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| Product | Quantum (Rs. Cr) | Long Term Rating | Short Term Rating |
| Bank Loan Ratings | 75.00 | ACUITE BBB | Stable | Reaffirmed | - |
| Total Outstanding Quantum (Rs. Cr) | 75.00 | - | - |
| Rating Rationale |
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Acuité has reaffirmed the long-term rating of ‘ACUITE BBB’ (read as ACUITE triple B) on the Rs.75.00 Cr bank facilities of SAA AB Engineering Private Limited (SEPL). The outlook is 'Stable'.
Rationale for rating reaffirmation The rating reaffirmation takes into account the stable operating and financial performance of SEPL, marked by stable operating income, range bound operating margins and moderate financial risk profile. The company’s experienced management with an established track record of operations and its reputed clientele plays an plays an important role. The rating is however constrained by the company’s moderately working capital-intensive operations, high bank limit utilisation, and operations in a highly competitive and fragmented industry. Going forward, ability of SEPL to maintain its scale of operations and profitability margins, while improving and maintaining an efficient working capital cycle will remain a key rating sensitivity factor. |
| About the Company |
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Saab Engineering (SE) was a Bangalore based partnership firm established in 1989 which later got converted to a private limited company in March 2021, and currently known as SAA AB Engineering Private Limited (SEPL). The company is engaged in manufacturing of various automotive and engineering components, and it has six manufacturing units with facilities for forging and machining of components.
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| Analytical Approach |
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Acuité has taken the standalone view of the business and financial risk profile of SEPL to arrive at the rating.
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Key Rating Drivers
| Strengths |
| Experienced management with an established track record of operations and reputed clientele
SEPL has an operational track record of more than three decades. Mr. Ajay Balagopal and Mr. Sanjiv Balagopal are the promoters of the company, having an extensive experience of over three decades in the engineering and auto ancillary industry. They are supported seasoned professionals in managing the daily operations. These factors have enabled SEPL establishing a healthy relationships with reputed clienteles like - Lucas TVS Ltd, SEG Automotive Group, Bosch Group, Schaeffler Group, Valeo India Private Limited, Subros Ltd. amongst the others. Acuité believes that SEPL will continue to benefit from its experienced management with an established track record of operations, and the reputed clientele. Moderate financial risk profile Financial risk profile of SEPL is moderate marked by moderate net worth, low gearing and moderate debt protection metrics. The tangible net worth of the company improved to Rs.57 Cr in 31 March, 2022 from the Rs.45 Cr in 31 March, 2022 due to accretion to reserves. The gearing (debt-equity) stood at 1.59 times in 31 March, 2022, against 1.82 times as on 31 March, 2021. The gearing of the company is expected to improve further and shall remain low over the medium term on account of absence of any debt funded capex plans. The total debt of Rs.91 Cr as on 31 March, 2022 consists of long term bank borrowings of Rs.42 Cr, short term bank borrowings of Rs.47 Cr and unsecured loans from directors of Rs.2 Cr. The interest coverage ratio and DSCR declined at 3.62 times and 1.30 times for FY2022 as against 4.33 times and 1.44 times for FY2021. The Net Cash Accruals to Total debt stood at same level of 0.20 times for FY2022 and FY2021. The Total outside liabilities to Tangible stood at 2.44 times for FY2022, against 3.10 times for FY2021. The Debt-EBITDA ratio stood marginally high at 3.65 times for FY2022 as against 3.03 times for FY2021. Acuité believes that the financial risk profile of SEPL will remain comfortable over the medium term due to its improving operating performance, moderate debt levels vis-à-vis moderate tangible net worth, and comfortable debt protection metrics. Increase in revenue and profitability SEPL reported an increase in its revenue of Rs.366 Cr in FY2023 (Estimate) as against Rs.276 Cr in FY2022 and Rs.218 Cr in FY2021. This is primarily on account of the automobile industry - post the pandemic phase, leading to an increase in demand for the various automotive components manufactured by the company, such as pulleys, spark plugs, pinions, rotors, hubs, etc., which are automotive necessities. The Domestic sales of the company increased to 92 percent in FY2023 (Estimate), as against 84 percent in FY2022 and 76 percent in FY2021. Further, the operating margin and net profit margin of the company improved to 10.95 percent and 4.42 percent in FY2023 (Estimate) as against 8.54 percent and 3.40 percent in FY2022 on account of overall improvement in the company’s scale of operations. Acuité believes that ability of SEPL to maintain its scale of operations and profitability will remain a key rating sensitivity factor. |
| Weaknesses |
| Moderately working capital intensive operations
The working capital operations of SEPL are moderately intensive, marked by the Gross Current Assets (GCA) of 158 days for FY2022, as against 197 days for FY2021. This is due to the elongated inventory and receivables cycle of the company, which further recorded an improvement in FY2022 of 79 days and 78 days as against 95 days and 106 days in FY2021. The creditors cycle of the company also improved to 95 days in FY2022 against 144 days in FY2021. The average bank limit utilization for 6 months’ period ended February 2023 however stood high at ~97 percent. Acuité believes that the ability of SEPL to improve and maintain an efficient working capital cycle over the medium term will remain a key rating sensitivity factor. Competitive and fragmented industry SEPL operates in a highly fragmented industry, subjected to intense competition due to the low-entry barriers, which limits the margins and scale. It is further exposed to the inherent cyclicality associated with the automotive industry, and a subsiding end-user industry could adversely impact its performance. The growth of auto component manufacturers will continue to be driven by volume growth of their key OEMs. Auto ancillaries with exposure to OEMs are witnessing increased competition with limited scope for volume growth, putting considerable pressure on the profitability. The operating margins have been volatile year-over-year from 8.21 per cent in FY2020 to 12.09 per cent in FY2021 and 8.54 percent in FY2022. Volatile margins caused by fluctuations in raw material prices, limited bargaining power and limited flexibility to pass on the prices to the customers. |
| Rating Sensitivities |
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| Material covenants |
| None |
| Liquidity position - Adequate |
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SEPL has an adequate liquidity position marked by sufficient net cash accruals (NCA) to its maturing debt obligations. The company generated cash accruals in the range of Rs.10 Cr to Rs.18 Cr during FY2020 to FY2022 against its repayment obligation in the range of Rs.10 Cr to Rs.12 Cr during the same period. Going forward the NCA are expected in the range of Rs.25 Cr to Rs.33 Cr for period FY2023-FY2025 against its repayment obligation in the range of Rs.12 Cr to Rs.5 Cr during the same period. The working capital operations of the company are moderately intensive marked by its gross current asset (GCA) days of 158 days for FY2022. The average bank limit utilization for 6 months’ period ended February 2023 however stood high at ~97 percent. Current ratio stands at 1.16 times as on 31 March 2022. The company has maintained cash & bank balance of Rs.0.54 Cr in FY2022.
Acuité believes that the liquidity of SEPL is likely to remain adequate over the medium term on account of sufficient cash accruals against its maturing debt obligations. |
| Outlook: Stable |
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Acuité believes that SEPL will maintain 'Stable' outlook over the medium term on account of its experienced management with an established track record of operations and reputed clientele. The outlook may be revised to 'Positive' in case of significant and sustained growth in revenue and profitability while effectively managing its working capital cycle and keeping the debt levels moderate. Conversely, the outlook may be revised to 'Negative' in case of lower than expected growth in revenue or deterioration in the financial and liquidity profile most likely as a result of higher than envisaged working capital requirements.
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| Other Factors affecting Rating |
| None |
| Particulars | Unit | FY 22 (Actual) | FY 21 (Actual) |
| Operating Income | Rs. Cr. | 275.94 | 218.21 |
| PAT | Rs. Cr. | 9.39 | 8.03 |
| PAT Margin | (%) | 3.40 | 3.68 |
| Total Debt/Tangible Net Worth | Times | 1.59 | 1.82 |
| PBDIT/Interest | Times | 3.62 | 4.33 |
| Status of non-cooperation with previous CRA (if applicable) |
| Not applicable |
| Any other information |
| None |
| Applicable Criteria |
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• Manufacturing Entities: https://www.acuite.in/view-rating-criteria-59.htm • Default Recognition: https://www.acuite.in/view-rating-criteria-52.htm • Application Of Financial Ratios And Adjustments: https://www.acuite.in/view-rating-criteria-53.htm |
| Note on complexity levels of the rated instrument |
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In order to inform the investors about complexity of instruments, Acuité has categorized such instruments in three levels: Simple, Complex and Highly Complex. Acuite’ s categorisation of the instruments across the three categories is based on factors like variability of the returns to the investors, uncertainty in cash flow patterns, number of counterparties and general understanding of the instrument by the market. It has to be understood that complexity is different from credit risk and even an instrument categorized as 'Simple' can carry high levels of risk. For more details, please refer Rating Criteria “Complexity Level Of Financial Instruments” on www.acuite.in.
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