| Motherson Sumi Systems Limited | ||||||
| Ratings reaffirmed ; rated amount enhanced for Bank Debt | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL has reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper of Motherson Sumi Systems Limited (MSSL).
Earlier on February 26, 2021, CRISIL Ratings had revised the outlook from ‘Negative’ to ‘Stable’. The outlook revision reflected sharp recovery in MSSL’s business performance from 2nd quarter of fiscal 2021 onwards after a sharp impact of the Covid-19 in 1st quarter and expected healthy outlook on global automotive sales in fiscal 2022, driven by healthy demand post waning of pandemic and global economic recovery. The revision also considered the significant improvement in the operating profitability of key subsidiary, SMRP BV (rated BB/Stable, by S&P Global Ratings) owing to turnaround in the Greenfield plants which are expected to add substantially to the overall consolidated profitability. This will lead to improvement in the company’s cash accruals, and improvement in key credit metrics.
Coupled with the same, the company also has successfully refinanced a bond repayment of around Rs 3000 crore due in December 2021 over a year in advance through raising of NCDs. The liquidity levels also remain strong with large cash surpluses of Rs 5086 crore as on 31st December 2020 (majority in overseas subsidiaries), increased from Rs.4860 crore as on March 31, 2020. Besides, the company’s global revolver facility and domestic working capital lines, were also only moderately utilised.
Global auto sales are expected to grow about 10-12% in calendar year (CY) 2021, after degrowing of 14% in CY 2020 owing to pandemic impact. The global auto recovery will also reflect in similar revenue growth at MSSL which derived 49% of its revenue in Europe, 16% in USA, 11% in India while remaining from the rest of the world in fiscal 2020. The Indian passenger vehicle segment is also expected to witness volume growth of 15-20% in fiscal 2020 after degrowing of 4-6% in fiscal 2021.
The operating profitability is estimated at 9-10% p.a. over medium term, improved from 8.2% in fiscal 2020 (estimated at 8.3% in fiscal 2021). Company’s Greenfield plants, commissioned in fiscal 2019 which posted EBIDTA loss of Euro 175 million in fiscal 2020 (operating margin impact of ~2% of revenues), achieved breakeven in 2nd quarter of fiscal 2021 owing to various efficiency measures taken by the company. Coupled with recovery in revenues, the profitability at Greenfields is expected to drive the operating margin expansion over medium term.
Also, the restructuring of business announced by company in June 2020 (to be effective from 1st April 2021) which will lead to demerger of domestic wiring harness business of company into separate entity (revenue contribution of 7% in 2020) and merger of the holding company of the group, Samvardhana Motherson International Limited (SAMIL, CRISIL AA/Watch with positive implications/CRISIL A1+), is not expected to have any majority impact on the credit profile of the company.
Also, over medium term, company’s organic capex is expected at ~Rs 2000-3000 crore, and mainly funded through cash accruals. Long term debt repayment obligations stand at ~Rs 1500 crore in fiscal 2022 and Rs 200 crore in fiscal 2023 as against expected cash accrual of Rs 4000 – 4500 crore p.a. This, coupled with efficient working capital management, will keep key credit metrics at healthy levels. For instance, CRISIL expects MSSL's gross debt to earnings before interest, tax, depreciation and amortization (EBITDA) to improve to below 2 times by fiscal 2022 and ~1.5 times by fiscal 2023 (from 2.3 times for fiscal 2020). In addition to the same, the company is expected to maintain the cash surpluses of over Rs 3000 crore. While the company has announced its 2025 vision of multiplying the revenues by three times and a part of this revenue growth will be through acquisitions, the funding philosophy is expected to be prudent as seen during past acquisitions. Having said that, material acquisitions, and funding philosophy, will remain a key monitorable.
The rating continues to reflect MSSL's established market position in the automotive components industry, its diversified revenue profile across customers, geographies, and product segments, healthy relationships with global original equipment manufacturers (OEMs), and strong execution track record of successful turnaround of overseas acquired entities. The ratings also reflect the company’s healthy financial profile backed by well-spaced out repayment obligations, and adequate liquidity.
These strengths are partially offset by aggressive acquisition led growth philosophy, high albeit reducing, revenue concentration towards Volkswagen Group (VWG, rated 'BBB+/Negative/ A-2' by S&P Global Ratings, comprising of Volkswagen, Audi, Seat, Skoda, and Porsche) and exposure to cyclicality in demand in global automobile industry. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of MSSL and its subsidiaries, including Samvardhana Motherson Automotive Systems Group B.V (SMRP BV), together referred to as the MSSL group. This is because of the operational and financial linkages among the entities. Further, the goodwill generated on acquisition of PKC is being amortised over a period of 5 years (from April 2017).
Please refer Annexure - Details of Consolidation, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: * Established market position in the automotive components industry The MSSL group has an established market position and is amongst the world's largest manufacturers of exterior rear-view mirrors with dominant market share, and is a leading global player in polymer-based interior and exterior modules. Its market position is further supported by increasing market share in the premium segment in the polymers division in bumpers, instrument panels and door panels. Moreover, the group is also the largest manufacturer of wiring harnesses for passenger vehicles in India. PKC (acquired in April 2017) has a dominant market share in North American and European heavy truck market.
The MSSL group's business risk profile is further supported by the synergies within various business segments, its strong in-house research and development capabilities, and long-term technical collaborations with Sumitomo Wiring Systems Ltd (SWS) and other joint venture (JV) partners.
* Diversified revenue profile across customers, geographies, and product segments The MSSL group has, over the years, significantly diversified its revenue profile through acquisitions. Ramp up of performance of acquired entities has helped the MSSL group in establishing a global presence across key product segments.
Further, the MSSL group's customer and geographic diversity has been improving. The healthy customer diversity helped the MSSL group withstand the slowdown witnessed by its largest customer, VWG; due to diesel engine emission issue in the recent past. The MSSL group's geographic diversity has also been improving, with exposure to its largest market, Europe, reducing to 49% in fiscal 2020 from 59% in fiscal 2015; the exposure to Asia Pacific, North America and South America has simultaneously increased. Integration of SMRC has further driven the improvement in geographic and customer diversity. The SMRC acquisition added five more countries to the geographical footprint of MSSL, taking the total revenue contributing countries to 41.
While the pandemic and sluggish global economic conditions will pose significant challenges to performance of the automotive and component companies worldwide in fiscal 2021, CRISIL believes that the MSSL group will benefit from its diversified customer profile and strong order book, which will enable it to register better than industry growth over the medium term.
* Healthy relationships with global OEMs Over the years, the MSSL group has forged healthy relationships with major global OEMs, on account of its focus on quality and delivery. The group benefits from a sustained inflow of new orders from OEMs, primarily in its major operating subsidiaries, Samvardhana Motherson Peguform (SMP) and SMR. The holding company of the major international operations of the group, SMRP BV’s (rated BB/Stable, by S&P Global Ratings) order book stood at EUR 13.1 billion (~Rs 113000 crore) at September 30, 2020.
The MSSL group has a well-diversified global client base in the passenger vehicles industry. Its customers include leading global OEMs such as VWG and its group companies, Daimler AG (rated BBB+/Stable/A-2’ by S&P Global Ratings), Hyundai Motor Co. (rated 'BBB+/Rating watch with negative implications' by S&P Global Ratings), Maruti Suzuki India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+'), Bayerische Motoren Werke Aktiengesellschaft (BMW ' rated 'A/Negative/A-1' by S&P Global Ratings), Nissan Motor Co. Ltd (rated 'BBB-/Rating watch with negative implications/ A-2' by S&P Global Ratings), Renault S.A. (rated 'BB+/Negative/B' by S&P Global Ratings), Ford Motor Company (rated 'BB+/Rating watch with negative implications/B' by S&P Global Ratings), General Motors Company (rated 'BBB/Rating watch with negative implications' by S&P Global Ratings), and Toyota Motor Corp (rated 'AA-/Rating watch with negative implications/A-1+' by S&P Global Ratings), among others.
* Strong execution track record of successful turnaround of, and ramp up of utilisation levels at overseas acquired entities The MSSL group has a track record of acquiring distressed companies and turning around their operations in a short span of time. The 22 acquisitions from fiscal 2002 till date have improved its geographical and product profiles, apart from being its growth driver. The MSSL group has also successfully integrated and stabilised the operations of the acquired entities. SMR's operating margin improved to 11.0% in fiscal 2020 and 13.2% in 3rd quarter of fiscal 2021 from negative margins at the time of the acquisition. SMP's operating margin stood at 9.6% in fiscal 2019 (adjusted for losses in greenfield plants commissioned in 3rd quarter of fiscal 2019, acquisition of SMRC in August 2018 and impact of Ind-AS 115) from 4% at the time of acquisition. The overall margin at SMP moderated in fiscal 2019 to 4.3% and 4.0% in fiscal 2020 owing to large operating losses at Greenfield plants. With the large scale efficiency measures undertaken by company as well as the initial teething issues and the ramp up costs now over, these plants achieved breakeven in 2nd quarter of fiscal 2021 onwards and with that SMP posted operating margin of 9.5% in 3rd quarter of fiscal 2021. PKC has also demonstrated improvement in operating performance since acquisition in March 2017; its operating profitability improved from 7.0% in fiscal 2018 to 10.0% in fiscal 2020 and 9.4% in 3rd quarter of fiscal 2021,
Over medium term, overall operating profitability is expected at 9-10%, compared with 8.2% in fiscal 2020 and estimated at ~8.3% in fiscal 2021, owing to recovery in revenue growth and profitability at Greenfields. MSSL group’s return on capital employed (RoCE) will recover fast as market conditions improve.
* Well-spaced out repayment obligations, resulting from long maturity of MSSL group's debt While the MSSL group has funded its acquisitions through a combination of debt, equity and accruals, it has also prudently ensured its debt obligations are well spaced out, besides also consistently working on lowering the cost of debt. For instance, the group has replaced high cost debt with longer tenure Euro and USD denominated debt at competitive rates over the past three years.
During the current fiscal, the company raised NCDs of Rs 2630 crore, primarily to refinance the bond repayment due in December 2021. With that, the company also has successfully refinanced a bond repayment of around Rs 3000 crore due in December 2021 over a year in advance.
The company’s long term repayment obligations stand at ~Rs 1500 crore in fiscal 2022 and Rs 200 crore in fiscal 2023 which are expected to be met out of cash accrual expected at Rs 4000-4500 crore p.a.
Despite pandemic impact the credit metrics remained relatively less affected with interest coverage estimated at ~10 times in fiscal 2021 as against ~13 times in fiscal 2020 and also gross debt to EBIDTA estimated at ~2.2 times as against 2.3 times in fiscal 2020. This was owing to controlled organic capex, efficient working capital management and cost optimization initiatives undertaken by the company. With improvement in revenues and profitability, the credit metrics are expected to improve over medium term, such as gross debt to EBITDA to improve to below 2 times by fiscal 2023.
Weakness: * Exposure to cyclicality in demand in global automobile industry While MSSL's revenue profile benefits from good geographic, customer and product diversity, it remains closely aligned to the performance of key geographies and customers. Due to dependence on large global OEMs, MSSL's business prospects are exposed to cyclical demand patterns inherent to the global automobile industry and ability of the OEMs to sustain their operating performance, more so as it has undertaken significant capex to cater to OEMs through Greenfield plants in USA as well as Hungary. Delay in earlier envisaged ramp up of these plants impacted the overall operating profitability in fiscal 2019 and first nine months of fiscal 2020.
* Aggressive acquisition-led growth strategy The MSSL group has demonstrated high growth through a number of acquisitions since 2002. MSSL group achieved revenues of about USD 8.9 billion in fiscal 2020. However, enhancement of RoCE is expected to be the main criteria for acquisitions. While MSSL may continue with its aggressive growth strategy over medium term, demonstration of management intent to prioritise sustenance of RoCE at healthy levels over revenue targets will be critical.
* High, albeit reducing, revenue concentration towards VWG The MSSL group's long-term strategy is to ensure that no single customer, country or component contributes more than 15% to the turnover. However, while the customer diversity is improving, VWG remains MSSL group's largest customer. The share of VWG reduced to 26% in fiscal 2020, from 49% in fiscal 2014. The share of VWG is expected to reduce further with the execution of large orders from Daimler and completion of acquisition of SMRC in August 2018. The SMRC acquisition has resulted in increase in the share from Renault S.A., and Peugeot S.A. (PSA) in fiscal 2019. |
Liquidity: Strong Cash and cash equivalents stood at Rs.5086 crore on December 31, 2020 at consolidated level (mainly in overseas subsidiaries). The utilization of revolving credit facility (RCF) of Euro 450 million at SMRP BV stood at Euro 36 million as on 31st December 2020. The RCF has a maintenance covenant requiring a net leverage ratio of 3.25x, the company has got the covenant amended by the under which the performance in Q1 of fiscal 2021 won’t be considered for calculation of covenant ratios. The utilization of fund based working capital limits of Rs 600 crore at standalone level stood at ~ 11% at December 31, 2020.
The company’s long term repayment obligations stand at ~Rs 1500 crore in fiscal 2022 and Rs 200 crore in fiscal 2023. The company has refinanced the sizable repayment of ~Rs 3000 crore due in December 2021 at a lower rate. The renewal of RCF at SMRP BV has also been approved by the lenders at Euro 350 million from existing Euro 450 million (Outstanding as on 31.12.2020 of Euro 36 million). The company has a track record of refinancing of higher cost debt at lower rates in the past. Over medium term, company’s organic capex is expected at ~Rs 2000-3000 crore, and mainly funded through cash accruals. Material acquisitions and funding philosophy will remain key monitorable. |
Outlook: Stable CRISIL Ratings believes that MSSL's credit profile will benefit from its strong business positions across its various businesses as well as focus on improving customer and geographic diversity alongside its efforts towards ramping up of liquidity and improving working capital management and profitability. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company MSSL, the flagship company of the Samvardhana Motherson group, was incorporated as a JV between Samvardhana Motherson International Ltd (SMIL, rated 'CRISIL A1+') and SWS in 1986. As on December 31, 2020, MSSL was owned by SMIL (33.43%), SWS (25.10%), the Sehgal family (2.85%), and public and others (38.62%). The company has over 165 subsidiaries with over 230 facilities across Asia, Europe, North America, South America, the Middle-East, Australia, and Africa as on March 31, 2020.
On July 02, 2020, board of directors of MSSL and SAMIL have approved reorganization of business which entails demerger of the domestic wiring harness business from MSSL into a new company, with similar shareholding structure as that of MSSL and subsequent merger of SAMIL into MSSL. As a result, MSSL will own 100% stake in Samvardhana Motherson Automotive Systems Group BV ('SMRP BV, rated 'BB/Stable' by S&P Global Ratings') which is currently owned by MSSL (51%) and SAMIL (49%). Besides, MSSL will also hold 33.4% stake in the demerged DWH subsequent to completion of the transaction. Post the reorganisation, MSSL will be renamed as 'Samvardhana Motherson International Limited'. The transaction is subject to receipt of regulatory and other approvals inter-alia approval from shareholders, creditors, NCLT etc. as may be applicable and is expected to be concluded in second-quarter of fiscal 2022 and be effective from April 1, 2021.
For the nine months ended December 30, 2020, the MSSL (consolidated) reported operating income of Rs 43026 crore and a net profit of Rs 551 crore as against operating income of Rs 49219 crore and a net profit of 1169 crore for the corresponding period of the previous year. |
Key Financial Indicators – Consolidated (CRISIL Ratings adjusted financials)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Purchase @ Interchangeable with short term loan and Packing Credit in Foreign Currency +Interchangeable with foreign exchange forward facility ^Short term limit-WCDL/Export & Import Finance/Trade Loans/STL/ LC / BG / SBLC ! Short term limit-WC/EPC/PCFC/FBD/FBP !! Foreign exchange forward facility |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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