| Salzer Electronics Limited | ||||||
| Ratings reaffirmed at 'CRISIL A / Stable / CRISIL A1 '; rated amount enhanced for Bank Debt | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank facilities and commercial paper programme of Salzer Electronics Ltd (Salzer) at 'CRISIL A/Stable/CRISIL A1'
The company registered 29% growth in revenue in the nine months of fiscal 2023, compared with the corresponding period of the previous fiscal, driven by higher offtake in the switch gear division. This was on account of uptick in industrial demand and from export markets, and healthy growth in building product segment. Operating margin margin for the nine months of fiscal 2023 expanded by 30 bps to 9.45% as compared with previous period, mainly due to price hikes taken by the company to counter higher raw material costs. For the full year fiscal 2023, SEL is expected to record a revenue growth of around ~28-30% aided by good order execution, while operating margins are expected to range around ~10% on account of improved operating leverage, price hikes taken by the company and moderation in the key raw material prices.
Over the medium term, the company is expected to register revenue growth of ~12-15% per annum, due to continuing healthy demand for existing products, and new products being introduced. With increased industrial activity, demand for electricity is expected to rise, driving demand for switchgear products in both domestic and export markets as they form an integral part in safe and secure transmission and distribution systems. Further gradual pick up in the LAN (local area network) cable business and continued demand from the agriculture sector for wires and cables is expected to support the revenue growth in medium term. Salzer’s operating margin is expected to increase to ~10.5-11% in fiscal 2024 supported by healthy share of exports, launch of new products entailing higher margins and series of price hikes to be taken by the company to mitigate impact of higher raw material cost. The company is expected to venture into manufacturing of DC Fast charging stations for electrical Cars, Trucks & Buses in India through a JV with Austria based Kostad Steuerungsbau GmbH, which shall also support revenue and margin growth.
The rating also factors in the company’s adequate financial risk profile and healthy debt protection metrics. Despite increase in debt over the past two fiscals utilized mainly towards working capital requirements, gearing is estimated to be comfortable at ~0.73 times as on March 31, 2023 and is expected to remain range bound between 0.6-0.7 times, with only nominal capex spending expected. Interest coverage ratio is expected to be in the range of ~3.30 to 3.40 times over the medium term. The company is also expected to generate annual accrual of ~Rs.60-70 crore, and only modest term debt obligations. Besides, company also has moderate availability under working capital bank lines.
The ratings continue to reflect the leading market position of the company in the domestic rotary switches market, its healthy relationships with key industrial clients and an extensive distribution network. These strengths are partially offset by exposure to intense competition in the fragmented wires and cable industry and working capital intensive operations. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Salzer and its domestic subsidiary, Kaycee Industries Ltd (Kaycee), which was acquired in May 2019. This is because the 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, aided by strong market position in the domestic rotary switches market Revenue growth is likely to remain steady, supported by the market leadership of Salzer in the Cam-operated rotary switches segment, strong product profile and established clientele. The acquisition of the nearest market competitor, Kaycee, in fiscal 2020, which is a pioneer in industrial switches, was complimentary and synergistic to the existing business and further stabilised the market position of the company. Further, the acquisition helped Salzer 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). Continued focus on research and development and technology tie-ups with global majors should help maintain competitiveness.
Adequate financial risk profile Networth is estimated to be ~Rs 385 crore as on March 31, 2023. Improving networth backed by continuous accretion to reserve led to a healthy capital structure, resulting in gearing of ~0.73 time as on March 31, 2023. Debt protection metrics are healthy, reflected in estimated net cash accrual to total debt and interest coverage ratios of ~0.20 time and ~3.4 times respectively. No major capex spending is expected over the medium term, ensuring debt metrics remain at healthy levels.
Weaknesses Working capital intensive operations Gross current assets is expected to remain high at 215 days as on March 31, 2023, due to high inventory and debtor levels. The company generally maintains large inventory as it manufactures a wide range of products and stocks raw materials (especially copper) when commodity prices are favourable and to ensure continuous availability for smooth operations. Moreover, receivables remain sizeable at over 100 days on account of inherently long payment cycle due to the credit period to be given to OEMs considering the long-standing relationships with them. Prudent management of working capital 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 barriers 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 Liquidity is estimated to be supported by cash surplus of ~Rs 18 to 20 crore as on March 31, 2023. Expected cash accrual of ~Rs 60-70 crore over medium term which will sufficiently cover yearly debt obligation of ~Rs 4-5 crore and modest annual capex over the medium term. With estimated gearing of ~0.73 time as on March 31, 2023, the company has sufficient headroom to raise additional debt, to meet its capex and incremental working capital requirement, if necessary. Bank limits are also utilised to extend of 60-70%, providing adequate flexibility to meet additional working capild requirements in line with increasing revenues. |
Outlook Stable CRISIL Ratings believes Salzer will continue to sustain its steady business performance, supported by healthy demand for its products, and stabilising operating margins. Salzer’s cash accrual will continue to improve over the medium term. Its financial risk profile is also expected to remain at adequate levels over the medium term. , and ensure its fin, supported by steady operating performance. The key credit metrics should also improve in the absence of any sizeable, debt-funded capex. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Salzer, incorporated in 1985, manufactures cam-operated rotary switches, toroidal transformers, cable ducts, isolators, modular switches, relays and automotive products. It has five manufacturing units in Coimbatore, 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 Salzer's cables). Salzer also has a marketing association with SEIPL for sale and distribution of its electrical installation products in India and a few overseas markets. Salzer sells its products overseas through associate company, Salzer Exports Ltd.
In May 2019, Salzer 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, Salzer increased its stake to 74.91%. Total cost of acquisition, of around Rs 18 crore, was funded through internal accrual. Kaycee manufactures various products such as rotary cam switches, weather tight switches and breaker control switches.
Profit after tax for Salzer on a consolidated basis was Rs 29.77 crore with revenue of ~Rs 734 crore in the first nine months of fiscal 2023, against Rs 19.63 crore and ~Rs 569 crore, respectively, in the corresponding period of fiscal 2022. |
Key Financial Indicators*
*CRISIL Ratings adjusted numbers |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 08-May-2023 in line with the lender-wise facility details as on 09-May-2022 received from the rated entity
Criteria Details
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