India Ratings & Research (Ind-Ra) has assigned Omax Autos a long-term issuer rating of 'BBB+'. The outlook is stable.
The ratings reflect Omax's well-established market position in the auto ancillary industry with a track record of more than three decades, and also its large size and presence in the high-value technology-oriented products segment. The ratings further reflect the company’s stable profitability and its strong relationship with the original equipment manufacturers (OEMs). Omax also supplies auto components such as body frames, mufflers, sprockets, gear shift shafts, pistons rods and seat adjusters to Hero MotoCorp (HMC), its key customer.
The ratings are also supported by Omax's adequate liquidity as evident from its moderate working capital use of 67% during August 2012-October 2013 and free cash and equivalents of Rs 378 million at FYE13.
The ratings are constrained by high customer concentration risks with 60% of the revenue originating from the top two customers and 70% of the revenue coming in from the two-wheeler industry. However, customer and segment concentration is a wider industry phenomenon. That being said, the concentration risk is mitigated by Omax's long-standing relationship with the OEMs to whom it is a key supplier of components. The company is also diversifying into the four-wheeler segment, which will likely mitigate the industry segment concentration risk. Vulnerability to cyclicality in the auto industry is also a constraining factor.
Omax recorded a moderate financial performance in FY13 with consolidated revenue at Rs 10,986 million and EBITDA margins of 6.43% (6.79%). In FY13, Omax's net interest coverage ratio (operating EBITDA/net interest expenses) was at 2.64x (FY12: 2.77x) and net financial leverage (total adjusted net debt/ EBITDA) was at 2.64x ( 2.01x).
Revenue for 1HFY14 fell 19% yoy to Rs 4,813.08 million on lower product demand from HMC, which has ramped up production at its Haridwar plant over its Dharuhera and Gurgaon plants. A slowdown in the commercial vehicles market also negatively impacted the revenue. An increase in employee costs, mainly from annual salary revisions and long-term labour agreements, as well as an increase in freight and packaging material costs lowered EBITDA margins to 5% in 1HFY14 from 7.5% in 1HFY13.
A delayed demand recovery in the auto sector could further stress the credit metrics of automotive suppliers. However, as Omax mainly caters to the two-wheeler segment which has performed better than the four-wheeler segment in 1HFY14, Ind-Ra expects Omax to perform better than its industry peers. Omax plans to use its Lucknow facility for supplies for the Indian Railways, thus diversifying away from the cyclical commercial vehicles segment. Revenue from the Indian Railways will be order driven.
Shares of the company declined Rs 0.95, or 2.49%, to trade at Rs 37.25. The total volume of shares traded was 1,000 at the BSE (10.03 a.m., Monday).
