Rating Rationale
April 05, 2018 | Mumbai
Motherson Sumi Systems Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.715 Crore
Long Term Rating CRISIL AA/Positive (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.150 Crore Commercial Paper Programme CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its ratings on the bank facilities and commercial paper programme of Motherson Sumi Systems Limited (MSSL; part of the MSSL group) at 'CRISIL AA/Positive/CRISIL A1+'.

The reaffirmation follows the announcement by MSSL of the acquisition of Reydel Automotive Holdings B.V. and Reydel Automotive Management B.V. (together referred to as Reydel group) through its step down subsidiary, SMRP BV, for a consideration of USD 201 million (approximately INR 1306 crore). The transaction is expected to be completed within 4-6 months, and is structured under a Lockbox arrangement from January 1, 2017.

CRISIL believes the proposed acquisition will benefit the MSSL group's business risk profile due to improved geographic and customer diversity. Revenue proportion from France and Korea is expected to improve to 10%, from earlier levels of 4% on account of the acquisition. Further, the revenues from Renault S.A. (Renault; rated 'BBB/Stable/A-2' by S&P Global Ratings), and Peugeot S.A. (PSA) is expected to increase to 11%; these OEMs contributed 5% of the revenues of the MSSL group prior to the acquisition.

The MSSL group is expected to fund the acquisition largely through available cash surplus and drawdown of existing banking limits. However, despite the acquisition funding, gross debt/earnings before interest, tax, depreciation and amortization (EBITDA) ratio is expected to remain under 2.2 times as on March 31, 2018 (2.48 times as on March 31, 2017) and progressively improve over the medium term. CRISIL believes any additional sizeable debt-funded acquisition in the near term will remain a key rating sensitivity factor.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of MSSL and its subsidiaries, including Samvardhana Motherson Automotive Systems Group B.V (SMRP BV; rated 'BB+/Positive' by S&P Global Ratings), together referred to as the MSSL group. This is because of the operational and financial linkages among the entities. Further, the goodwill and intangibles of Rs. 3,228 crore generated on acquisition of PKC is being amortised over a period of 5 years, from the date of completion of the transaction.

Key Rating Drivers & Detailed Description
Strengths:
* Established market position in the automotive components industry
The MSSL group has an established market position among the world's largest manufacturers of rear-view mirrors (with a global market share of 24%), and is a leading player in polymer-based interior and exterior modules in Europe. Its market position is further supported by increasing market share in the premium segment in the polymers division. Moreover, the group is the largest manufacturer of wiring harnesses for passenger vehicles in India, with a dominant market share. The acquisition of Stoneridge Inc., USA (renamed to MSSL Wiring Systems Inc.), earlier in August 2014 and the acquisition of PKC in March 2017, has enhanced the group's presence in the global wiring harness business.

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. Having started as a supplier of wiring harness products, the group's acquisitions of Samvardhana Motherson Peguform (SMP, in 2011) and Samvardhana Motherson Reflectec (SMR, in 2009) added rear view mirrors and polymer modules to its product portfolio. These acquisitions also helped the MSSL group in establishing a global presence in these segments.

Further, the MSSL group's customer and geographic diversity has been improving. The healthy customer diversity has helped the MSSL group withstand the slowdown witnessed by its largest customer, Volkswagen Group (VWG; rated 'BBB+/Stable/ A-2' by S&P Global Ratings, comprising Volkswagen, Audi, Seat, Skoda, and Porsche) due to diesel engine emission issue. The MSSL group's geographic diversity has also been improving, with exposure to its largest market, Europe, reducing to 51% for the first six months of fiscal 2018 from 57% in fiscal 2015; the exposure to Asia Pacific, North America and South America has simultaneously increased.

CRISIL believes that the group will continue to benefit from its diversified customer profile, leading to steady revenue 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, SMP and SMR. Consequently, the MSSL group's order book improved to EUR 15.2 billion (approximately INR Rs 117,205 crore) as on September 30, 2017 compared with EUR 7.7 billion (approximately INR Rs 56,010 crore) as on March 31, 2014. The order book includes a large order of EUR 2.2 billion (approximately INR Rs 16,000 crore) from Daimler AG (Daimler, rated 'A/Stable/A-1' by S&P Global Ratings). The order will increase the MSSL group's revenue share from the North American market, thereby further improving its geographic diversity.

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, Hyundai Motor Co. (rated 'A-/Negative' by S&P Global Ratings), Maruti Suzuki India Ltd (rated 'CRISIL AAA/Stable/CRISIL A1+), BMW, Nissan Motor Co. Ltd (rated 'A/Stable/ A-1' by S&P Global Ratings), Renault, Ford Motor Company (Ford, rated 'BBB/Stable/A-2' by S&P Global Ratings), General Motors Company (GM; rated 'BBB/Stable' by S&P Global Ratings), Daimler, and Toyota Motor Corp (rated 'AA-/Stable/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 21 acquisitions 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 10.8% during the first nine months of fiscal 2018 from 1% at the time of the acquisition. SMP's operating margin improved to 5.6% during the first nine months of fiscal 2018 from 1.3% in fiscal 2012, and is expected to further improve over the medium term, driven by the stabilisation of new plants for the SMP division.

The recent acquisition, PKC, has also demonstrated improvement in operating performance since acquisition; it reported 21.7% growth in revenues and maintained its profitability at 7.2% for the first nine months of fiscal 2018 (as compared to 6.8% during the corresponding period of the previous fiscal).

* Well-spaced out repayment obligations, resulting from the long maturity of the MSSL group's debt, and the group's adequate liquidity
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 two years. The MSSL group has repayment obligations of Rs 931 crores in fiscal 2019; however, repayment obligations are expected to reduce sharply to under Rs 70 crore annually from fiscal 2020-2022.

The group's liquidity also benefits from its healthy cash generating ability, significant undrawn working capital bank lines, and cash of around Rs 2,685 crores as on December 31, 2017. Cash reserves may however, deplete in case of any material acquisitions.

Weaknesses:
* Aggressive acquisition-led growth strategy, and organic expansion plans, necessitating large debt addition, which may lead to moderation in key credit metrics
The MSSL group has demonstrated high growth through acquisitions in the past, with 21 debt-funded acquisitions. The most significant of these were the acquisition of Visiocorp (renamed SMR), global manufacturer of rear-view mirrors, in March 2009, of Peguform (renamed SMP), manufacturer of bumpers, dashboards, and door trims in Europe, in November 2011, PKC, manufacturer of wiring harness for commercial vehicles, in March 2017 and Reydel, global manufacturer of instrument panels, door panels and console and cockpit modules, in April 2018.

The MSSL group's key credit metrics moderated post these large acquisitions; its gearing was at 2.1 times as on March 31, 2012, from 0.7 times as on March 31, 2011 and its debt-to- EBITDA ratio deteriorated to 2.63 times as on March 31, 2013, from 1.40 times as on March 31, 2011. Thereafter, the MSSL group's debt protection metrics strengthened, mainly due to a turnaround at SMP and SMR, only moderate sized acquisitions, and focus on working capital improvement. Acquisition of PKC, completed in March 2017, while prudently funded through a mix of debt and fresh equity issuance, temporarily increased the debt/EBITDA to 2.48 times as on March 31, 2017, from 1.76 times as on March 31, 2016. The credit metrics are expected to remain comfortable after the acquisition of Reydel; debt/EBITDA is expected to be under 2.2 times as on March 31, 2018 after factoring in the acquisition.

CRISIL expects the MSSL group's gearing to remain range bound at around 0.8-1.0 times, while its debt-to-EBITDA ratio is expected to gradually improve over the medium term, unless there are sizeable debt funded acquisitions, and of loss making entities.

* 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 30% during the first nine months of fiscal 2018 (including the revenue proportion of Reydel), from 44% in fiscal 2015. The share of VWG is expected to reduce further with the execution of large orders from Daimler.
Outlook: Positive

CRISIL 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 improving working capital management and profitability.

Upside scenario:
* Continued improvement in geographic and customer diversity
* Healthy revenue growth, especially in SMP, while maintaining profitability
* Debt/EBITDA reduces to below 1.8 times (2.48 times as on March 31, 2017) and gearing to below 0.9 times (1.01 times as on March 31, 2017) on a sustained basis

Downside scenario:
* SMR and SMP's operating margins weaken considerably
* Significant deterioration in debt protection metrics, most likely due to higher than expected debt-funded acquisitions or capex, such that debt/EBITDA increases beyond 2.75-3.0 times on a sustained basis.
* Sizeable cash outflow in the form of dividends or share buyback.

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 AA-/Stable/ CRISIL A1+') and SWS in 1986. As on December 31, 2017, MSSL was owned by SMIL (33.4%), SWS (25.1%), the Sehgal family (2.9%), and public and others (38.6%). The company has over 130 subsidiaries with 180 facilities across Asia, Europe, North America, South America, the Middle-East, Australia, and Africa.

For fiscal 2017, the wiring harness division contributed 15% of the group's revenues and 30% of the group's EBITDA. SMR (rear view mirrors division) contributed 28% and 29% of the group's revenues and EBITDA respectively, whereas SMP (polymers division) contributed 52% and 33% of the group's revenue and EBITDA respectively.

For the nine months ended December 31, 2017, the MSSL group (consolidated) reported a net profit of Rs 1502 crore on total revenues of Rs 41,198 crore as against Rs 1466 crore on total revenues of Rs 31,805 crore for the corresponding period of the previous year.

On a standalone basis, MSSL reported a net profit of Rs 827 crore on total revenues of Rs 7,028 crore for fiscal 2017, as against a PAT of Rs 719 crore on total revenues of Rs 5,871 crore for fiscal 2016. For the nine months ended December 31, 2017, MSSL, on a standalone basis, reported a net profit of Rs 637 crore on total revenues of Rs 5,642 crore as against Rs 554 crore on total revenues of Rs 5,149 for the corresponding period of the previous year.

About Reydel
Reydel is an established global supplier of Instrument Panels, Door Panels, Console Modules, Decorative Parts and Cockpit Modules, with presence across Europe, South America and Asia. Key customers of Reydel are Renault, PSA, VWG, GM and M&M. For calendar year 2017, Reydel reported an EBITDA of USD 68 million (approximately INR 442 crore) on revenues of USD 1,048 million (approximately INR 6812 crore)

Key Financial Indicators (MSSL Group - Consolidated)
Particulars Unit 2017 2016
Revenue Rs. Cr. 42,360 37,123
Profit After Tax (PAT) Rs. Cr. 2,091 1,727
PAT margins % 4.9 4.7
Adjusted Debt / Adjusted Net Worth Times 1.01 1.09
Interest Coverage Times 12.1 10.6

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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Crs.) Rating Assigned with Outlook
NA Cash credit* NA NA NA 300 CRISIL AA/Positive
NA Cash credit** NA NA NA 30 CRISIL AA/Positive
NA Cash credit*** NA NA NA 40 CRISIL AA/Positive
NA Cash credit$ NA NA NA 40 CRISIL AA/Positive
NA Cash credit& NA NA NA 65 CRISIL AA/Positive
NA Overdraft limit^* NA NA NA 45 CRISIL AA/Positive
NA Overdraft limit^** NA NA NA 80 CRISIL AA/Positive
NA Letter of credit^*** NA NA NA 50 CRISIL A1+
NA Letter of credit$* NA NA NA 50 CRISIL A1+
NA Foreign Exchange Forward$**@ NA NA NA 5 CRISIL A1+
NA Proposed Long term Bank Loan Facility NA NA NA 10 CRISIL AA/Positive
NA Commercial Paper NA NA 7-365 days 150 CRISIL A1+
*Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Purchase
** Interchangeable with Working Capital Demand Loan, Export Packing Credit, Foreign Bill Purchase, Foreign Bill Discounting
*** Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Discounting
$ Interchangeable with Foreign Bill Discounting, Packing Credit in Foreign Currency,
& Interchangeable with Working Capital Demand Loan, Usance Letter of Credit
^* Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency
^** Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Export Bill Discounting
^*** Interchangeable with Bank Guarantee
$* Interchangeable with Bank Guarantee, Forward Limit
$**@ Foreign exchange forward has a notional value of Rs 250 crore
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
-  CCR    --    --    --    --  30-06-15  Withdrawal  CCR AA-/Stable 
Commercial Paper  ST  150  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change    No Rating Change  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  615  CRISIL AA/Positive/ CRISIL A1+    No Rating Change  30-11-17  CRISIL AA/Positive/ CRISIL A1+  14-10-16  CRISIL AA/Stable/ CRISIL A1+  30-06-15  CRISIL AA-/Positive/ CRISIL A1+  -- 
Non Fund-based Bank Facilities  LT/ST  100  CRISIL A1+    No Rating Change    No Rating Change    No Rating Change  30-06-15  CRISIL A1+  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit* 300 CRISIL AA/Positive Cash Credit* 300 CRISIL AA/Positive
Cash Credit** 30 CRISIL AA/Positive Cash Credit** 30 CRISIL AA/Positive
Cash Credit*** 40 CRISIL AA/Positive Cash Credit*** 40 CRISIL AA/Positive
Cash Credit$ 40 CRISIL AA/Positive Cash Credit$ 40 CRISIL AA/Positive
Cash Credit& 65 CRISIL AA/Positive Cash Credit& 65 CRISIL AA/Positive
Foreign Exchange Forward$**@ 5 CRISIL A1+ Foreign Exchange Forward$**@ 5 CRISIL A1+
Letter of Credit^*** 50 CRISIL A1+ Letter of Credit^*** 50 CRISIL A1+
Letter of Credit$* 50 CRISIL A1+ Letter of Credit$* 50 CRISIL A1+
Overdraft^* 45 CRISIL AA/Positive Overdraft^* 45 CRISIL AA/Positive
Overdraft^** 80 CRISIL AA/Positive Overdraft^** 80 CRISIL AA/Positive
Proposed Long Term Bank Loan Facility 10 CRISIL AA/Positive Proposed Long Term Bank Loan Facility 10 CRISIL AA/Positive
Total 715 -- Total 715 --
*Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Purchase
** Interchangeable with Working Capital Demand Loan, Export Packing Credit, Foreign Bill Purchase, Foreign Bill Discounting
*** Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Foreign Bill Discounting
$ Interchangeable with Foreign Bill Discounting, Packing Credit in Foreign Currency,
& Interchangeable with Working Capital Demand Loan, Usance Letter of Credit
^* Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency
^** Interchangeable with Working Capital Demand Loan, Packing Credit in Foreign Currency, Export Bill Discounting
^*** Interchangeable with Bank Guarantee
$* Interchangeable with Bank Guarantee, Forward Limit
$**@ Foreign exchange forward has a notional value of Rs 250 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Auto Component Suppliers
CRISILs Criteria for rating short term debt

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