| Sharda Motor Industries 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 AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Sharda Motor Industries Limited (SMIL).
The rating continues to reflect SMIL’s established market position, healthy relationships with customers, efficient working capital management and strong financial risk profile. These strengths are partially offset by risks of customer concentration and product concentration in revenue, susceptibility to increase in raw material prices and pricing pressure from original equipment manufacturers (OEMs). |
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 promoters 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 (TML; ‘CRISIL AA-/Negative/CRISIL A1+’). Apart from exhaust systems, SMIL manufactures and supplies various suspension systems and also trades in catalytic convertors for its customers.
Efficient working capital management SMIL manages its working capital efficiently, which is reflected in high unencumbered cash balance estimated at Rs 280 crore as on September 30, 2021, and nil utilization of fund-based limits for the 12 months ending August 31, 2021. SMIL’s debtors and inventory have been at 30-40 days each in the three years ending March 31, 2020 but debtor were at higher level of 73 days as on March 31, 2021 because of higher sales incurred in fourth quarter of fiscal 2021. The working capital cycle is ably supported by SMIL’s ability to stretch its payables, which have been around 120 days in the two years ending March 31, 2021, and are estimated to remain at similar levels over the medium term.
Strong financial risk profile SMIL's capital structure is healthy with total outside liabilities to tangible networth (TOLTNW) ratio, 1.26 time as on March 31, 2021, which is higher than 0.72 time as on March 31, 2020. This is largely on account of increased usage of bill discounting facility during the year. Going ahead, continuous accretion to reserves and the absence of major debt-funded capital expenditure (capex) should ensure that the TOLTNW ratio improves further. The debt protection metrics were also estimated to be robust, with interest coverage ratio of 95 times and net cash accrual to adjusted debt ratio of 5 times for fiscal 2021
Weakness: Customer concentration and product concentration risks in revenue Post 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 of catalytic convertors for various OEMs.
The top two customers in the exhaust business (M&M and Hyundai) accounted for 69% of total revenue in fiscal 2021, against 70% contribution from the same customers in fiscal 2020. Revenue concentration risk is expected to remain high because of the reduced product portfolio and business deals having been reached between various OEMs and their vendors for BS-VI products. It is highly likely that there will be major reduction in customer and product concentration over the medium term, which 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, which periodically revise prices based on their financial standing and willingness. As such, any benefit in operating margin comes with a lag. |
Liquidity: Superior SMIL has healthy unencumbered cash and bank balance of Rs 280 crore as on March 31, 2021. Liquidity is further supported by nil utilization working capital lines.
SMIL is anticipated to generate cash accrual of over Rs 130 crore in fiscal 2022, against nil term debt obligation. Furthermore, the organic capex is estimated at Rs 40 crore in fiscal 2022 is expected to be funded entirely by cash accrual. Any major reduction in cash levels or increase in funds deployed towards non-core activities will remain a key monitorable. |
Outlook: Stable CRISIL Ratings believes SMIL will continue to benefit, over the medium term, from its established position, healthy relationships with OEMs, and steady demand for passenger cars and utility vehicles. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company SMIL was incorporated in 1986. SMIL, managed by Mr. Ajay Relan, is India’s largest manufacturer of exhausts for automotive players. SMIL’s existing product profile comprises exhausts and suspension systems for passenger cars, utility vehicles, light commercial vehicles, medium and heavy commercial vehicles, and vans. SMIL has nine manufacturing facilities across India to support its customer base.
SMIL is listed on both the Bombay Stock Exchange and the National Stock Exchange. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
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Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | |||||||||||||||
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Criteria Details
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