Press Release Premier Car Sales Limited
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Press Release Premier Car Sales Limited March 26, 2021 Ratings Amount Facilities/Instruments Ratings Rating Action (Rs. crore) Revised from CARE CARE BBB-; Stable 36.23 BB+; Stable Long Term Bank Facilities (Triple B Minus; (Reduced from 48.15) (Double B Plus; Outlook: Stable) Outlook: Stable) 57.14 CARE A3 Revised from CARE Short Term Bank Facilities (Enhanced from 42.24) (A Three) A4+ (A Four Plus) 93.37 Total Bank Facilities (Rs. Ninety-Three Crore and Thirty-Seven Lakhs Only) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The revision in ratings assigned to the bank facilities of Premier Car Sales Limited (PCSL) factors in the continuous growth in scale of operations, improvement in capital structure, moderate profitability margins, efficiently managed working capital cycle and experienced promoters along with established track record of operations. On the other hand, the ratings continue to be constrained by limited bargaining power with OEM, inherent competition and cyclical nature of auto industry and fortunes of the company linked with growth plans of the manufacturer. Rating Sensitivities Positive Factors - Factors that could lead to positive rating action/upgrade: Improvement in overall gearing at below 1x. Increase in scale of operations beyond Rs. 600 crores on a sustainable basis while maintaining PBILDT margin above 6% Negative Factors- Factors that could lead to negative rating action/downgrade: Any increase in debt levels lead to deterioration in overall gearing at above 2.50x. Decline in total operating income by more than 15% Detailed description of the key rating drivers Key Rating Strengths Experienced Promoters The overall management of PCSL is looked after by Mr. Vijay Kumar Agarwal (Managing Director) who has an experience of over four decades in the automobile dealership business. He commenced his career with dealership of Premier cars in 1981. Mr Vijay Kumar Agarwal is ably supported by his brothers Mr Suresh Kumar Agarwal and Mr Sushil Kumar Agarwal, who have experience of over two decades in same business. The promoters and promoters’ group have provided continuous support for PCSL’s expansion through infusion of funds. The promoters have infused additional funds of around Rs. 13.38 crore in FY20 as unsecured loans, leading to a total of Rs. 29.16 crore as on March 31, 2020. Apart from this, the promoters have also extended need-based support to meet the expansion plans / liquidity requirements of the company. Established track record of operations and long-standing association with Hyundai Motors PCSL is engaged in automobile dealership business for over 4 decades and has a long-standing association with its principal Hyundai Motor India Limited (HMIL). PCSL is the oldest Hyundai dealer in Uttar Pradesh and is also the sole authorized distributor of Hyundai parts in entire Uttar Pradesh. Over the years, the company has expanded its operations by obtaining dealership of Honda’s two wheelers as well as parts dealership for Hyundai and Ashok Leyland. PCSL has an integrated mode of operations, functioning in various verticals of automobile dealership business to provide one stop solution to its customers. It operates service stations, sells spare parts, and also has 1 CARE Ratings Limited Press Release tie-ups for vehicle finance and insurance. This allows it to provide a comprehensive range of services to the customer at a single point. Consistent improvement in financial risk profile For the period FY18-FY20(FY refers to the period from April 1 to March 31), PCSL’s total operating income grew from Rs. 395.66 crore to Rs. 462.98 crore reflecting a compounded annual growth rate of around 8.17% and company reported an y-o-y growth of 6% from Rs. 436.09 crore in FY19. The growth in total operating income was driven by the increase in vehicles sold coupled with increase in average sales realisation of per vehicle specially 4Ws. An automotive dealer’s revenues are primarily driven by volumes, while the profits are driven by the sale of spares and service income, as the latter fetches higher profit margins. The company has limited negotiating power with manufacturers and has no control over the selling price of the vehicles as the same is fixed by the manufacturers. However, the PBILDT margin of the company improved from 4.15% in FY19 to 5.80% in FY20 owing to change in product mix and increase in sales from spares division. Further, the interest expense of the company declined by 14% during FY19-20 due to lower utilization of working capital facilities. Consequently, PAT margin of the company increased to 3.09% in FY20 from 1.24% in FY19. The capital structure of the company shown improvement as reflected by an overall gearing of 1.25x as on March 31, 2020 (PY: 1.89x). The improvement is mainly due to lower utilization of working capital facilities. Further, owing to increase in gross cash accruals from Rs. 7.18 crore in FY19 to Rs. 15.34 crore in FY20, the debt coverage indicators of the company also improved. The total debt/GCA and interest coverage ratio stood at 4.64x and 3.89x respectively for FY20 as against 11.28x and 2.25x respectively for previous year. Current year performance in 9MFY21: During 9 months ended on December 2020 of current financial year, the company sold 6118 vehicles during 9MFY21, and reported a total operating income of Rs. 367.59 crore and PBIDLT margin stood at 5.04%. Moderate Working capital cycle The company has efficiently managed its working capital cycle as reflected in its operating cycle days of 51 days as on March 31, 2020 (PY: 54 days), particularly driven by comfortable levels of collection and creditor days. The average collection period stood at 10 days, as the sale are either done on “Cash and Carry basis” or through vehicle financing from banks/ financial institutions and processing of such vehicle loans takes marginal time. On the other hand, due to limited bargaining power average creditor days remain modest at 8 days for FY20 (PY: 6 days). Inventory management is crucial for PCSL as it is required to stock different models of vehicles and spares in the showrooms in order to ensure adequate availability and visibility, thus leading to moderate levels of inventory. The average inventory holding days of the company stood at 49 days during FY20 (PY: 52 days). Key Rating Weaknesses Limited bargaining power PSCL’s business model is largely in the nature of trading wherein profitability margins are moderate. Moreover, dealers have less bargaining power over principal manufacturer. In order to capture the market share, the auto dealers’ offers better buying terms like allowing discounts on purchases. Such discounts offered to customers create margin pressure. The company procures its product directly from its principal; and is not dependent upon any dealers/distributors for business which helps the company to avail better pricing of purchases. Furthermore, the fortunes of the company are directly linked to its supplier. This also exposes the company’s revenue growth and profitability to its supplier’s future growth prospects. Any impact on business and financial profile of the manufacturer will also have an impact on the growth prospects of the company. Inherent competition and cyclical nature of the auto industry The company is exposed to competition from the products of other OEM’s and dealers operating in the same region. In order to capture the market share, the auto dealers’ offer better buying terms like allowing discounts on purchases. Accordingly, the company has to resort to offering better buying terms like allowing discounts to capture the market share. Such discounts create margin pressure and negatively impact the earning capacity of the company. However, the company’s association with its customers, its established network helps it to sustain the competition to an extent and maintain its strong market position in the region. Furthermore, the auto industry is inherently vulnerable to the economic cycles and is highly sensitive to the interest rates and fuel prices. The company thus faces significant risks associated with such cyclical nature of the auto industry. Industry Outlook 2 CARE Ratings Limited Press Release The automotive sector has shown a quick recovery in past recent months and wholesales data for 11M-FY21 shows that passenger vehicles and two wheelers have reached nearly 85% of FY20 levels. However, three wheelers demand is still slow and is expected to take much longer to recover. Tractors have outperformed this year by clocking almost 1/5th more sales than previous year. The following month of March 2021 has a low base for all segments of automobiles and hence, growth during this month and Q4-FY21 is expected to be extortionate. Liquidity: Adequate The adequate liquidity is characterized by sufficient cushion in projected cash accruals for FY21 of Rs. 13.97 crore vis-à-vis repayment obligations of Rs. 1.47 crore and moderate cash and bank balance of Rs. 4.90 crore. The working capital cycle of the company is moderate at 51 days for FY20 (PY: 54 days), improvement is mainly on account of decrease in inventory period to 49 days from 52 days. The average collection and creditor days stood comfortable at 10 days and 8 days respectively for FY20. The current ratio of the company is above 2.00x for FY20 and average utilization for working capital limits for last twelve months ended January 2021 remains low at 5.79%. Analytical approach: Standalone Applicable Criteria Criteria on assigning ‘Outlook’ and ‘Credit Watch’ to Credit Ratings CARE’s Policy on Default Recognition Financial ratios – Non-Financial Sector Criteria for Short Term Instruments Rating Methodology –Wholesale Trading Liquidity Analysis of Non-Financial sector entities About the Company Premier Car Sales Limited (PCSL) was incorporated in 1981 and promoted by Mr.