% in the nine months through February 2024.

 

The ratings continue to reflect the leading market position of SEL in the domestic rotary switches market, healthy relationships with key industrial clients, extensive distribution network and adequate financial risk profile. These strengths are partially offset by exposure to intense competition in the fragmented wires and cable industry and large working capital requirement.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of SEL and its subsidiaries, Kaycee Industries Ltd (Kaycee), Salzer EV Infra Pvt Ltd and Salzer Kostad EV Chargers Pvt Ltd as these entities operate under a common management and have significant business and financial linkages.

 

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

• Healthy revenue growth from existing and upcoming new products, aided by strong market position in the domestic rotary switches market, healthy relationship with industrial clients

Revenue growth is likely to remain steady, supported by the market leadership of SEL in the cam-operated rotary switches segment, strong product profile and established clientele. The acquisition of the nearest market competitor, Kaycee, in fiscal 2020 (a pioneer in industrial switches) was complimentary and synergistic to the existing business and further stabilised the market position of SEL. The acquisition also helped SEL to expand its footprint into railways and provided access to a pan-India dealer network. Sustained revenue growth is expected to be driven by new products in the industrial switchgear segment and the marketing and distribution arrangement with Schneider Electric India Pvt Ltd (SEIPL; ‘CRISIL AAA/Stable/CRISIL A1+’). SEIPL is the erstwhile electrical and automation division of Larsen & Toubro Ltd (L&T). Furthermore, revenue offtake from the smart meter business, which is under implementation, is expected from the second half of the current fiscal and will be a key driver for the company’s growth in the long term. Continued focus on research and development and technology tie-ups with global majors should help maintain competitiveness.

 

• Adequate financial risk profile

Networth estimated to be ~Rs 455 crore as on March 31, 2024, due to steady accretion to reserves, which led to a gearing of ~0.63 time despite debt addition of Rs 12-15 crore during the fiscal to fund capex. Debt protection metrics were healthy, as reflected in estimated net cash accrual to total debt and interest coverage ratios of ~0.21 time and ~3.0 times, respectively, for fiscal 2024. Capex of ~Rs 35 crore in the current fiscal to set up the smart meter plant and meet regular expansion expenses will be partly funded through debt of Rs 17-20 crore. The expected higher contribution from smart meters and stable raw material prices for existing products will help improve operating profitability to 10.5-11% over the medium term from 9.5-10% in fiscal 2024. Along with steady revenue growth, this will lead to stable cash generation, thereby keeping debt metrics healthy.

 

Weaknesses

• Working capital-intensive operations

Gross current assets are expected to remain high at ~211 days as on March 31, 2024, because of sizeable inventory as the company manufactures a wide range of products and stocks raw materials (especially copper) when commodity prices are favourable. Receivables remain stretched at over 100 days on account of inherently long payment cycle extended to customers, majority of who are original equipment manufacturers. Prudent working capital management will remain critical over the medium term.

 

• Exposure to intense competition in the electrical cables industry

Domestic manufacturers of electrical installation products face intense competition from the unorganised sector and cheap Chinese imports as the industry has low entry barrier and the technology can be easily replicated. Although longstanding relationships with customers with guaranteed offtake and introduction of value-added products will support overall offtake in the electrical cables segment, continued exposure to competition may limit profitability.

Liquidity: Strong

Cash surplus is likely at ~Rs 15 crore as on March 31, 2024. Furthermore, expected annual cash accrual of Rs 80-85 crore will adequately meet yearly debt obligation of Rs 7-9 crore and capex plans of ~Rs 35 crore over the medium term. While bank limit was utilised by ~89% for the nine months through February 2024, with estimated gearing of ~0.64 time as on March 31, 2024, the company has sufficient headroom to raise additional debt to meet capex or incremental working capital requirement.

Outlook Stable

CRISIL Ratings believes SEL will continue to sustain its steady business performance supported by healthy demand for existing products such as switchgears and cables as well as better contribution from new products  including smart meters. Better operating leverage and continued control on costs along with stable raw material prices will enable a gradual improvement in operating margins, also benefiting cash generation. SEL’s financial risk profile is also expected to remain at adequate levels over the medium term, supported by prudently funded capex plans.

Rating Sensitivity factors

Upward Factors

• Sustained revenue growth, including from new products, and operating margin in the range of 11-12%, also benefitting cash generation
• Sustenance of healthy debt metrics, through prudent funding of capex and improved working capital levels

 

Downward Factors

• Sustained decline in revenue and fall in operating margin to below 8-9% also impacting cash generation.
• Large, debt-funded capex or acquisition or further stretch in the working capital cycle weakening the key debt metrics

About the Company

SEL, incorporated in 1985, SEL manufactures cam-operated rotary switches, toroidal transformers, cable ducts, isolators, modular switches, relays and automotive products. It has five manufacturing units in Coimbatore and one unit in Hosur (both in Tamil Nadu). The company has a longstanding relationship with SEIPL (the erstwhile electrical and automation division of L&T, which remains the largest customer for SEL's cables). SEL also has a marketing association with SEIPL for sale and distribution of its electrical installation products in India and a few overseas markets. SEL sells products overseas through associate company, Salzer Exports Ltd.

 

In May 2019, SEL entered into a share purchase agreement to acquire shares representing 72.32% stake in Kaycee from its principal promoter, Universal Trust Pvt Ltd, and subsequently, in the third quarter of fiscal 2020, SEL increased its stake to 74.91%. Total cost of acquisition, of around Rs 18 crore, was funded through internal accrual. Kaycee manufactures rotary cam switches, weather tight switches and breaker control switches.

 

SEL reported consolidated operating income of Rs 839 crore and profit after tax (PAT) of Rs 33 crore for the first nine months of fiscal 2024, against Rs 734 crore and Rs 29 crore, respectively, in the corresponding period previous fiscal.

Key Financial Indicators (Consolidated)*

As on / for the period ended March 31		2023	2022
Revenue	Rs crore	1038	804
PAT	Rs crore	40	24
PAT margin	%	3.8	3.0
Adjusted debt / adjusted networth	Times	0.69	0.73
Interest coverage	Times	3.74	3.44

*CRISIL Ratings-adjusted numbers

Any other information: Not applicable