Rationale

The rating reaffirmation factors in P.R. Nayak Associates Pvt Ltd’s (PRN) market position as the exclusive authorised dealer for JCB India Limited (JCB) across several districts in Karnataka and the long-standing experience of its promoters in the dealership businesses. The medium-to-long-term demand outlook for construction equipment remains favourable, driven by higher Government spending on infrastructure. The company’s principal original equipment manufacturer (OEM), JCB, enjoys a strong market position in the mining and construction equipment (MCE) industry, with its backhoe loaders enjoying a dominant market share. With strong demand in the domestic MCE industry, PRN’s revenue witnessed robust growth of 53% and 6.5% in FY2023 and 11M FY2024, respectively. The rating is, however, constrained by the cyclicality of the MCE industry, PRN’s low profitability inherent to the dealership business, working capital-intensive nature of operations and modest debt coverage indicators with interest cover of 2.1 times in FY2023. Besides, competition from dealers of other OEMs in Karnataka exert pressure on its sales and profit margin. The company’s operating margins are impacted by increasing operating costs owing to addition of new branches and thin dealer margins. The operations are working capital intensive with sizeable funds blocked in inventory and receivables, whereas there is low credit period from its principal OEM. Given the cyclicality associated with the MCE industry, sharp downturn in demand dynamics could result in liquidity crunch and hence prudent working capital management remains crucial for the company to sustain its credit profile. Going forward, PRN’s ability to increase its scale of operations and earnings, on a sustained basis, while judiciously managing its working capital cycle remains crucial from the credit perspective. The Stable outlook reflects that PRN will continue to benefit from its position as the exclusive authorised dealer for JCB for the region and continue to maintain a stable operating and financial performance going forward as well.