TEXT-Fitch release on Shriram Pistons and Rings Limited

(The following statement was released by the ratings agency)

Sept 4 - Fitch Ratings has today assigned India-based Shriram Pistons and Rings Limited (SPRL) a National Long-term Issuer rating of 'AA-(ind)' (AA minus(ind)). At the same time, Fitch has assigned a rating of 'AA-(ind)' (AA minus(ind)) to its fund based working capital limits (amounting to INR350.0m) and 'F1+(ind)' to its non fund based working capital limits (amounting to INR710m). Fitch has also affirmed the ratings for SPRL's commercial paper program (amounting to INR50.0m and carved out of fund based working capital limits) at 'F1+(ind)'. The Outlook is Stable.

SPRL's ratings factor its consistently high operating profit margins, comfortable financial leverage and long-standing tie-ups with leading international technology providers, which results in strong association with original equipment manufacturers (OEMs) across diverse segments of the automobile industry. These technology partners own a significant financial stake in SPRL which translates into timely renewal of technology agreements. SPRL's exposure to a single customer is capped at about 10-11% of its total revenues in the last two years insulating it from concentration risk.

SPRL has registered 15.5% growth in revenues from INR4624m in FY07 (FY08: INR5343m) despite the concerns of a slowdown in the automobile industry. The growth in revenues has been largely led by its commercial vehicles segment and exports. Exports, which grew at 43% in FY08, have contributed significantly to revenues - INR1234m in FY08 and 23% of total sales in FY08, compared to 18.7% in FY07. Its operating EBITDA/revenue ratio stood at 22.8% in FY08 and 23.1% in FY07. Operating profitability has remained in this range between FY06-FY08, and is significantly higher than most of its peers given the higher technological level of SPRL's products. Fitch notes that SPRL has been able to maintain its margins despite a sharp increase in cost of raw materials reflecting its strong bargaining power with the OEMs.

SPRL's robust business profile is also aided by its financial profile with leverage (Total Debt/EBITDA) at moderate levels between 1.6x-1.8x for the past three years. Though increasing debt levels coupled with rising borrowing costs have exerted pressure on debt protection measure as Op EBITDA/Net Interest ratio dropped from 14.3x in FY05 to 7.9x in FY08, it still remains at comfortable levels. SPRL's regular capacity expansion in the past coupled with increasing working capital requirements led to negative free cash flow of INR336m in FY08 and INR405m in FY07 which has largely been funded through debt. Fitch notes that SPRL is in the midst of a significantly large capex programme which would need debt funding, and while financial leverage is expected to deteriorate from FY08 levels, it is expected to remain consistent with the ratings assigned.

Positive rating factors include SPRL's ability to increase the share of export revenues while increasing overall revenues substantially, post-commissioning of its second manufacturing facility, as well as a reduction in financial leverage while sustaining current levels of profitability. A decline in revenue and profitability resulting from its inability to pass on raw material price increases and/or lower volume growth resulting from a continued slowdown in the automobile industry, and time/cost overruns on its expansion plans impacting the financial risk profile would be negative ratings factor.

SPRL was established in 1972 with a production facility for manufacturing pistons, piston rings, piston pins and engine parts. SPRL has long standing technical collaboration with leading international technology providers such as Kolbenschmidt, Riken Corporation (6462.T: Quote, Profile, Research), Fuji Oozx and has entered into a tie-up with Honda Foundry for supplies to Honda Group. According to Q1 FY09 results, SPRL's revenues and profitability (EBIDTA) has grown by 25.7% to INR1450m and 32.0% to INR301m, respectively, compared to a year ago.