Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL AA/Stable' rating on the long-term bank facilities of Motherson Auto Limited (MAL).

 

The rating continues to reflect the healthy counterparty risk profiles of Samvardhana Motherson group (SMG) entities, steady cash flow from lease rentals  to MAL and its wholly owned subsidiary, Motherson Lease Solutions Limited (MLSL, 'CRISIL AA/Stable') and healthy debt protection metrics. The rating also factors in strong business and financial linkages with, and support from, SMG. These strengths are partially constrained by performance of MAL and MLSL being directly linked to the growth prospects and performance of SMG companies.

 

The rating action also takes a note of announcement of reorganisation plan by Samvardhana Motherson Group on 2nd July 2020. The primary income of MAL is through lease rental from the land and buildings owned on which SMG have their plants and offices in India while MLSL earns through lease rental from the vehicles and equipment provided to SMG.

 

In fiscal 2021, consultancy business (contributing ~29% to MAL Consolidated) has been transferred to another group company, Samvardhana Motherson International Limited (SAMIL, 'CRISIL AA/Watch Positive') and new business segments in defence and aerospace sector is taken over by MAL from SAMIL (net cashflow involved in the transaction is ~Rs 12 crore).  Despite this, the debt service coverage ratio (DSCR) at MAL consolidated level is expected to comfortable at remain above 1.5 times over medium term. Further, the refinancing of debt under MAL has increased the tenure of the loan hence annual repayment obligations have been reduced in line with decline in income from consultancy business supporting the DSCR.

 

Earlier in fiscal 2020, the operating performance of MAL (including MLSL) improved with revenue improving by 10% to Rs 209 crore compared to previous fiscal, while the operating profitability improved to over 83% from 80%.

 

The company has adequate cushion available. The liquidity remains comfortable with working capital facility of Rs 5 crore in MAL and Rs 60 crore in MLSL and these remain utilised at 50% over last 6 months ending December 2020.

Analytical Approach

CRISIL Ratings has taken a consolidated view of MAL combining with business and financial risk profiles of the wholly-owned subsidiary, MLSL, which leases vehicles and equipment to SMG entities.

 

Further, CRISIL has applied the group notch-up to the ratings of MAL. This is because promoters of MAL also own SAMIL and Motherson Sumi Systems Ltd (MSSL; rated ‘CRISIL AA+/Stable/CRISIL A1+’). Leveraging of the common group name helps MAL negotiate better financial and operating terms with all stakeholders, on behalf of smaller group companies, while it also ensures high moral obligation for SMG to support MAL, if required.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Steady cash flow from lease rentals, and strong counterparty risk profile

MAL acts as the lessor for factories and corporate and registered offices of SMG companies. Over 90% of the lease rentals come from subsidiaries and joint ventures of MSSL and SAMIL. Renewal, vacancy, and counterparty risks are low as MSSL/SAMIL group entities occupy most of the space leased out. Hence, cash flows will continue to be supported by leasing income over the medium term.

 

MLSL leases movable fixed assets and provides insurance solutions to the SMG companies. Vehicles (comprising 58% of the asset portfolio) contributed 60% to the total revenue in fiscal 2020, while equipment leasing (42%) accounted for the rest. The vehicles are leased for five years, after which they are sold in the open market. For equipment, the lease period is 3-7 years. MLSL also provides insurance solutions to group companies, though revenue contribution of this business remains low. The entire vehicle requirement and a large portion of SMG's equipment requirement are met by MLSL, thus ensuring steady cash flow in the form of operating leases. Furthermore, counterparty risk is low as all customers are SMG group companies. Growing asset base under lease should continue to augment income and cash flow over the medium term.

 

• Healthy debt protection metrics

Cash flows from rental income are more than suffice to cover debt obligation. A DSRA is not available for the loans; however, working capital line of Rs 65 crore (Rs 5 crore for MAL and Rs 240 crore for MLSL) is available as on December 2020 in case of any cash flow mismatch or delay in receipt of rent.

 

Debt metrics improved in fiscal 2020 on consolidated basis, for instance, the ratio of gross debt to the earnings before interest, taxes, depreciation and amortization (EBIDTA) improved to 2.5 times in fiscal 2020 from 2.9 times in previous fiscal. External debt decreased to Rs 418 crore as on March 31, 2020 from Rs 443 crore as on March 31, 2019. Further external debt remained at Rs 399 crore as on December, 31, 2020.  Debt service coverage ratio is expected to be comfortable through the tenure of the loan.

 

• Strong business and financial linkages with, and support from, SMG

MAL is critical for operations of SMG entities, as the group does not prefer to work on third-party rented premises for setting up factories to ensure continuity of operations. Further, the corporate office is also held by MAL and leased out to group companies. Some of the companies operate on a small scale, which increases the economic incentive for centralised operations.

 

Also, MLSL plays an important role in driving the group philosophy of high return on capital employed. By availing of leasing services through MLSL, capital of the group entities does not get blocked in non-core assets, while centralised leasing and insurance services drives efficiency within SMG entities. This also results in tax benefits for both MLSL (through higher depreciation) and SMG entities (through operating lease rentals).

 

Though currently self-sufficient, promoters and group companies are expected to support both the entities in case of contingencies. Leveraging of the common group name helps the entities negotiate better financial and operating terms with all stakeholders on behalf of smaller group companies and ensures high moral obligation for SMG to support MLSL, if required.

 

Weakness:

• Performance directly linked to growth prospects/performance of group companies

Services provided by MAL and MLSL are mainly for entities within the SMG. As a result, growth in rental income would be directly linked to expansion of operations or new entities being set up within the group. However, as these are long-term lease contracts, with escalation clauses, cash flows from existing rental arrangements should be sufficient for debt servicing.

 

Any change in the credit risk profiles of the key operating companies in the group will remain a rating sensitivity factor.

Liquidity: Strong

Liquidity remains healthy. Cash flows from rental income and existing assets are more than suffice to cover debt obligation. A DSRA is not available for the loans; however, working capital line of Rs 65 crore is available in case of any cash flow mismatch or delay in receipt of rent and these remain utilised at 50% over last 6 months ending December 2020. Debt servicing including interest payments stands at Rs 84 crore for fiscal 2021 for both MAL and MLSL combines. Promoters also own SAMIL and MSSL, and will support both the entities in case of exigency.

Outlook Stable

MAL is likely to maintain adequate debt protection metrics over the medium term, backed by steady cash flows from the rental business provided to SMG entities. The company will continue to derive strong support from SMG.

Rating Sensitivity factors

Upward Factors

• Strengthening of debt protection metrics due to higher-than-expected cash flows, led by strong growth in group companies leading to DSCR of more than 2.5 times
• Revision in ratings of key companies in SMG.

 

Downward Factors

• Weakening of debt protection metrics (leading to DSCR below 1.5 times) and liquidity if large debt is contracted without a corresponding increase in lease rentals, there is significant delay in receipt of lease rentals,
• Any significant deterioration in credit quality of key companies in SMG

About the Company

MAL, incorporated in 1983, is promoted by Mr Vivek Chaand Sehgal, Mr Laksh Vaaman Sehgal, and Ms Renu Alka Sehgal.

 

The company owns the land and building on which SMG companies have their plants, registered offices, and corporate offices in India. The arrangement for leasing services is via long-term contracts.

 

Incorporated in 2009, MLS is a wholly owned subsidiary of MAL. MLS leases assets and provides insurance solutions within the SMG companies. Assets such as vehicles, equipment, plant and machinery, software, furniture, and fixtures are provided on lease to group companies. MLS also offers insurance solutions: guidance, advisory, and procurement and claim settlement services.

 

For first nine months of fiscal 2021, the revenue and profit before tax for MAL standalone stood at Rs 62 crore and Rs 33 crore respectively.

Key Financial Indicators

As on/for the period ended March 31	Unit	2020	2019
Revenue	Rs crore	140	132
Profit after tax (PAT)	Rs crore	70	40
PAT margin	%	49.7	30.6
Adjusted debt/adjusted networth	Times	1.7	2.4
Interest coverage	Times	4.1	3.1

 

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	Long Term Loan	NA	NA	Feb-27	91	NA	CRISIL AA/Stable
NA	Long Term Loan	NA	NA	Jan-33	169	NA	CRISIL AA/Stable
NA	Overdraft	NA	NA	NA	5	NA	CRISIL AA/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	45	NA	CRISIL AA/Stable

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Motherson Lease Solution Limited	Full	Wholly owned subsidiary of MAL
Motherson Auto Limited	Full	Parent company