| Salzer Electronics Limited | ||||||
| Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL A/Stable/CRISIL A1' ratings on bank facilities and commercial paper of Salzer Electronics Ltd (Salzer). CRISIL has also withdrawn its rating on bank loan facilities worth Rs 9.64 crore based on the entity's request. The rating withdrawal is in line with CRISIL's policy on withdrawal of ratings.
Healthy performance in the second and third quarters of fiscal 2021, driven by relaxation of lockdowns, pickup in offtake of wires and cables from the agriculture sector, and large export orders in the switchgear business, curbed the decline in revenue to 4% in the first nine months of fiscal 2021, over the previous fiscal. Operating margin declined marginally by 74 basis points to 11%, mainly due to lower capacity utilisation in the first quarter of fiscal 2021, following the lockdown, less favourable product mix and the hike in raw material prices that could not be fully passed on to customers. Revenue is estimated to grow by 5% in fiscal 2021, while the operating margin may decline by 50-80 basis points.
The second wave of the Covid-19 pandemic and resultant lockdowns in certain states may only have a limited impact on Salzer, as demonstrated last year. Going forward, performance will be supported by uptick in industrial activity, continued offtake from the agriculture segment and product launches.
The ratings continue to reflect the leading market position of Salzer in the domestic rotary switches market, healthy relationships with key industrial clients and its adequate financial risk profile. These strengths are partially offset by exposure to intense competition in the electrical cables industry and working capital-intensive operations. |
Analytical Approach For arriving at its rating, 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 these entities operate under a common management, with significant business and financial linkages. Moreover, CRISIL has amortised goodwill of Rs 2.35 crore and Rs 6.98 crore generated on account of acquisitions of Salzer Magnet Wires Ltd and Kaycee, over a period of five years starting from fiscals 2019 and 2020, respectively.
Please refer Annexure - List of entities consolidated, for details of the entities considered and their analytical treatment for 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 healthy, supported by market leadership of Salzer in the cam-operated rotary switches segment, new products launched in industrial switchgears, higher-margin products in the wires and cables business, 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 technological competitiveness.
* Adequate financial risk profile: Financial risk profile is marked by large networth estimated at Rs 327 crore and gearing of about 0.50 time as on March 31, 2021. Debt protection metrics should remain stable, with net cash accrual to total debt and interest coverage ratios of around 0.22 times and 2.94 times, respectively, in fiscal 2021 (0.22 times and 3.18 times, respectively, in fiscal 2020). Furthermore, after a marginal decline in fiscal 2021, cash accrual should improve over the medium term.
Weaknesses: * Working capital-intensive operations: Operations are marked by large inventory and stretched receivables. The company maintains inventory of around 100 days as it has to manufacture and maintain stock of a wide range of products. It also stocks raw materials (especially copper) when commodity prices become favourable. Receivables are high around 100 days due to the inherently long payment cycle. Prudent management of operations remains critical going forward.
* 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 used can be easily replicated.
Although longstanding relationships with customers and introduction of value-added products will support offtake in the cables segment, continued exposure to competition may limit profitability. |
Liquidity: Strong Liquidity is marked by a surplus of around Rs 11 crore and access to an unutilised bank limit of Rs 20 crore, as on March 31, 2021. Cash accrual is likely to improve gradually to Rs 45-50 crore per fiscal, driven by increase in orders. During fiscal 2022, annual capex is to be pruned to Rs 8-10 crore, and the maturing debt obligation will be around Rs 5 crore. With an estimated gearing of 0.50 time as on March 31, 2021, Salzer has sufficient headroom to raise additional debt, to meet its capex and incremental working capital requirement, if necessary. |
Outlook: Stable CRISIL Ratings believes steady operating performance will continue to drive healthy cash accrual over the medium term, despite certain headwinds due to the second wave of the Covid-19 pandemic. Furthermore, key credit metrics should improve, in the absence of any sizeable debt-funded capital expenditure (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 L&T. Its 51:49 cable manufacturing joint venture with L&T, Salzer Cables Ltd, was merged with Salzer effective April 1, 2008.
L&T held 26% stake in Salzer and liquidated its holding in July 2015, as part of L&T's initiative to divest its non-core investments. However, L&T (now SEIPL) 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 few overseas markets. Salzer sells its products overseas through associate company, Salzer Exports Ltd. |
About Kaycee Kaycee manufactures products such as rotary cam switches, weather tight switches and breaker control switches. It was originally bought out by the CMS group from Bajaj Electricals Ltd in 2002. The CMS group is a leading player in IT/ ITES, traffic signalling cash management, e-governance and surveillance.
In May 2019, Salzer entered into a share purchase agreement to acquire shares representing a 72.32% stake in Kaycee, from its principal promoter, Universal Trust Pvt Ltd. Furthermore, in the third quarter of fiscal 2020, Salzer increased its total stake to 74.91%. Total cost of acquisition, of around Rs 18 crore, was funded through a mix of debt and internal accrual.
Profit after tax was Rs 14 crore on revenue of Rs 416 crore in first nine months of fiscal 2021, against Rs 435 crore and Rs 17 crore, respectively, in the corresponding period of fiscal 2020. |
Key Financial Indicators*
*CRISIL adjusted numbers |
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)
*These facilities are available for Salzer Electronics Ltd-Unit II under Multiple Banking Arrangement. However, its overall utilisation is subject to Maximum Permissible Drawing Powers of the said Unit. |
Annexure – List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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