Detailed Rationale

CRISIL Ratings has downgraded its rating on the bank facilities of Ucal Limited (Ucal; Formerly known as Ucal Fuel Systems Limited) to 'CRISIL BBB/Stable' from 'CRISIL BBB+/Stable'.

 

The rating action follows continued moderation in Ucal’s business performance following subdued exports of two wheelers, owing to difficult macroeconomic environment in key markets. Continued decline in exports have impacted offtake of carburetors by key clients viz. Bajaj Auto Ltd (Bajaj Auto, rated CRISIL AAA/Stable/CRISIL A1+’) and TVS Motor Co Ltd (TVSM). Accordingly, the company’s supplies for two-wheelers from Bajaj Auto and TVSM, meant for export markets, witnessed a sharp decline due to difficult business conditions, mainly in Africa, and other Asian countries. impacting Ucal’s business performance. The moderation in performance has continued in the first quarter of fiscal 2024 with two wheeler export volumes of Bajaj Auto and TVSM declining by 56% and 22%, over the corresponding period of fiscal 2023.

 

With over 30% of standalone revenues of Ucal derived from domestic e-carburetor (electronic-carburetor) sales to Bajaj Auto and extant regulations requiring less than 125 cc engine capacity vehicles to switch to fuel injection engines (FIE) effective April 1, 2025, e-carburetor volumes are expected to drop by 30-40% from fiscal 2024 onwards. Despite Ucal commencing manufacturing of FIE on a pilot basis, it is yet to obtain offtake commitment from Bajaj Auto, and the same is expected in the third quarter of fiscal 2024. Further additional business orders of Rs ~100 crore from non-carburetor products and continued demand for BS-carburetors and VM-carburetors (BS-II & BS-IV) in export markets, will however, not compensate entirely for decline in domestic revenues from e-carburetors in the current fiscal. Acceptance of the FIE and ramp up of volumes, is expected to though aid recovery in revenues in fiscal 2025.

 

Ucal’s operating profitability also declined on-year by 230 bps to 7% in fiscal 2023 on account of increase in the price of raw materials and decline in volume of carburetors and oil pump by 4% and 25% respectively, resulting in lesser fixed cost absorption. The decline in operating profitability to ~2% was extremely sharp in the fourth quarter of fiscal 2023, mainly due to lower exports by its key customers.Operating margins are estimated at ~6-6.5% in fiscal 2024, lesser than earlier anticipated, due to lower sale volumes of e-carburetor and increase in share of trading business (ECUs) with lower margins; this in turn will impact cash accruals. Operating margins may recover to over 7% over the medium term, with ramp up in business levels.

 

Owing to lower operating profitability and cash generation, the company’s debt protection metrics such as interest cover and ratio of net cash accruals to total debt moderated to 3.01 times and 0.20 times in fiscal 2023, from 4.48 times and 0.33 times, respectively in fiscal 2022. Gearing though remained at adequate levels of ~0.54 times at March 31, 2023. Ucal is undertaking capex of Rs.35 crores pertaining to FIE and non-carburetor products which is being funded with relatively high-cost borrowings, with coupon of 11-12% from NBFCs. This along with modest cash accruals (Rs.35-40 crore in fiscal 2024, and Rs.40 crore in fiscal 2025), due to continued pressure on profitability and high cost of debt, will impact debt protection metrics. The interest cover ratio is expected to decline to below 3 times in fiscal 2024, before seeing a slight recovery in fiscal 2025. Cash accruals though are expected to suffice to meet term debt obligations of Rs.30 crore in fiscal 2024, and Rs. 28 crore in fiscal 2025.

 

The company’s liquidity position has also moderated with lower cash generation than earlier anticipated. Besides, Ucal surrendered ~Rs.35 crore of its fund based working capital limits to its erstwhile key lender due to non-fulfilment of certain sanction terms. CRISIL Ratings understands that Ucal is in discussion with a banker to enhance its working capital limits to ensure sufficient working capital availability, as well as enhance the liquidity. In the meanwhile, it has access to other working capital facilities which are being utilized for its operations. Timely increase in proposed working capital limits, and sufficient drawing power to meet working capital needs and cash flow timing mismatches, if any, will be critical, and a key rating monitorable.

 

The ratings continue to reflect the company’s established presence in the carburetor business, with long-standing relationship with major two-wheeler and four-wheeler automotive original equipment manufacturers (OEMs), long standing promoter experience, established engineering capabilities and integrated manufacturing facilities. These strengths are offset by high product and customer concentration, volatile operating profitability, and moderate financial risk profile and liquidity.

Analytical Approach

CRISIL Ratings has adopted a consolidated view of two wholly owned subsidiaries Ucal Polymer Industries Ltd(UPIL) and Ucal Holdings Inc. for the purpose of analyzing the financial profile of Ucal as they are wholly owned, in the same line of business and there exists complete fungibility of funds between the parent and its subsidiaries. It may be noted that UPIL has a subsidiary UPIL USA Inc and Ucal Holdings Inc has 2 subsidiaries Ucal Systems Inc & AMTEC Moulded products Inc, USA which have already been consolidated at UPIL and Ucal Holdings Inc respectively.

 

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 presence in carburetor business with long-standing relationship with customers:

The company has long-standing presence with coveted customers such as Bajaj Auto and TVSM and remains the sole supplier to some of their vehicle models. The company also has established relations with Maruti Suzuki Ltd (Maruti Suzuki; CRISIL AAA/Stable/CRISIL A1+) for some of the products in FIE, such as fuel pumps, oil pumps, delivery pipe assembly and throttle body assembly. While carburetors continue to be the largest contributor to revenues, they are being increasingly replaced by FIE over the years. However, carburetors still have a market in the affordable <125 cc bike segment majorly in export markets like Africa, Sri Lanka, Bangladesh, Nepal etc which still operates with lower BS standards like BS-II & BS-IV. Ucal manufactures both Bharat Stage (BS) VI compliant electronic carburetor (domestic market) as well as traditional mechanical carburetor (export market).

 

Experienced promoter, integrated facilities and established engineering capabilities: Ucal was established in 1985 by Carburetors Ltd, pioneers in India in manufacturing carburetors and mechanical fuel pumps. In 1987, Ucal entered into a joint venture with Mikuni Corporation of Japan (Mikuni Corporation), an internationally renowned company for fuel management system and products. In 2008, Carburetors Ltd, the Indian promoter of Ucal, acquired the equity stake held by co-promoter, Mikuni Corporation. However, Ucal has absorbed extensive technical know-how provided by Mikuni Corporation. Mr Jayakar Krishnamurthy (Chairman, Managing Director), an MBA in Finance from Duke University, USA, manages the operations. He is assisted by  professionals in key roles. The promoter, by virtue of his vast experience, has been able to help Ucal forge relationships with leading OEMs, and has set up integrated manufacturing facilities, offering a host of products, reflecting established engineering capabilities. Besides, several new products are also under development, with FIE systems also in test phase. These new products are expected to support revenue growth over the medium term, as carburetors for two wheelers with engine capacity <125 cc get phased out.

 

Weakness:

High product and customer concentration: Ucal has high product and client concentration with over 30% of standalone revenues from e-carburetor sales to Bajaj Auto. Besides, Bajaj Auto also remains the single largest customer for Ucal. Despite addition of non-carburetor products over the years such as air suction valve, oil pumps, vacuum pump, fuel pumps, fuel filter, throttle body assembly, and delivery pipe assembly, concentration of a single product and few customers remains high. This client concentration risk is expected to impact revenues for Ucal in the near term, with Bajaj Auto gradually migrating from existing e-carburetor to FIE in less than<125 cc vehicles as mandated by extant regulations and the product will be phased out completely from April 1, 2025. New products including FIE supplies to Bajaj Auto are not expected to immediately offset revenue decline due to phasing out of domestic e-carburetor sales to Bajaj Auto.

 

Volatile operating profitability: Ucal’s operating profitability has been volatile over time fluctuating between 11-15% between fiscals 2015-2020, and dipping to 9-10% in fiscals 2021 and 2022. Operating margins further reduced to ~7% in fiscal 2023 due to limited ability to pass on raw material costs, from ~9.3% in fiscal 2022. Operating profitability is extremely sensitive to volumes, which  were impacted in the last quarter of fiscal 2023, due to sluggish export demand. Besides, increasing share of traded products which offer 1-2% margins only, has also impacted Ucal’s overall operating profitability. Impact was felt the most in the last quarter of fiscal 2023, when operating profitability dipped to ~2%. With e-carburetors for below 125 cc engine vehicles being phased out in the domestic market, and being replaced gradually by FIE, operating profitability will be further impacted in fiscal 2024, before a gradually recovery may be possible in fiscal 2025.

 

Moderate financial risk profile and liquidity: Ucal’s financial risk profile has moderated in fiscal 2023, with lower operating profitability impacting debt metrics. Although gearing levels are at 0.54 times as on March 31, 2023, other debt metrics like Interest coverage ratio and net cash accruals to adjusted debt declined to 3.01 times and 0.20 times in fiscal 2023, from 4.48 times and 0.33 times, respectively in fiscals 2022, due to lower operating profits.

 

The performance of US subsidiary viz. Ucal Holdings Inc (UHI) has also remained modest. While UHI reported an operating profit of Rs.12.8 crore on revenues of Rs.234 crore in fiscal 2023, increase in interest costs following higher interest rate environment in the US, resulted in net losses of Rs.8.8 crore.

 

Ucal is undertaking capex of Rs.35 crore in fiscal 2024 mainly for FIE and non-carburetor products, With operating profitability remaining under pressure, the company is funding capex with high cost borrowings from non-banking financial companies (ranging from ~11-12%) which will impact key debt metrics in fiscal 2024, before a gradual recovery backed by improved sales is likely in fiscal 2025.

 

Working capital availability may come under strain in the near term, due to steep reduction in working capital limits from its erstwhile lead banker in February 2023. Hence, unless the company arranges for additional working capital limits, liquidity pressures are likely to exacerbate, in the event of slightly lower than expected profitability. 

Liquidity: Adequate

Ucal’s liquidity position has moderated and may come under strain in the near term, due to lowering of available working capital bank limits (cash credit) in February 2023, by Rs.35 crore, due to non-fulfilment of necessary conditions, for collaterals. The company’s estimated cash accruals of Rs.~38 crore in fiscal 2024 and Rs.41 crore in fiscal 2025 are likely to suffice to meet term debt obligations of Rs.~30 crore and Rs.28 crore respectively in these years. However, capex will require to be funded mainly from debt.

 

The company has been utilizing the sales discounting, purchase order financing and sales invoice financing facilities from Kotak Mahindra Bank for their working capital requirements. Earlier, bank limit utilization, against drawing power available averaged 65% between March 2022 and February 2023.

 

The company is in discussion with its existing lenders for obtaining additional working capital limits, which will be critical to ensure sufficient working capital, and also obviate any stress on liquidity, due to possible cash flow timing mis-matches from operations. The same will be a rating monitorable.

Outlook: Stable

CRISIL Ratings expects UCAL`s business performance will witness moderation due to temporary loss of business from a key product as well as sluggish export prospects, which will also impact its operating profitability, as well as cash generation in the near to medium term. The company's financial risk profile and liquidity position will also remain moderate over the near to medium term.

Rating Sensitivity Factors

Upward Factors

• Better than anticipated revenue generation, including through customer and product diversity, and operating profitability sustaining at 8-9%, benefitting cash generation 
• Improvement in financial risk profile, supported by better cash generation and prudent management of working capital
• Improvement in liquidity position, including through higher working capital limits being sanctioned.

 

Downward Factors

• Continuing pressure on revenues due to loss of share in business from key customers and delay in ramp up of FIE business
• Operating profitability sustaining below 3-4% impacting cash generation
• Moderation in key debt protection metrics due to lower profitability, and higher than expected debt levels, due to capex/acquisitions or elongation of working capital
• Pressure on  liquidity, due to inability to/or delay in obtaining additional working capital limits.

About the Company

Ucal was incorporated in 1985 by Mr M Muthukrishnan to manufacture carburetors and fuel pumps for Maruti Suzuki. Ucal has since enhanced its product portfolio to include fuel-injection components, air-suction valves, and machined-die castings, among other products. It has manufacturing facilities in Maraimalainagar (Tamil Nadu), and Gurgaon. It has two wholly-owned subsidiaries—the US-based Ucal Holding Inc and Ucal Polymers Ltd, which manufactures specialised rubber and plastics components exclusively for Ucal. The company is currently in the process of developing the Fuel injection engines for <125 CC vehicles and has already submitted prototypes to Bajaj Auto; supplies of the same are expected by third quarter of fiscal 2024.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Working Capital Term loan*	NA	NA	Jul-2024	31.23	NA	CRISIL BBB/Stable
NA	Proposed Term Loan	NA	NA	NA	3.77	NA	CRISIL BBB/Stable

*Guarantee Emergency Credit Loan