Sigma Electric Manufacturing Corporation Private Limited

January 16, 2019

Summary of rating action Current Rated Amount Instrument* Rating Action (Rs. crore) Long-term / short-term – fund-based/non-fund 105.00 [ICRA]A- (stable)/A2+; assigned based Long-term – fund-based/CC 8.00 [ICRA]A- (stable); assigned Short-term – non-fund based 12.00 [ICRA]A2+; assigned Short-term – fund-based/non-fund based 35.00 [ICRA]A2+; assigned Total 160.00 *Instrument details are provided in Annexure-1

Rationale The assigned ratings favourably factor in the established operations of Sigma Electric Manufacturing Corporation Private Limited (Sigma) in the electrical castings industry for over 20 years, with the company using a wide range of material grades such as aluminium, copper, zinc, steel and iron. It has an entrenched product portfolio servicing the electrical fittings segment, power transmission and distribution, as well as customised products for residential and commercial use, instrumentation and home appliance industries. The company exports over 90% of its products to its Group company in USA, Sigma Electric Manufacturing Corporation, which manages its marketing and distribution in the US. The company optimises cost and production by maintaining an efficient supply chain and by investing in technology, inventory management software and implementing lean manufacturing across all its units. The ratings are also supported by its reputed end-user client profile, which includes large home improvement companies, appliance manufacturers, engineering and power transmission companies. Sigma enjoys healthy revenue visibility from its core electric market and growing business from the customised segment. The profitability at operating level is expected to remain stable at current levels.

The capital structure remains leveraged on account of interest bearing compulsory convertible debentures (CCD), which were infused in FY2017, subsequent to the acquisition by Argand partners (New York-based private equity fund) from the Goldman Sachs Partner Fund. The ratings are constrained by the significant interest outflow that impacted the net margins and funds flow from operations leading to moderate interest coverage ratios. However, ICRA draws comfort from the subordination of CCD interest payment to all banking interest payments. While the free cash flows remain impacted by the moderately high working capital intensity as well as moderate capex plans, the liquidity position is supported by unutilised working capital lines. Sigma is exposed to volatility in commodity prices, although it is pass through in nature and the company enjoys a natural hedge as a net exporter.

Outlook: Stable ICRA expects Sigma to continue to benefit from its established market position in the core electric business in the US, its entrenched product portfolio, reputed end-customer profile and efficient supply chain. The outlook may be revised to Positive if substantial growth in revenue and profitability strengthens coverage indicators. The outlook may be revised to Negative if cash accrual is lower than expected, or if capital expenditure is more than expected, or if any stretch in the working capital cycle weakens liquidity.

Key rating drivers

Credit strengths Established position in the castings industry spanning over 20 years with a strong market position - Incorporated in 1996 the company manufactures castings for electrical components and fittings used in commercial, residential projects and power transmission and distribution. It also forayed into the custom business for industrial equipment, home appliances and instrumentation. It is a market leader in the United States across low voltage electrical product segments, including electrical fittings and weather proof boxes (estimated 30% shares of die cast weather proof boxes) and Power Transmission and Distribution cutouts and connectors (estimated 70% share in cutouts).

Diversified product portfolio - The company is a large integrated player in the USA with a complete range of castings in all non-ferrous metals in addition to iron and steel. The core electrical segment comprises ~83% of consolidated revenues of the entity and supplies products such as fitting, connectors, couplings, weatherproof box, flip covers, lamp holders, lamp holder covers, lighting kits and grounding fittings. It also manufactures cconnectors and fittings for the power transmission and distribution sector and custom products in the industrial segment, instrumentation and appliance manufacturers.

Reputed end-user client base- The Indian entity exports all products to the US entity through which sales are made. Sigma has a reputed end-user customer base that comprises large engineering companies, home improvement stores, home appliance companies and power transmission companies. Its top three customers comprise 32.0% of the consolidated revenue portfolio for FY2018, while the top ten customers comprise 68.0%. The concentration risk is mitigated by Sigma’s established relationships with them and the large size of these corporations. The company has a total customer portfolio of about 42 companies.

Consistent track record of profitability at operating level – Sigma has demonstrated consistent track record of profitability at operating level and ICRA expects the operating margins to be in the range of 12-14% supported by Sigma’s ability to pass on volatility in raw material prices to its Group company.

Credit challenges Leveraged capital structure due to interest bearing CCDs and significant interest component - The debt and coverage indicators deteriorated after change in the ownership structure in FY2017. The new private equity fund infused capital by way of equity and CCDs that bear a high coupon rate. This led to leveraged debt matrices with interest coverage of 2.1 times as on March 31, 2018. ICRA, however, draws comfort from the subordination of CCD interest payments to all banking interest payments.

Moderately high working capital cycle- The working capital cycle remains moderately high at 32% in FY2018. The debtors consist of sales to the Group entity in the US to whom products are exported. The inventory primarily constitues dye castings manufactured by Sigma for is own use and custom dyes as per client specifications. The creditors consist of raw material imports that are paid in 90-120 days, while domestic suppliers are paid in 45-60 days. To maximise the creditor days, Sigma has increased the usage of vendor bill discounting that provides it additional time to pay its domestic suppliers.

Liquidity Position Sigma’s funds flow position is supported by its stable profitability and adequate accruals. However, high interest outgo impacts the fund flow to an extent. Similarly, the debt-funded capacity expansion over and above regular maintenance capex has led to stretched free cash flows. The company, however, has unutilised interchangeable limits that support its liquidity position, which is expected to remain moderate, going forward.

Analytical approach

Analytical Approach Comments

Applicable Rating Methodologies Corporate Credit Rating Methodology

Parent/Group Support NA Consolidation / Standalone Standalone Financials

About the company Sigma Electric Manufacturing Corporation Private Limited is a Pune-based company established in 1996 by Mr. Sajjan Kumar Agarwal. During FY2007–FY2008, Goldman Sachs Capital Partner Fund, a private equity (PE) fund, acquired majority equity stake (i.e., 80.11%) in Sigma. In October 2016, Argand Partners LLP, a New York-based PE firm bought out Goldman Sachs’ 80% and Mr. Sajjan Agarwal’s equity to acquire 100% ownership of the company.

Sigma manufactures castings for the electrical and fittings industry, connectors and cut-outs for the power transmission and distribution sector, and custom products for the industrial, instrumentation and appliances segment. It has a wide range of material grades such as aluminum, zinc, copper, iron and steel. Sigma has a total of nine manufacturing units across India, with five in Pune (Maharashtra) and four in Jaipur (Rajasthan), and a total installed production capacity of 31,390 metric tonne per annum. It is an export oriented company with over 90% of its exports going to Sigma Electric Manufacturing Corporation, a Group entity in Garner USA. The company services its North American customer base from a 180,000-square feet warehouse and distribution centre in Garner, North Carolina, USA.

Key financial indicators (audited)

5M FY2017* FY2018 Operating Income (Rs. crore) 361.69 886.82 PAT (Rs. crore) 0.04 0.69 OPBDIT/OI (%) 12.68% 13.18% RoCE (%) 6.41% 6.91%

Total Debt/TNW (times) 1.11 1.16 Total Debt/OPBDIT (times) 3.70 3.63 Interest coverage (times) 2.13 2.13 *The company was merged into its acquiring company post NCLT order with appointed date as October 31, 2016

Status of non-cooperation with previous CRA The company has an outstanding rating of ACUITE A- (Issuer not cooperating)/ACUITE A2+ (Issuer not cooperating) for Rs. 164.00 crore bank lines since December 20, 2018.

Any other information: None

Rating history for last three years:

Current Rating (FY2019) Chronology of Rating History for the Past 3 Years Date & Date & Date & Amount Amount Date & Rating in Rating in Rating in Rated Outstanding Rating FY2018 FY2017 FY2016 Instrument Type (Rs. crore) (Rs. crore) Jan 2019 1 Fund based/non Long term/ 105.00 105.00 [ICRA]A- - - - fund based short term (Stable)/ [ICRA]A2+ 2 Fund based Long term 8.00 8.00 [ICRA]A- - - - (Stable) 3 Non- fund based Short term 12.00 12.00 [ICRA]A2+ - - -

4 Fund based/non- Short term 35.00 35.00 [ICRA]A2+ - - - fund based

Complexity level of the rated instrument: ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

Annexure-1: Instrument Details Date of Amount Issuance / Coupon Maturity Rated Current Rating ISIN No Instrument Name Sanction Rate Date (Rs. crore) and Outlook Long term / short term - [ICRA]A- (Stable)/ NA fund based/non- fund NA NA NA 105.00 [ICRA]A2+ based NA Fund based/ CC NA NA NA 8.00 [ICRA]A- (Stable) NA Non fund based NA NA NA 12.00 [ICRA]A2+ Short term-fund based/non- NA NA NA NA 35.00 [ICRA]A2+ fund based Source: Company

Annexure-2: List of entities considered for consolidated analysis: Not applicable

ANALYST CONTACTS Subrata Ray Gaurav Jain +91 22 6114 3408 +91 20 6606 9922 [email protected] [email protected]

Vanshika Gupta +91 20 6606 9919 [email protected]

RELATIONSHIP CONTACT Jayanta Chatterjee +91 80 4332 6401 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries: +91-124-3341580 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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