Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Simmonds Marshall Limited (SML) to ‘Stable’ from ‘Negative’ while reaffirming the rating at ‘CRISIL BBB-‘. The short term rating has been reaffirmed at ‘CRISIL A3’

 

The revision in outlook factors in improvement in liquidity and debt coverage indicators, as observed in increased cushion in the debt obligation vis-à-vis cash generation driven by improvement in profitability as reflected in fiscal 24 and Q1FY25 performance which is likely to sustain going forward.

 

Operating income has grown by 3% in fiscal 2024 over a high base, after witnessing a growth of 18% in fiscal 2023. The first quarter of fiscal 2025 witnessed modest revenue growth of around 2% year-on-year (y-o-y), despite high single-digit volume growth, amidst softening of raw material prices, benefits of which the company has passed on to its customers. The company is expected to record close to double-digit volume growth in fiscal 2025, aided by the favourable outlook for the two-wheeler industry (constituting around 50% of overall revenue), and by tapping existing customers having a higher share of business and getting new orders. Operating margin witnessed material recovery and increased from 6.3% in fiscal 23 to 9.2% in fiscal 2024, aided by a decline in employee cost and benefits of operating leverage. With correction in steel prices, the margin has further expanded to 10.9% in the first quarter of fiscal 2025. With steel prices remaining benign, the operating margin is likely to remain in the range of 9-10% in the medium term.

 

Capital structure was moderate but has improved due to increase in profitability. Gearing and total outside liabilities to tangible networth ratios stood at 1.45 times and 3.7 times as on March 31’2024. Sharp erosion in networth, due to sequential losses incurred since fiscal 2020, has adversely affected leverage ratios and the financial risk profile. However, the company reported a positive profit after tax for fiscal 2024. Absence of any major debt-funded capex plans should also support the financial risk profile over the medium term.

 

Liquidity remains adequate, marked by moderate bank limit utilisation and improvement in working capital management. Bank limit utilisation averaged 80% for the six months ended June 30, 2024, from around 90% reported in the past. The company brought down its inventory to 115 days as on March 31, 2024, from 129 days, a year before. Faster realisation of receivables and significant credit period from suppliers should ease pressure on the working capital cycle over the near term. While the promoters have infused funds in the past, timely support in case of weaker-than-expected performance is monitorable.

 

The ratings continue to reflect the established market position of SML in the nuts-and-bolts segment and strong customer relationships with major automotive original equipment manufacturers (OEMs). These strengths are partially offset by the sub-par but improving financial risk profile, the modest scale of operations with limited revenue diversity, and large working capital requirement.

Analytical Approach

To arrive at the ratings, CRISIL Ratings has combined the business and financial risk profiles of Simmonds Marshall and its 99% subsidiary, Stud (India) Ltd (SIL), together referred to as Simmonds Marshall. Unsecured loans from promoters have been treated as debt for analytical purpose.

 

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:

Established position in the fasteners segment, backed by longstanding customer relationships

With a presence of over five decades in the fasteners business, the company has established its position in the domestic market. It has maintained healthy relationships with customers over the last 10-15 years. Contribution to revenue from two-wheelers is highest at around 54%, followed by commercial vehicles (CVs; around 20%) and tractors (4%). Key OEM customers include Honda Motorcycle and Scooters India Ltd, Bajaj Auto Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’), Hero Moto Corp Ltd (rated ‘CRISIL AAA/Stable/CRISIL A1+’), Ashok Leyland Ltd and TVS Motor Company Ltd. However, sustained demand from OEMs remains a key monitorable.

 

Weaknesses:

Modest scale of operations and volatility in operating margin

The company manufactures nuts and bolts for major automobile OEMs. Notwithstanding the long track record of operations, the scale remains modest, as reflected in estimated topline of around Rs 192 crore in fiscal 2024. Networth remains small, estimated at around Rs 33 crore as on March 31, 2024. Furthermore, the clientele comprises two-wheeler manufacturers, which exposes revenue to any downside in the concerned segment. The operating margin has been volatile over the past five years, amid variation in material cost (45-50% of sales), high employee expenses (20-30%) and an increase in inventory cost. The company has the ability to pass on any hike in prices, though with a lag, as it does not have much bargaining power with OEMs. Ability to improve the margin to pre-2019 levels is monitorable.

 

Sub-par financial risk profile with working capital-intensive operations

Debt protection metrics have improved, aided by higher cash accrual against fixed debt obligation. Interest coverage ratio stood at 2 times in fiscal 2024, as compared to 1.3 times in fiscal 2023. Gearing was modest at 1.45 times as on March 31, 2024. Funding support from the promoter will support the financial risk profile. The promoter has been consistently infusing funds via equity and unsecured loans (outstanding around Rs 9 crore as on March 31, 2024). The unsecured loans carry an interest rate of 8%. The promoter is expected to provide further support, in case of exigencies. Gross current assets were high at 153 days as on March 31, 2024 (improved from 175 days, a year ago), led by inventory of around 115 days and receivables of around 44 days. Reduction in high-cost inventory, timely realisation of receivables and stretched payables helped support the working capital cycle.

Liquidity: Adequate

Bank limit utilisation was moderate, averaging 80% during the six months ended June 30, 2024, as against 90% earlier. While the unutilised limit provides a cushion, timely support from promoters, in the event of moderation in performance, remains crucial. Expected net cash accrual of Rs 10-15 crore will sufficiently cover the debt obligation of Rs 3-5 crore over the medium term.

Outlook: Stable

CRISIL Ratings believes the business risk profile of SML will improve, with a recovery in demand for two-wheelers, which may translate into higher operating margin and cash accrual.  However, debt protection metrics could remain moderate over the medium term and witness gradual recovery.

Rating Sensitivity Factors

Upward Factors

• Sustained improvement in scale of operations with operating margins above 9-11% resulting in improved cash generation and improvement in debt coverage indicators.
• Sustained moderation in bank limit utilisation resulting in lower reliance on debt leading to improvement in financial risk profile

 

Downward Factors

• Sharp decrease in scale of operations or operating margins declining below 6% materially impacting cash generation and debt service coverage indicators.
• Further stretch in the working capital cycle impacting liquidity or large capex with increasing reliance of external debt thereby impacting overall debt protection parameters

About the Company

SML, incorporated in 1960, by the promoter, Mr Shiamak Marshall, manufactures industrial fasteners for the automotive segment and caters to CV and two-wheeler manufacturers. The manufacturing unit in Kasarwadi, Maharashtra, has the capacity to produce 5,500 tonne per annum of nuts.

 

In 2012, SML acquired SIL that manufactures studs for heavy CV manufacturers. In 2014, the company entered into a joint venture with Francis Kirk and Son Ltd (Francis Kirk; UK) to manufacture fasteners for the UK market. Products are manufactured at the Kasarwadi plant and products are marketed by Francis Kirk.

 

For the first quarter of fiscal 2025, SML reported a net profit of Rs.1.2 crore on an operating income of Rs 48 crore.

Key Financial Indicators

Particulars	Unit	2024	2023
Revenue	Rs crore	192	186
Reported profit after tax (PAT)	Rs crore	3	-3
PAT margin	%	1.7	-1.5
Adjusted debt/adjusted net-worth	Times	1.4	1.6
Interest coverage	Times	2.0	1.3

CRISIL Ratings adjusted numbers

Any other information: Not Applicable