SAHIL AUTOMOBILES

Rating Facility Long-term Bank Facilities Amount (Rs crore) 9.80 Rating1 CARE BB (Double B) Remarks Assigned

The rating assigned by CARE is based on the capital deployed by the proprietor and the financial strength of the firm at present. The rating may undergo a change in case of the withdrawal of capital or the unsecured loans brought in by proprietor in addition to the financial performance and other relevant factors. Rating Rationale The rating is primarily constrained on account of the small scale of operations of Sahil Automobiles (SA) in the highly competitive automobile dealership business, its constitution as a proprietorship firm, thin profitability and high working capital intensity of its operations. The rating, however, derives strength from the vast experience of the proprietor in managing the automobile dealership business along with a long-standing association with its key principal Honda Motorcycle & Scooter India Private Limited (HMSI) and stable demand outlook for the two-wheeler segment. The ability of SA to increase its scale of operations along with an improvement in profitability and effective management of its working capital in a highly competitive automobile dealership business are the key rating sensitivities. Background Incorporated in 2001, SA is a proprietorship firm headed by Ms Sanita Arora. Based out of Jabalpur, Madhya Pradesh, SA is engaged in two-wheeler automobile dealership business as an authorized dealer of HMSI. The Arora family had initially started with the dealership business of Vespa Scooters in 1996 and with Yamaha Motorcycles in 1991 which were later on followed by HMSI in 2001 and Maruti Suzuki India Limited (MSIL) in 2004. SAs showrooms are supported with 3-S (Sales, Services and Spare Parts) facilities. Credit Risk Assessment Vast experience of the proprietor and other family members in the automobile dealership business Ms Arora, who is a commerce graduate and has a work experience of around 15 years, looks after the overall operations of SA. Ms Arora is well supported by Mr Deepak Arora, her husband, who is a commerce graduate with an MBA (Master in Business Administration) degree and has been associated with the automobile dealership business for nearly the last 20 years. The proprietor and her husband, Mr Deepak Arora have wide experience in managing automobile dealership business with their long standing association with Vespa Scooters, Yamaha Motorcycles, HMSI and MSIL. MSIL dealership (which is in the passenger car domain) is being handled by Mr Deepak Arora through a separate proprietary concern named Standard Auto Agencies (SAA; rated CARE BB/ CARE A4+). During FY13 (refers to the period April 01 to March 31), SAA reported a total operating income of Rs.140.36 crore and PAT of Rs.1.78 crore. Established operations with long standing association with its principal - HMSI SA was formed in the year 2001 and since then it has been engaged in the automobile dealership business. SA currently holds an authorized dealership of two wheelers of HMSI, based out of Jabalpur. SA owns and operates two showrooms with 3-S (Sales, Service and Spares) facilities within Jabalpur with total employee strength of around 105 personnel. The firm offers complete solution including arranging finance for its customers. SAs revenue stream includes trading margins from the sale of vehicles of HMSI which accounted for 91% of total operating income during FY13 and sales of spare parts and servicing income (7% in FY13). Besides these, SA earns income in the form of incentives from HMSI and commission from insurance companies which formed a marginal 2% of total operating income during FY13.

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During FY13, SA sold 3,771 motorcycles and 5,169 scooters compared with 2,484 motorcycles and 4,852 scooters during FY12. There was a growth of 52% in sales volume of motorcycles and 6% in scooters during FY13 on account of an increase in the demand for gearless motorcycles and scooters. Currently SA holds a very good market share for HMSI two-wheelers in the Jabalpur region with there being only one more HMSI dealer in the region, which puts SA in an advantageous position. Small scale of operation albeit consistent growth in income, thin profitability and low capital base SA has small scale of operations, although improved year-on-year, marked by a total operating income of Rs.50.34 crore in FY13 and a small capital base of Rs.4.27 crore as on March 31, 2013. The total operating income, which registered a CAGR of 31% during the past five years ended FY13, grew at a healthy rate of 26% during FY13 over the previous year on the back of a strong volume growth. The growth in sales volume of the firm has been moving in line with that of the principal, HMSI, itself. Considering the trading nature of business, the profitability has remained stable with PBILDT and PAT margins in the range of 34% and 1.4-2.5%, respectively. The margins in the automobile dealership business are thin, partly inherent to the trading nature of business. The capital structure of SA remained moderately leveraged due to high working capital borrowings and small net-worth base. However, majority debt comprises of working capital borrowings to fund the high level of inventory which is again inherent in the automobile dealership business. The liquidity has remained moderate with a current ratio of 1.24 times as on March 31, 2013 and average utilization of fundbased working capital limits at around 70% during the trailing 12 months ended August 2013. Intense competition in two-wheeler dealership business with fortunes linked to the performance of HMSI, the principal SA faces aggressive competition on account of the established presence of authorized dealers of other two-wheeler manufacturers like Bajaj Auto Ltd, TVS Motors Ltd, Mahindra and Mahindra, Hero Moto Corp Ltd, etc in Jabalpur, Madhya Pradesh. These original equipment manufacturers (OEMs) are encouraging more dealerships to improve their market penetration and sales, thereby increasing competition amongst dealers. Due to the very high competition in the industry, automobile dealers are also forced to pass on discounts and offers to attract customers which restrict their margins. SA is an authorized dealer of HMSI which is the market leader in the scooter segment with nearly 42% market share with an overall 7-8% market share in two-wheeler industry in India. Hence, the fortune of SA significantly depends upon the performance of HMSI and HMSIs ability to maintain its market share and launch new vehicles and variants. Any unfavorable event affecting the growth plans of HMSI will have a significant impact on the performance of SA as its revenue is concentrated to one dealership only. Stable demand outlook for the two-wheeler industry backed by expected growth in the scooter segment After witnessing a slowdown in FY13, CARE Research estimates a marginal improvement in the economic scenario and expects the two-wheeler industry to grow at 8-9% in FY14. The growth would be aided by moderation in inflation post first half and normal monsoon. The motor cycle segment is likely to grow in the range of 6-7% and the scooter segment is expected to grow at 13-14%; hence, CARE Research expects the scooter segment to remain the growth engine for the overall two wheeler industry. Further, CARE Research foresees demand in rural and semi-urban areas would drive the two-wheeler demand in the near to medium term period. During August 2013 on a Y-o-Y basis, the two-wheeler industry witnessed a growth of 6.7% after witnessing six straight months of decline. The Y-o-Y growth in August 2013 was on the back of strong growth of 21.4% in the scooter segment and 2.8% growth in the motor cycle segment. Further, it may be noted that, HMSI was able to grow during FY13 as well on account of its leadership position in the motorcycle as well as scooter segment. Constitution as a proprietorship firm and risk related to withdrawal of the fund Being a proprietorship firm, the firm has limited access to capital market restricting its financial flexibility and it also faces the risk of withdrawal of capital.

Financial Performance For the period ended / as at March 31, Working Results Net Sales Total Operating income PBILDT Interest Depreciation PBT PAT (after deferred tax) Gross Cash Accruals Financial Position Proprietors Capital/ Tangible Net worth Total capital employed Key Ratios Growth Growth in Total Operating income (%) Growth in PAT (after Def. Tax) (%) Profitability PBILDT/Total Op. income (%) PAT (after deferred tax)/ Total income (%) ROCE (%) Solvency Long-term Debt Equity ratio (times) Overall gearing ratio (times) Interest coverage (times) Term debt/Gross cash accruals (years) Total debt/Gross cash accruals (years) Liquidity Current ratio (times) Quick ratio (times) Turnover Average collection period (days) Average inventory (days) Average creditors (days) Operating cycle (days) A-Audited, (This follows our brief rational for entity published on 31 October 2013) 2011 (12m, A) 27.54 28.40 1.08 0.30 0.08 0.70 0.53 0.61 2.06 5.03 2012 (12m, A) 38.98 40.02 1.96 0.50 0.15 1.31 1.01 1.16 3.37 9.03 (Rs. Crore) 2013 (12m, A) 49.17 50.34 2.00 0.51 0.19 1.42 0.99 1.18 4.27 11.21

21.44 66.16 3.79 1.86 21.46 0.58 1.44 3.58 1.97 4.90 1.03 0.52 4 16 2 18

40.95 91.55 4.91 2.53 25.82 0.52 1.68 3.92 1.51 4.88 1.37 0.26 2 28 1 29

25.78 -1.84 3.97 1.97 19.09 0.34 1.62 3.93 1.23 5.87 1.24 0.40 2 38 1 39

DISCLAIMER CARE's ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. The rating assigned by CARE is based on the capital deployed by the proprietor and the financial strength of the firm at present. The rating may undergo change in case of withdrawal of capital or the unsecured loans brought in by the proprietor in addition to the financial performance and other relevant factors. CAREs ratings are opinions on credit quality and are not recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating fee, based on the amount and type of bank facilities/instruments.

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