Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of India Japan Lighting Private Limited. (IJLPL) to ‘CRISIL A+/Stable/CRISIL A1+’ from ‘CRISIL A/Stable/CRISIL A1’.

 

The rating action reflects CRISIL Ratings’ expectations that IJLPL will over the medium term, witness continued steady business performance, supported by steady demand from passenger vehicle (PV) and two wheeler (2W) original equipment manufacturers (OEMs). While revenue growth is expected at ~10% annually over the medium term, the company is also expected to maintain its operating efficiency at above average levels of 10-11%. Sustained healthy cash generation from operations, and prudent funding of capital expenditure, mainly from accruals, will ensure continued strong balance sheet and robust debt protection metrics. Liquidity is also expected to remain strong with cash surpluses of over Rs.150 crores, and complete availability against its fund based working capital facilities Besides, timey support from its parent, Japan based Koito Manufacturing Co. Ltd Koito),is also expected to be forthcoming.

 

Earlier in fiscal 2023, IJLPL’s revenues registered a growth of 57%, on the back of a 50% growth in revenues in fiscal 2022, supported by strong demand from PV and 2W OEMs for LED lights In volume terms, PV and 2W sales witnessed a volume growth of 27% and 18% on year respectively. With increase in scale of operations and rationalisation of expenses, operating margins improved to ~10.7%, in fiscal 2023, from ~9.8% in fiscal 2022.

 

The rating action also factors in the healthy financial risk profile, marked by comfortable debt protection metrics; interest coverage ratio was at ~116 times for the fiscal 2023, against 34.4 times in previous fiscal. The company has prepaid its entire long-term debt in fiscal 2023 through cash accruals, and working capital limits were also not utilized. Debt protection metrics were at robust levels. Liquidity is also strong, supported by surplus ~of Rs.145 crore as on March 31, 2023 and unutilized bank limits of Rs.82 crore.

 

The rating also continue to draw comfort from the strong operational and financial support, via loans or equity from the parent, Koito Manufacturing Co Ltd (Koito) extended in the past, which is expected to continue in case of any sizeable debt funded capex plans or in the event of any contingencies. Koito also has a strong business risk profile, is almost debt free, and had cash surpluses of almost Rs.20,000 crore in fiscal 2023. Koito has a strong position in the global automotive lighting components segment, with established relationships with key clients such as Suzuki Corp, Toyota Motor Corporation, Honda Cars etc. IJLPL functions largely as an extension of Koito in India and deals with Indian arms of the Japanese automotive OEMs, besides sharing common bankers with its parent.

 

The rating of IJLPL continues to be supported by its established market position in the automotive LED lighting segment, diverse customer base, improving operating efficiency, and its healthy financial risk profile and liquidity. These rating strengths are partially offset by exposure to risks related to cyclicality in the automotive sector, especially performance of PV OEMs, and part vulnerability of margins to volatile price movements and capacity utilization levels.

Analytical Approach

To arrive at the ratings, CRISIL Ratings has factored in support from its parent, Koito Manufacturing Co Ltd (Koito). IJLPL will continue to derive significant financial, operational and management benefits, given its strong linkages with Koito.

Key Rating Drivers & Detailed Description

Strengths:

Established market position, supported by an established customer base: IJLPL caters to established OEMs such as Maruti Suzuki (India) Ltd, (MSIL,  rated CRISIL AAA/Stable/A1+), Toyota Kirloskar Motors (TKML), Tata Motors Ltd (TML; 'CRISIL AA/Stable/CRISIL A1+'), Honda Cars India Limited and Nissan Motor India Pvt Ltd (NMIPL) and enjoys a healthy share of business. These OEMs account for almost 60% of all PVs sold in the Indian market, and hence supplies to these OEMs enable IJPLPL hold a healthy market share in the PV lighting system segment.

 

Improving operating efficiency: Through continuous cost improvement, automation initiatives and better operating leverage through strong revenue growth, IJLPL has improved its operating margins to over 10% in fiscal 2021, from just over 6% in fiscal 2021. Its operating margins are now almost in par with established peers in the automotive component space, and expected to remain so in the future, as well.

 

Healthy financial risk profile:

Financial risk profile is healthy with capex being funded through internal accrual and support from the parent. The company has capex plans of ~Rs. 130 crore in fiscal 2024 and will be fully funded through internal accruals. The company has a debt free balance sheet at present, and is unlikely to raise any debt in future. Debt protection ratios are robust, and expected to remain so. Earlier large capex for Sanand plant was supported by foreign loans from the parent, which were converted to equity.

 

Strong financial and operational support from the parent, Koito: Koito has extended sizeable financial support to IJLPL in the past, for meeting its capex plans and debt obligations. However, presently, IJLPL is debt-free, and has prepaid its long-term facilities in fiscal 2023. The parent also offers strong technical expertise for setting up its facilities and know-how for the manufacturing processes. Besides IJLPL has gained key customers, such as MSIL and TKML through its relationship with Koito. Any change in stance of support from Koito remains a key rating sensitivity factor.

 

Weaknesses:

Exposure to risk arising from large exposure to auto OEMs: IJLPL derives of its entire revenue from auto OEMs while 75% contribution comes from PV, 20% from 2W and 5% from commercial vehicles.. High dependence on OEMs especially in PV segment makes the performance susceptible to their business cycles. Further bulk of revenue comes from two - customers MSIL and TKML. However, healthy market share enjoyed by these OEMs in the auto market mitigates this risk. The company through its recently built facility at Sanand, Gujarat is expected to expand its customer revenue base.

 

Partial susceptibility to volatility in input prices and utilisation levels: IJLPL mostly caters to large OEMs and has the flexibility to pass on price of key raw materials, albeit with a lag. However, there is constant pressure from OEMs as well, to rein in costs on a regular basis, given the high competitive intensity. Besides, IJLPL imports nearly ~40% of its requirement, and thus, remains vulnerable to any unfavorable movement in foreign exchange rates. However, the company enjoys open and free credit from its overseas suppliers due to its relationship with Koito.

This apart, with new capacity being available at Sanand, ramp up of utilisation levels will be critical, to avoid a drag on profitability.

Liquidity: Strong

Liquidity is strong, marked by expectation of support from the parent, Koito, both on an ongoing basis and in case of exigencies. On a standalone basis too, IJLPL’s liquidity position is strong, with more than sufficient cash accrual expected to cover its capex plans over the medium term. Besides, IJLPL has cash surplus of around ~Rs 145 crore as on March 31, 2023 and Rs.82 crore of unutilized bank limits.

Outlook: Stable

CRISIL Ratings believes that IJLPL’s business risk profile will continue to benefit from steady order flow from established PV and two-wheeler OEMs. The company is also expected to sustain steady operating profitability, and cash generation. The financial risk profile is also likely to remain healthy, with low reliance on debt. The credit risk profile will continue to benefit from financial and operational support from the parent, Koito.

Rating Sensitivity factors

Upward Factors:

• Improvement in the credit profile of Koito
• Better than anticipated revenue growth, supported by better customer diversity and increase in market share, and operating margins above 12%, benefitting cash generation.
•  Sustenance of healthy financial risk profile.

 

Downward Factors:

• Significant deterioration in credit risk profile of Koito and or change in stance of support.
• Sustained decline in revenues with operating margins declining below 8- 9%, impacting cash generation.
• Significant debt funded capex spending, impacting debt protection metrics.
• Material reduction in liquid surplus, due to high dividend payout, share buyback or capital reduction.

About the Company

IJLPL was incorporated in December 1996, as an equal joint venture between Lucas-TVS and Koito. In fiscal 2015, it became a subsidiary of Koito, when the latter infused Rs 200 crore by way of equity to increase its stake to 70.11%. In fiscal 2020, Koito increased its stake to 100% by buying out the balance 30% stake from Lucas-TVS, for a consideration of Rs 148.5 crore.

 

IJLPL manufactures headlamps, rear combination lamps, fog lamps, and other signal/indicator lamps for auto applications. Its key customers include MSIL, TML, TKML, and NMIPL. The company has production facilities in Puduchatram near Chennai (Tamil Nadu), and Bawal (Haryana). It also has assembly operations at Hinjewadi in Pune (Maharashtra) and is in the process of commissioning a plant at Sanand, Gujarat.

 

As on March 31, 2023, the company has generated an operating income of ~Rs.1368 crore and EBITDA margin of ~10.75% respectively.

About Koito

Koito was incorporated in 1915 and is a listed entity in Tokyo Stock Exchange since 1949 with its headquarters at Tokyo, Japan. Koito engages in the manufacturing and marketing of automotive lighting equipment, aircraft parts, and electrical equipment.

 

The group is a global leader in the automotive lighting industry with a global market share of ~20%. Its global market share of LED based automotive segment stands at ~70%. Koito group consists of a total of 31 companies comprising 16 companies in Japan and 15 overseas subsidiaries in 12 countries. Koito generated revenues of over Rs.53000 crore in fiscal 2023, and had an operating margin of ~10%.  

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity  levels	Rating assigned with outlook
NA	Bank Guarantee	NA	NA	NA	20	NA	CRISIL A1+
NA	Bank Guarantee	NA	NA	NA	20	NA	CRISIL A1+
NA	Bank Guarantee	NA	NA	NA	40	NA	CRISIL A1+
NA	Bank Guarantee	NA	NA	NA	20	NA	CRISIL A1+
NA	Bank Guarantee*	NA	NA	NA	35	NA	CRISIL A1+
NA	Bill Discounting	NA	NA	NA	20	NA	CRISIL A1+
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	108.5	NA	CRISIL A+/Stable
NA	Short Term Loan	NA	NA	NA	14	NA	CRISIL A1+
NA	Short Term Loan	NA	NA	NA	13	NA	CRISIL A1+
NA	Short Term Loan	NA	NA	NA	55	NA	CRISIL A1+

*Interchangeable with sub-limit of Rs. 20 crore bill discounting facility