Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and debt programmes of Brakes India Private Limited (Brakes India; part of the Brakes India group). 

 

Brakes India’s performance in fiscal 2021 has been impacted on account of the pandemic and overall slow-down in the automotive sector, which has resulted in lower revenues and profitability, compared with the earlier fiscal. However, the company is well positioned to benefit from the expected volume recovery supported by its dominant market position in the domestic braking systems segment, diversified product portfolio, healthy segmental diversity and strong clientele. Besides recovery in aftermarket and export is expected to also support overall revenue growth, of ~10% over the medium term. Despite sizeable cost reduction initiatives taken during the pandemic in fiscal 2021,  operating profitability is estimated to have dipped to ~9.5-10%, from 12% in fiscal 2020, and should improve to 12-13% (but still below highs of 15-17% registered between fiscal 2017-19) over the medium term, supported by higher revenues.

 

Brakes India has historically maintained a healthy financial risk profile marked by sizeable net worth (estimated at ~Rs.2600 crores at March 31, 2021), and minimal debt on its balance sheet, translating into robust debt protection metrics. Better cash generation will ensure modest annual capital spend of Rs.250-275 crores, and incremental working capital requirements are met, without material need to raise debt in the near term.

 

As part of streamlining of holdings held by TVS family members in various TVS group companies, the family has decided to align the ownership of different group companies with the respective arms of the families managing them. As part of the restructuring, a composite scheme of amalgamation and arrangement is planned, involving T.V. Sundram Iyengar & Sons Ltd. (TVS & Sons), Sundaram Industries Private Ltd. (SIPL) and Southern Roadways Private Ltd. (SRPL) and the family holding companies. Via the scheme, the holdings in Brakes India will come to the holding firm of TS Santhanam’s family group. While the operating companies are not directly part of the family agreement, their holdings will witness a change. The restructuring within the TVS group family members is not expected to have a major impact on Brakes India.

 

Post the acquisition of Wabco Holdings Inc by ZF Friedrichshafen AG (ZF AG, 49% JV partner in Brakes India) in 2020, the Competition Commission of India (CCI) had ordered ZF AG, as proposed by it, to divest its stake in Brakes India to address the competition concerns arising out of the presence of competing products in some categories between Wabco India and Brakes India. The TVS group now plans to buy out ZF AG’s stake in Brakes India through its group companies. Any support to the group or possible alignment within the group, should it happen, may not impact the credit profile of Brakes India, due to its material revenues, established business position, healthy cash generating ability, robust balance sheet and sizeable cash surplus.

 

CRISIL Ratings does not expect any near-term impact of ZF AG’s exit on Brakes India's business as its technology licences from ZF AG that are independent of its shareholding. In addition, Brakes India has ongoing technology agreements for braking products with other technology partners. The existing business contracts of the company are also expected to remain unaffected by proposed exit of ZF AG from Brakes India.

 

The ratings continue to reflect the Brakes India group’s leading position in the braking systems market, and diversified revenue profile. The rating is also supported by the group’s healthy financial risk profile because of minimal debt, efficient working capital management, and healthy liquidity. These strengths are partially offset by large, though moderating, exposure to the cyclical medium and heavy commercial vehicle (M&HCV) segment and high dependence on Europe for exports.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Brakes India and its 51% subsidiary, Dunes Oman LLC (FZC) [Dunes Oman]. This is because Brakes India is Dunes Oman’s majority shareholder and both the entities are in the same business. The entities are together referred to as the Brakes India group.

 

Refer to Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

• Leading position in the braking systems business

The group is one of the largest players in the braking systems business, with a 55-60% share in the market for domestic OEMs, including leadership in the commercial vehicle (CV) and tractor segments. Additionally, CRISIL Ratings does not expect any near-term impact of ZF AG’s exit on Brakes India's business as Brakes India has technology licences from ZF AG that are independent of its shareholding. In addition, Brakes India has ongoing technology agreements for braking products with alternate technology partners.

 

• Diversified revenue profile

The Brakes India group has a diversified presence across the OEMs, aftermarket, and exports segments. It is also present across automobile segments, including CVs, passenger cars, utility vehicles, and tractors. Leading customers in the OEM segment include Tata Motors Ltd (CRISIL AA-/Stable/ CRISIL A1+), Ashok Leyland Ltd, Maruti Suzuki India Ltd (CRISIL AAA/Stable/CRISIL A1+), and Mahindra and Mahindra Ltd (CRISIL AAA/Stable/CRISIL A1+).

 

While the group’s mainstay is braking components, increasing contribution from foundry operations (including those of Dunes Oman [~25% of the estimated total revenue in fiscal 2021]) has enhanced product and geographical diversity. Although the current slowdown has impacted all the segments, diversified revenue should lead to stability in the medium term.

 

• Healthy financial risk profile and liquidity

Brakes India’s healthy cash accrual, moderate capital spending, and efficient working capital management have enabled it to lower its debt levels significantly, resulting in robust credit metrics. Although the group’s cash generation has been impacted in fiscals 2020 and 2021 due to the slowdown, this was partially offset by significant reduction in capex. Liquidity remains healthy, supported by cash surplus of around Rs 450 crore as on March 31, 2021, and sparingly utilised working capital bank lines. The company is expected to incur capital spending of Rs.250-275 crores annually, which along with incremental working capital lines can be serviced from its accruals.

 

Weaknesses

• Exposure to the cyclical CV segment

Although the group’s clientele is spread across various segments in the automotive industry. In nine months fiscal 2021, the group derived around 26% of its revenue for the brakes division from CVs. This segment has displayed the highest cyclicality in the past decade; this, coupled with the current slowdown, lends partial volatility to the group’s revenue.

 

• High dependence on Europe for exports

The group derives 28% of its total revenue from exports in the brakes and foundry divisions. Also, around 75% of the turnover comes in from Europe. Any significant demand weakness from the European region will constrain the pace of growth in the export business.

Liquidity: Strong

Brakes India enjoys strong liquidity, driven by expected cash accrual of more than Rs 300 crore and 400 crore in fiscals 2021 and 2022, respectively, and cash and equivalents of over Rs 450 crore currently. Utilisation of fund-based limit of Rs 200 crore averaged 10% over the 12 months through March 2021. The company does not have any long term debt outstanding at present. Internal accruals and cash surplus should comfortable fund company’s planned capex along with incremental working capital requirement.

Outlook Stable

CRISIL Ratings believes that the expected recovery in business performance in fiscal 2022, supported by better demand outlook and the company’s solid market position, along with improving profitability should help generate better cash accruals over the medium term. Financial risk profile is also expected to remain at healthy levels over the medium term, notwithstanding any possible support to or alignment with group companies, if required.

Rating Sensitivity factors

Upward Factors

• Strengthening of the market position in the brakes segment and sustained growth in business levels, also leading to annual cash accrual of over Rs 700 crore
• Sustenance of healthy financial risk profile over medium term
• Maintenance of good liquidity

 

Downward Factors

• Steep decline in consolidated revenue and operating margin (below 8-9%) on a due to weak demand or loss of key customers
• Large, debt-funded acquisitions/capex/material alignment within the group impacting the debt metrics on sustained basis

About the Group

Established in 1962 in Chennai, Brakes India manufactures brake systems (installed capacity of 9.5 million unit per annum) and ferrous castings (126,000 tonne per annum [TPA]). The Chennai-based TVS group owns 51% of the company’s equity shares, while ZF AG owns the remaining 49% through ZF International UK Ltd. Brakes India's subsidiary, Dunes Oman, manufactures non-machined castings with capacity of 36,000 TPA. The brakes division contributes 70-75% of the revenues, while the foundry business contribute the balance.

Key Financial Indicators (Consolidated)

Particulars	Unit	2020	2019
Revenue	Rs Crore	4178	5135
Profit After Tax (PAT)	Rs Crore	237	474
PAT Margin	%	5.7	9.2
Adjusted Debt/ Adjusted Networth	Times	0.02	0.06
Interest coverage	Times	39.61	107.80

 

Any other information: Not applicable

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs Crore)	Complexity level	Rating Assigned with Outlook
NA	Cash Credit*	NA	NA	NA	40	NA	CRISIL AA+/Stable
NA	Cash Credit*#	NA	NA	NA	160	NA	CRISIL AA+/Stable
NA	Letter of Credit**	NA	NA	NA	120	NA	CRISIL A1+
NA	Proposed Long-Term Fund-Based Facility	NA	NA	NA	5	NA	CRISIL AA+/Stable
NA	Non-Convertible Debentures##	NA	NA	NA	20	Simple	CRISIL AA+/Stable
NA	Commercial Paper##	NA	NA	7-365 days	25	Simple	CRISIL A1+

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Dunes Oman LLC (FZC)	Fully consolidated	Strong business and financial linkages