Detailed Rationale

CRISIL Ratings has revised its outlook on the long term bank facilities of Mercedes-Benz India Private Limited (MBIL) to ‘Positive’ from ‘Stable’. Long term rating has been reaffirmed at ‘CRISIL AA+’.

 

The outlook revision follows the revision by, S&P Global Ratings (S&P) of parent, Daimler Ag’s (Daimler’s) long term ratings to ‘BBB+/Positive’ from ‘BBB+/Stable’ given the stronger prospects for company’s profitability and cash flows in the current year. In the first quarter of 2021, Daimler reported 16% revenue growth and a 14% earnings before interest and tax (EBIT) margin in its Cars & Vans division leading to S&P raising its forecast for Daimler's adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) and free operating cash flow in 2021 and 2022. Additionally, S&P believes, the recent model launches are likely to solidify Daimler’s position in the electric vehicles (EV) market. EVs currently make up 10% of Daimler's total car sales.”

 

The ‘Positive’ outlook also reflects the view that MBIL’s vehicle sales will continue to recover from the pandemic-related slump over the near to medium term. While second quarter of calendar year (CY) 2020 was significantly impacted on account of the pandemic induced lockdown, MBIL’s sales started picking up from July onwards with gradual relaxation of lockdown. Sales in the quarter of January-March 2021 witnessed a growth of ~34% year-on-year, buoyed by good pick-up of new products and an overall positive customer sentiment. To carry forward the momentum, MBIL plans to introduce 15 fresh products, including new models and facelifts of existing models in CY 2021 starting from the second quarter. New launches, combined with the gradual recovery in economy and consumer sentiment, should drive performance going forward. Additionally, company has increased its car prices by 5% from January 15, 2021. This coupled with improving sales should benefit profitability over the medium term.

 

Earlier, in February 2021, Daimler’s board had decided to evaluate a spin-off of its Truck and Bus business and begin preparations for a separate listing of the Truck division. As per the proposed plan, post the spin-off, shareholders in Daimler will receive a ‘significant majority stake’ in the new unit, while Daimler will hold a minority stake. The listing process is expected to be completed by the end of CY 2021.

 

Details of the transaction including the final capital structure of Cars division are not available at present. CRISIL Ratings continues to closely monitor these developments and will take appropriate rating action, pending further availability of information, and basis discussion with MBIL’s management.

 

The ratings continue to reflect MBIL’s dominant position in the domestic luxury car industry, strong technological, managerial, operational, and financial support the company receives from its parent, Daimler AG (Daimler; rated 'BBB+/Positive/A2' by S&P Global Ratings [S&P]) and the company’s adequate financial risk profile. These strengths are partially offset by the small size of, and intensifying competition in the domestic luxury car segment, and large dependence of MBIL on the domestic market for revenue growth.

Analytical Approach

The rating of MBIL factors in support expected from its parent, Daimler. CRISIL Ratings believes MBIL will, in case of exigencies, receive distress support from its parent for timely repayment of debt obligations, considering the strategic importance of MBIL for the parent and the corporate guarantee extended by Daimler for MBIL’s external borrowings.

Key Rating Drivers & Detailed Description

Strengths

Dominant position in the domestic luxury car industry

MBIL dominates the luxury car industry in India, reflected in its market share of around 40% in CY 2020. Luxury car sales in India witnessed a steep decline of 37% in CY 2020. According to industry estimates, 21,400 luxury cars were sold in India in 2020 as against 34,000 units sold in 2019 -– a decline of about 37%, due to the Covid-19 outbreak, higher cost of BS VI vehicles, and sluggish economic conditions, affecting consumer buying decisions.

 

MBIL’s performance, however, has been better than peers, demonstrating its strong market position. Also, the early starter advantage, longstanding presence of 27 years in India, and the largest product basket among peers, have helped MBIL, retain market share dominance.

 

MBIL has effectively leveraged its established presence in the Indian market, strong brand, and focus on service and customer satisfaction to develop a crop of loyal customers. As compared with peers in the luxury car market in India, MBIL offers the largest product portfolio of 23 models across price points and has the widest network of distribution set up of 94 outlets spread across 47 Indian cities, which significantly benefit its business risk profile.

 

Strong operational, financial and managerial support from the parent, Daimler

Being a wholly owned subsidiary of Daimler, MBIL benefits from access to the latter’s extensive product portfolio, superior technology and design, and manufacturing expertise in the luxury car segment.

 

Mercedes-Benz AG plays an important role in the overall Daimler group’s revenue and profitability. MBIL, in India, in turn is one of the key centres in Mercedes-Benz’s global completely knocked down (CKD) production network (India, Brazil, Indonesia, Malaysia, Thailand and Vietnam). MBIL’s production facility spread over 100 acres in Chakan, Pune assembles a wide range of models including sedans and sports utility vehicles (SUVs) – largely imported in CKD condition from branches of Mercedes-Benz. A state-of-the-art paint shop in keeping with Mercedes-Benz global standards has also been established at Chakan. Mercedes Benz’s models from across the globe are steadily being introduced into the Indian market, and some vehicles are also customised to customers’ needs in India.

 

MBIL also receives managerial and financial support from the parent. All the board members in MBIL are nominated by Daimler, and a significant section of the top management, including the Managing Director, are from Daimler. Further, until fiscal 2021, the parent has invested about Rs 2357.48 crore in the form of equity and Rs 429 crore as external commercial borrowings to support the Indian operations. Daimler’s substantial cash reserve, marketable securities, and networth provide adequate flexibilitxy to offer additional support to MBIL in case of exigencies. Furthermore, Daimler has guaranteed MBIL’s short-term working capital debt.

 

Given MBIL’s strategic importance to Daimler, Daimler will continue to provide necessary support to MBIL.

 

Adequate financial risk profile

Financial risk profile is adequate; albeit improvement in key credit metrics, which were at average levels in fiscal 2020, and expected to gradually improve, is likely to be delayed by at least a year, due to the moderation in performance, owing to Covid-19, and sluggish demand. Cash accrual are likely to largely suffice to meet the modest capital expenditure (capex), repayment obligation, and working capital requirement over the medium term, thereby limiting debt intake. High dividend payment in fiscals 2018 and 2019 was a part of the capital structure policy of the Daimler group and the restructuring undertaken, which temporarily impacted MBIL’s credit metrics. No major dividend is expected to be paid over the medium term, supporting gradual improvement in credit metrics.

 

Weaknesses

Small size and intensifying competition in the domestic luxury car segment

Luxury cars constitute 1.17% of the overall passenger vehicle (PV) market in India, one of the lowest amongst large economies. China and US for example have 16% and 10% share of luxury cars, respectively. Additionally, while the number of luxury car manufacturers in India has steadily increased over the years, the overall market size has remained more or less stagnant at under 40,000 units in the past five years. The segment’s volumes further de-grew by 37% in CY 2020, due to the Covid-19 impact.

 

With more players and models vying for a share of the slowly growing pie, competition in the domestic luxury car market may intensify, resulting in price competition and lower realisations. While MBIL’s dominant market position supported by its strong brand, extensive product portfolio and wide distribution network partially offsets this risk, CRISIL Ratings believes, MBIL’s market position and operating profitability movement over the medium term, will depend on its ability to launch successful variants and models in the domestic market.

 

High revenue dependence on domestic market

Except for fiscal 2019, where the company had a one-time export order from the US to supply 4,080 units, MBIL derives its entire revenue from the domestic market. The wide presence of the parent across the globe restrict export opportunities for MBIL. This exposes the company to the inherent cyclicality in the Indian passenger vehicle industry, though the luxury segment is the least volatile of all segments. The demand patterns in this industry have displayed cyclicality in the past, in line with economic growth, financing availability, and consumer sentiments. These variables will continue to impact demand patterns for luxury cars in India.

Liquidity: Adequate

MBIL's adequate liquidity is driven by expectation of support from the parent, Daimler, to provide ongoing and need-based support in case of exigencies. MBIL’s long-term debt is in the form of external commercial borrowings from Daimler. Besides, Daimler has also guaranteed MBIL’s short-term working capital debt.  As on March 31, 2021, long-term loans from Daimler stood at Rs 429 crore, with repayment obligation of Rs 129 crore in fiscal 2022. Further MBIL also had cash surplus of Rs 604 crore as on March 31, 2021.

 

On a standalone basis also, MBIL’s liquidity should remain adequate driven by expected annual cash accrual in excess of Rs 200 crore in fiscal 2021, besides, access to bank lines. Its repayment obligations are modest.

Outlook Positive

CRISIL Ratings believes that MBIL will maintain its dominant position in the domestic luxury car segment, supported by a large and successful product portfolio, new launches, strong distribution network, and access to Daimler’s technology. Its profitability too is expected to improve supported by better sale volumes. MBIL’s financial risk profile is expected to gradually strengthen in fiscal 2022, supported by better business performance & modest capital spending. Further, timely support from the parent, Daimler, is expected to be forthcoming in the event of any financial exigency.

Rating Sensitivity factors

Upward factors

• Upgrade in rating of Daimler by S&P Global Ratings by 1 notch or more
• Sharp improvement in operating performance of MBIL, with cash accruals of over Rs 400 crores
• Sustenance of credit metrics at adequate levels, including through need based support from parent

 

Downward factors

• Downgrade in Daimler’s rating by S&P Global Ratings by a notch or more
• Change in stance of parent towards supporting MBIL
• Sharp deterioration in MBIL’s  operating performance, almost resulting in losses at operating profit level, including due to extended Covid-19 impact
• Material increase in external debt, in the event of a large capex or elongation of working capital cycle

About the Company

Established in 1994, MBIL pioneered the luxury car market in India. MBIL is part of Mercedes-Benz’s Global Production Network and plays an important role in the CKD/MVP production network in Brazil, Indonesia, Malaysia, Thailand and Vietnam.

 

MBIL’s production facility in Chakan, with total capacity of 20,000 units per annum, is capable of assembling a wide range of models including Sedans (C-Class, E-Class, S-Class and as well as Maybach) and SUVs (GLA, GLC, GLE and GLS) – the largest portfolio among luxury car manufacturers in India. MBIL is also the first luxury carmaker to start locally manufacturing AMG performance models comprising the AMG GLC 43 4MATIC Coupe and the AMG A35 4M saloon

About Daimler

Daimler, headquartered at Stuttgart, Germany, is a leading global auto manufacturer focused on the premium car and CV segments. The group's operations are divided into Mercedes-Benz Cars, Daimler Trucks, Mercedes-Benz Vans, Daimler Buses, and Daimler Mobility, a captive finance operation that supports the other businesses. Daimler shareholders approved the new holding structure in May 2019, and it took effect November 1. It bundles cars and vans under Mercedes-Benz AG, and trucks and buses are under Daimler Truck AG. The already independent Daimler Financial Services AG is combined with the other mobility business under Daimler Mobility AG.

 

Additionally, in February 2021, Daimler’s board has decided to evaluate a spin-off of its Truck and Bus business and begin preparations for a separate listing of the Truck division.

 

Daimler is a listed company. The biggest shareholders as of December 31, 2020, were investor, Mr Li Shufu (Tenacion 3 prospect invest. Ltd., 9.7%), chairman and 100% owner of Geely Holding; Kuwait's Sovereign Savings Fund (6.8%); Chinese BAIC Group (5%); and Renault/Nissan (3.1%). The rest is free float.

Key Financial Indicators – MBIL*

As on / for the period ended March 31		2020	2019
Revenue	Rs crore	4903	6441
Profit after tax (PAT)	Rs crore	-87	307
PAT margin	%	-0.02	4.8
Adjusted debt/adjusted net worth	Times	1.84	2.15
Interest coverage	Times	1.67	3.58

*CRISIL Ratings adjusted numbers

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 level	Rating Assigned with Outlook
NA	Proposed Working Capital Facility*	NA	NA	NA	2300	NA	CRISIL AA+/Positive

*Interchangeable with Proposed Long Term Bank Loan facility