| Motherson Sumi Systems Limited | ||||||
| 'CRISIL AA+/Stable' assigned to Non Convertible Debentures | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has assigned its ‘CRISIL AA+/Stable' rating to Rs 700 crore non-convertible debentures (NCDs) of Motherson Sumi Systems Limited (MSSL). CRISIL Ratings has also reaffirmed its ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper.
The ratings take into account receipt of NCLT approval for reorganisation plan of the company and completion of merger of Samvardhana Motherson International Limited (SAMIL, upgraded to 'CRISIL AA+/Stable/CRISIL A1+' from CRISIL AA/Watch Positive/CRISIL A1+) with MSSL. Company announced the restructuring plan in June 2020 (to be effective from 1st April 2021) which is now complete. This has led to demerger of domestic wiring harness business of company into separate entity (revenue contribution of ~8% in 2021) and merger of the holding company of the group, SAMIL. The announcement does not have any major impact on the credit profile of the company. The name of the new MSSL post-merger is expected to be changed to Samvardhana Motherson International Limited.
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+/Stable/ 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.
In fiscal 2022, revenue is expected to grow at ~10% on-year driven by expected gradual recovery in global automotive sales and increase in product price realisation due to higher commodity prices. The operating profitability is expected at 7.5-8.5% with passing on increase in raw material prices and recovery in demand. Gradual easing of chip shortage resulting in recovery in vehicle sales globally, strong orderbook of MSSL, minimal risk of electrification and strong market positioning in its product segments will drive industry leading growth in the medium term. The operating profitability is estimated at 9-10% p.a. over medium term driven by recovery in revenues and ramp up in profitability at Greenfields.
Also, over medium term, company’s organic capex is expected at ~Rs 2000-3000 crore per annum and mainly funded through cash accruals. Long term debt repayment obligations stand at ~Rs 1800 crore in fiscal 2022 and Rs 1000 crore in fiscal 2023 as against expected cash accrual of Rs 4500 – 5500 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 2023 and ~1.5 times by fiscal 2024 (from 2.1 times for fiscal 2022). 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 liquidity levels also remain strong with large cash surpluses of Rs 3433 crore as on 30th September 2021 (majority in overseas subsidiaries). Besides, the company’s global revolver facility and domestic working capital lines, were also only moderately utilised. |
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. Further, CRISIL has also combined erstwhile SAMIL and its subsidiaries as its merger with MSSL is complete. 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).
MSSL has received the NCLT order for the scheme of arrangement wherein the domestic wiring harness (DWH) business has been demerged into a separate entity and the holding company, SAMIL has been merged with MSSL
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:
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. Recent acquisitions such as Nanchang JMCG Mekra Lang Vehicle Mirror Co and CIM Tools Private Limited are likely to strengthen its position in mirrors in China and aerospace components respectively.
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.
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 slowdown in demand multiple times in the past. The MSSL group's geographic diversity has also been improving, with exposure to its largest market, Europe, reducing to 45% in fiscal 2021 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.
Global light vehicle sales are expected to grow about 6-8% in calendar year (CY) 2022, after growing slower recovery seen in CY 2021. The global auto recovery will also reflect in similar revenue growth at MSSL which derived ~45% of its revenue in Europe, 15% in USA, 11% in India while remaining from the rest of the world in fiscal 2021. The Indian passenger vehicle segment is also expected to witness volume growth of 15-20% in fiscal 2022. Furthermore, MSSL plans to increase share of non-auto business over next five years in identified segments such as aerospace, logistics, health & medical and technological & industrial solutions through organic and inorganic routes.
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.
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 15.3 billion at September 30, 2021.
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 A-/Stable/A-2’ by S&P Global Ratings), Hyundai Motor Co. (rated 'BBB+/Stable' by S&P Global Ratings), Maruti Suzuki India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+'), Bayerische Motoren Werke Aktiengesellschaft (BMW ' rated 'A/Stable/A-1' by S&P Global Ratings), Nissan Motor Co. Ltd (rated 'BBB-/Negative/ A-3' by S&P Global Ratings), Renault S.A. (rated 'BB+/Negative/B' by S&P Global Ratings), Ford Motor Company (rated 'BB+/Positive/B' by S&P Global Ratings), General Motors Company (rated 'BBB/Stable' by S&P Global Ratings), and Toyota Motor Corp (rated A+/Stable/A-1+' by S&P Global Ratings), among others.
The MSSL group has a track record of acquiring distressed companies and turning around their operations in a short span of time. The 25 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. 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. PKC has also demonstrated improvement in operating performance since acquisition in March 2017. Operating margin of SMRP BV and PKC moderated during first six months of fiscal 2022 due to lag in passing on increase in raw material prices, supply chain challenges and one-off expenses. With gradual recovery in demand, and pass through of costs, operating margin is expected to normalise for these businesses in the near term.
Over medium term, overall operating profitability is expected at 9-10%, compared with 7.6% in fiscal 2021 and estimated at ~8% in fiscal 2022, owing to recovery in revenue growth, ramp up in profitability at Greenfields and normalisation of supply chain. MSSL group’s return on capital employed (RoCE) will recover fast as market conditions improve.
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.
The company’s long term repayment obligations stand at ~Rs 1800 crore in fiscal 2022 and Rs 1000 crore in fiscal 2023 which are expected to be met out of cash accrual expected at Rs 4500-5000 crore p.a.
Despite pandemic induced slowdown in demand, the credit metrics remained relatively less affected with interest coverage estimated at ~9-10 times in fiscal 2022 as against ~8.8 times in fiscal 2021 and also gross debt to EBIDTA estimated at ~2.0 times as against 2.5 times in fiscal 2021. 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.
Weaknesses:
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.
The MSSL group has demonstrated high growth through number of acquisitions since 2002. MSSL group is estimated to achieve revenue over Rs 60000 crore in fiscal 2022. 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.
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 below 30% fiscal 2020 onwards, from 49% in fiscal 2014. The share of VWG is expected to reduce further with the execution of large orders from Daimler and further diversification. 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.3433 crore on September 30, 2021 at consolidated level (mainly in overseas subsidiaries). The utilization of revolving credit facility (RCF) of Euro 350 million at SMRP BV stood at Euro 73 million as on 30th September 2021. The utilization of fund based working capital limits of Rs 1000 crore at standalone level stood at an average of ~ 20% for last 5 months ending November 2021.
The company’s long term repayment obligations stand at ~Rs 1800 crore in fiscal 2022 and Rs 1000 crore in fiscal 2023. 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.
ESG Profile: CRISIL Ratings believes that MSSL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The auto ancillary sector has a moderate impact on the environment because of the emissions from its core operations. The sector also has moderate social impact because of its large workforce across its own operations and value chain partners and focus on innovation and product development. MSSL’s evolving focus on addressing these ESG risks supports its already strong credit risk profile.
Key ESG highlights- - The company focuses on product design, choice of materials and process technologies to minimise product carbon footprint and their corresponding Life Cycle Impact Assessment - Company has pledged to UN-Sustainable Development Goals (SDGs) and company ensures consistent understanding, application and adherence to the group Human Rights Policy and UN Global Compact principles - The Lost Time Injury Frequency Rate (LTIFR) at 0.94 is low as compared to peers - MSSL also has better gender diversity with women constituting 22% of the total workforce - MSSL’s governance structure is characterized by 50% of board comprising of independent directors, presence of non-executive chairman, split in chairman and CEO position, and extensive disclosures There is growing importance of ESG among investors and lenders. MSSL’s commitment to ESG will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital market |
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, 2021.
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 six months ended September 30, 2021, the MSSL (consolidated) reported operating income from continued operations of Rs 30233 crore and a net profit of Rs 461 crore as against operating income of Rs 23306 crore and a net loss of 733 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 Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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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*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 Export Packing Credit, Foreign Bill Discounting and Foreign Bill Purchase
%Interchangeable with Working Capital Demand Loan
##interchangeable CC/WCDL/FBD/PCFC/EPC
$ Interchangeable with Working Capital Demand Loan, Usance Letter of Credit, Pre and post shipment limit
@@Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency and Export Bill Discounting
+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
Criteria Details
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