Key rating drivers & detailed description

Strengths:

Established market position and strong customer base

Experience of around three decades in manufacturing exhaust systems has enabled the promoter to develop heathy relationships with OEMs such as Mahindra and Mahindra Ltd (M&M), for which SMIL is the preferred supplier of independent front suspension systems. It also caters to various models of Hyundai Motor India Ltd (Hyundai; rated ‘CRISIL A1+’) and Tata Motors Ltd (‘CRISIL AA-/Negative/CRISIL A1+’). Apart from exhaust systems, SMIL manufactures suspension systems and also trades in catalytic convertors.

Efficient working capital management

Unencumbered cash balance is estimated to be high at Rs 280 crore as on September 30, 2021, while utilisation of fund-based limit was nil for the 12 months ended August 31, 2021. Receivables and inventory have been 30-40 days each in the three years ended March 31, 2020; receivables were stretched at 73 days as on March 31, 2021, because of higher sales incurred in the fourth quarter of the fiscal. Working capital cycle is supported by stretching payables, which have been around 120 days in the two fiscals ended March 31, 2021. Payables are to remain at a similar level over the medium term.

Strong financial risk profile

Total outside liabilities to tangible networth (TOLTNW) ratio, at 1.26 times as on March 31, 2021, was weaker than 0.72 time as on March 31, 2020, on account of increased usage of bill discounting facility. However, steady accretion to reserves and absence of any major debt-funded capital expenditure (capex) should ensure TOLTNW ratio improves over the medium term. Debt protection metrics were estimated to be robust, with interest coverage and net cash accrual to adjusted debt ratios of 95 times and 5 times, respectively, for fiscal 2021.

Weaknesses:

Customer and product concentration in revenue

After the de-merger of the seating business, which became effective as on March 16, 2020, SMIL only has exhausts and suspension line businesses, along with trading in catalytic convertors for various OEMs. Moreover, the top two clients (M&M and Hyundai) in the exhaust business accounted for 69% of total revenue in fiscal 2021 (70% in 2020). Revenue concentration is expected to remain high because of the reduced product portfolio and business deals reached between various OEMs and their vendors for BS-VI products. Decline in customer and product concentration over the medium term will be a key monitorable.

Susceptibility to increase in raw material prices and pricing pressure from OEMs

The company has limited bargaining power with OEMs, who revise prices periodically based on their financial standing and willingness. As such, any benefit in operating margin comes with a lag.

Key financial indicators

Annexure - Details of Instrument(s)

Annexure – List of entities consolidated

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